I think we are a long way from this scenario

This seems a little extreme:

The government has men with guns and dungeons. The armed men will throw you in the dungeon unless you pay taxes. So if the government chooses to accept random pieces of paper as payment, the pieces of paper become valuable. The point of collecting taxes isn't that the government needs money (it can print money) it's that if the quantity of taxes is too low relative to the stock of money, then the money loses its value and the price level rises.

But, at it's heart it points out something that is often forgotten about government.  We have lived under a benign and strong government for so long that we (as a culture) seem to have forgotten that somebody is likely to have people with guns.  When the people with guns are members of a republic with an obligation to protect the citizenry, things are rather good.  But if you make the government "small enough to be drowned in the bathtub", there will still be people with guns but they might have a different view of what constitutes a code of conduct.

This is not to say government cannot be improved (in a thousand ways), but it is worth keeping in mind that there are no scenarios where the "people with guns" issue goes away completely (even if we got rid of all guns, feel free to substitute "people with clubs").