Say you’re a gang leader and you control a territory. In order to pay your henchmen and enrich yourself, you decide to tax the local population and extract a proportion of all their wealth. Now, they might conduct most of their trade with each other using silver pieces, cigarettes, US Dollars, or bundles of pink wool. Whatever it is, the most effective way of working would be to conduct a valuation of everyone’s assets in the most standard form of currency there is and then demand payment of your slice in that standard currency. So, farmer Joe has 30 cows and 5 archers of land, which is valued at 15,000 cigarettes, therefore you demand 2000 cigarettes from Joe, or else the henchmen come round and rough him up a bit. Farmer Joe now needs to sell a few cows in exchange for cigarettes in order to pay you.
This is an effective way of working, however, you can run into issues. The threat of a good beating means there is a constant demand for cigarettes, and they are valued very highly. More so than they might otherwise be worth for what they are. As such, within your territory smoking becomes a show of wealth, a kind of status symbol. When it comes to buying products or services from people outside your territory, cigarettes might not be valued so highly. And if a neighbouring gang controlled a cigarette factory; they may soon realise that they can get your people to give them all sorts of things in exchange for a few cigarettes, which they can easily make more of any time they like. A massive transfer of assets may start to occur with all your people selling off their cows, chickens and family heirlooms to people in the nearby gang’s territory in exchange for cigarettes which they are making more of every day. Pretty soon your territory is awash with cigarettes and little else. Inflation kicks in and prices rise because thousands of cigarettes are chasing fewer and fewer products that people actually want or need.
What’s needed is a form of currency that only you control, not the gang next door. You decide to open your own cigarette factory making your own branded cigarettes. You pay these cigarettes to your henchmen and then demand protection money exclusively in the form of your own brand of cigarettes. The value of normal cigarettes collapses and the value of your own brand of cigarettes rockets. Things get back to normal as neighbouring gangs are not able to flood your economy with their cigarettes any more. In fact, neighbouring gangs actually value your brand of cigarettes quite highly because they know your people will work hard in exchange for them, so they can be used to buy stuff. For a while, all is plain sailing.
However, you can now make more cigarettes any time you like. The temptation is too great, you start to make more of them and use them to buy bespoke velvet suits and pimp up your Bentley Continental. Pretty soon there are too many out there relative to the number of things people want, and prices go up again. Neighbouring gangs loose interest in holding on to them too because their value is dropping fast. Congratulations, you have devalued your own currency.
You decide that want you need is a form of currency that neither you nor any other gang can make more of. Its a toss up between Bitcoin and the Euro, but you’ve never trusted computers so you opt for the Euro. You exchange your cigarette reserves for Euros and announce that protection money must now be in the form of Euros. Only the ECB can print more Euros and they look like a sensible bunch, so you put your trust in them. All is plain sailing once more.
Until one year, when a price bubble in chicken claw soup causes your entire population to invest in chickens and chicken farming equipment. You issue warnings or course, but they don’t listen. The price of chickens rockets with some going for as much as 20,000 EUR. People invest all their savings in frozen chicken claw soup, then one day, when people remember that they don’t like chicken claw soup, the price collapses and your people are destitute. They live off their chicken stockpiles for a while before eventually running out. They now have no Euros, no chickens, and they’re staving. What’s more, all your people know how to do is raise chickens and make soup. They flood into neighbouring areas offering their services, but there are only so many chickens that need raising and with so many people looking for work, wages fall. You cannot collect enough protection money any more and no amount of punishment beatings can change that. Your reserves are empty and your henchmen abandon you. Things are looking pretty bleak. If only you’d kept your cigarette factory going, now would be a good time to up production and keep things ticking over.
In a last ditch attempt to save your sorry ass, you go to the ECB and try to persuade them to make some more Euros to give to you. Your people are suffering you say, they can’t even buy food. They make you squirm a bit, they make you sell off some of your suits and your Bentley, but they eventually give in to your request and bail you out. You return to your gang den in with a suitcase full of Euros and your tail between your legs. As you hand out the last of the crisp 500 EUR bills to your henchmen, you think to yourself, what might have happened if I’d have chosen Bitcoins instead of Euros. “Phew” you say to yourself, at least I can reason with the ECB, if I’d have chosen Bitcoin people might have starved.