Can You Create Your Own Currency?

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I used to work in a manufacturing plant in India which was in a remote location, away from the city. About 1500 people lived inside the complex and there were few shops, mostly daily necessities, grocery, laundry etc.

Often I went to the grocery shop to purchase stuff and the bill ended up to be ₹ 95 and none of us had change. So I used to give him ₹ 100 and he gave me back a piece of paper. It mentioned ₹ 5, and it had the signature of that shopkeeper. I assumed that I can keep that paper with me, and use it to buy other things later.

It looked something like this:

You know what was interesting?
Other people inside the campus also accepted that piece of paper!

So the grocery shop gave me a paper worth ₹ 5, but even the laundry guy accepted that paper. I could get my clothes ironed from the laundry and give him that piece of paper. Obviously, the laundry person would also need to buy groceries and therefore he could give that note to the grocery store.

People inside the campus actually transacted in those paper chits of ₹5 and ₹ 10! Everybody accepted those pieces of paper because everybody needed to go to the grocery store some time in the future. Within that factory location, we had a new currency!

People could buy stuff without actually paying in India’s official currency notes. Simple pieces of paper could work.

Why does this work?

It is simply because other people accepted it. You can create any currency at all, as long as other people are accepting it.

After all, a currency note is just a piece of paper. It draws all it’s power from acceptance by other people. Power resides where men believe it resides (ahem).

Why do people believe in the official currency notes?

You might therefore ask why a ₹ 2000 note should be accepted by me as actually having the value of ₹ 2000. This is because that currency is legal tender.

This means that the law recognises that currency note as having a value of ₹ 2000. So if you have paid that currency note to a shopkeeper and if he is not giving you your material, you can go to the court, and the court will believe that you have actually made a payment to that person, because that ₹ 2000 note is a legal tender.

But if you have made a payment to that shopkeeper in a simple piece of paper with your signature on it, the court will not support you. Because the law does not recognise that currency as having any value.

Therefore, you can make all the currency notes for yourself, but you cannot force the government, the court and the law to believe it. And if the court does not believe it, other people will be afraid to accept that note because they have nowhere to go if you don’t fulfil on your promise.

Hence most people accept official currency notes only, and not any other notes.

Is it illegal to have any other currency notes?

No, it’s not illegal.

As you will remember in my example, we actually had a simple piece of paper. There is nothing illegal about it. You are not breaking the law by doing any such transaction.

But the problem is (as explained above) that the law does not recognise this as a legal tender, which means that if you paid someone in your personal currency, then the law will treat this as if not paid at all. So, if the other person accepts it – congratulations, but if he does not – dude, you are on your own, the courts will not help you!

Does it result into tax evasion?

Of course not! You can transact in anything for all the government cares, as long as you are paying your own taxes. If you paid someone using chits of paper (such as the shopkeeper above), you still earned that money and you should pay tax on it.

Just because you are earning in some other currency notes does not mean that you are not earning. As far as income tax is concerned, it is your income and you should pay tax on it. In itself, this does not result into tax evasion unless you are actively evading the tax yourself, in which case you should be ready to face any penalties as per the law.

Hence, the net conclusion is:

  1. You can create any currency for yourself, but you can’t legally force others to accept it. The law only considers the official currency notes – hence, those you can force others to legally accept.
  2. If others are accepting your currency notes, it is not illegal to transact in that currency notes. As long as others are accepting it, you’re completely fine. But if they don’t accept it, you cannot then approach the courts.
  3. Regardless of whether you are transacting in official currency notes or any other random currency notes, you still have to pay tax on your income. Not doing so is illegal, and you can be penalised for it.

This post was originally written by Palkesh Asawa.

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Piyush is the Editor at Business Quant. He's worked in the financial domain for several years now, with his work being featured in prominent international financial portals such as CNN Money, Yahoo Finance, Daily Finance etc. His love for financial analysis brought him to BQ.