But that is where a very powerful economic law, Gresham’s Law, comes into play.
Simply put, “bad money pushes out good money.” When currencies compete, everybody wants to spend the weaker of the two and save the stronger. And while virtual money can be doubled or trebled with the push of a computer keyboard button, the government *cannot* make more paper money, or even higher denomination bills.
Even if they made $500 or $1000 bills, they would be useless, because nobody could make change for them.
So here are two forms of dollars. Having cash that is completely under your control at home in a safe place, means that you can act quickly no matter what happens.
Virtual money is under someone else’s control, made worse by yet another recent change in the law, so that bank customers cannot even demand “demand accounts”, if the bank doesn’t want to, or has orders not to, relinquish them.
The public seems to be reaching this conclusion as well, because home safes and strongboxes have been flying off the shelves for several years now.
There is a way to see the virtual vs. physical split from an objective viewpoint as well, by understanding the behavior of ‘scrip’. Scrip is a non-legal tender complementary currency that is very tightly controlled as to its value and the price of things purchased with it.
It was created hundreds of times in the US during the Great Depression, and kept local markets and local government functioning when the US dollar had severe deflation and shortage.
The expression at the time was “You could buy a pound of hamburger for a nickel, but nobody had any nickels.” So scrip filled that gap. For example, if a pound of hamburger cost 1 scrip, no matter what the dollar did, it still cost 1 scrip. People bought their scrip with dollars, and could use whichever currency gave them the better deal.
Importantly, on the local level, scrip actually helped to stabilize the dollar.
http://en.wikipedia.org/wiki/Scrip
Once again, there is no difference between checkbook dollars [what you call -- not incorrectly -- virtual money] and paper dollars. They spend the same. People use them in the same way.
Paper dollars have no more purchasing power than the others. You are trying to make a distinction where none exists.
There is one scenario where you might be right. If an electro-magnetic pulse from a nuclear bomb destroys all of our electronics [wiping out trillions of dollars instantly], then paper dollars might become relatively valuable.
But that's not even certain, because the only reason green pieces of paper have any value at all is the confidence of individuals that they will be accepted as payment. After a nuclear attack, I'm not so sure such confidence would exist.
Instead of trying to defend paper fiat money, go study up on why gold would be a better currency.
“Even if they made $500 or $1000 bills, they would be useless, because nobody could make change for them.”
I know a lot of people, including me, that carried a $1,000 bill in their wallet especially for emergancies in the 1950s.
The car owner gave me one for weekend expenses for the race car in 1957 and by the end of the weekend it was spent.