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Currency competition is an idea coming from classical liberal economists, that holds that there should be different currencies left to the free market. Friedrich Hayek is probably the most pronounced defender of the concept. Ron Paul also is in favor of currency competition, and tried to pass a bill to allow it, possibly based on his irrational obsession with inflation. Bitcoin fans are big on the idea, in the form of an excuse to have Bitcoin taken at all seriously.
In countries that do not specifically ban trading in other currencies, i.e., most countries, there is already currency competition. Nothing legally prevents you from trading Euros for goods in the US for example; it's just usually inconvenient because US merchants are not mandated to accept Euros. Foreign currency exchanges (forex or FX) are based on currency competition; this is how people are able to travel between countries with different currencies. Some countries (often oppressive regimes) restrict currency competition by banning unofficial exchanges and mandating unrealistic exchange rates for travelers. Some examples of countries with official exchange rates (as of 2017) are North Korea, Cuba, and Venezuela. During the Cold War, most of the Eastern Bloc had official exchange rates.
Isolated communities in Canada often use municipal trade tokens and trade dollars. Over the course of a long winter lasting six months, the stock of a village's currency can remain fixed with no new currency coming in from outside. In the course of normal business, especially during periods of increasing economic activity, or "economic growth", much currency can disappear from circulation due to hoarding or when the community re-establishes contact with outside and local merchants must resupply for another six months. A currency shortage can have devastating effects - payrolls can't be met, shopping and purchases slow, interest rates rise. A temporary or artificial currency can be introduced that the townspeople have confidence in will be honored and accepted for most small-scale transactions.
Despite Ron Paul's lunatic ideas, the United States has had currency competition in one form or another for the entirety of its history. Between 1837 and 1866, any entity in the United States could issue paper money: individuals, companies, churches, banks, whatever. The National Bank Act ended this practice, but the act did not eliminate the use of scrip, a form of credit issued by institutions. Scrip became illegal in 1938 under the Fair Labor Standards Act, but it continued to be used in stock markets. Since 1991, residents of Western New York have been using a local currency called Ithaca Hours, which has been ruled legal by the IRS. Casino tokens, another form of local currency, have been used in Nevada since at least 1931 onward.
After hyperinflation, Zimbabwe was forced to abandon its currency. The government used US dollars and other foreign currencies were also used by the general population. The economy got better after that. Growth started back around the same time at which businesses started using other currencies and even more when the government abandoned the national currency.
- Ron Paul proposes 'currency competition' in bid to end federal monopoly on money by Pete Kasperowicz (03/16/11 02:01 PM EDT) The Hill.
- The weird obsession that's ruining the GOP by James Pethokoukis (July 23, 2014) The Week.
- See the Wikipedia article on Private currency.
- "Zimbabwe's trillion-dollar note: from worthless paper to hot investment", The Guardian, 14 May 2016