Part 1 doesn’t still doesn’t really explain money though?

So, let’s look at this another way, hypothetically if we took a small group of people, 1000 or so, and dumped them on an island (always my go to when trying to understand something!), where they each had their own area of land to settle, some were livestock farmers, some food growers, tradesmen & equipment manufacturers, etc. but there was no existing currency or monetary system in place.

They would need to develop a trade system, so that the tradesmen could eat and the farmers / people could have equipment made and maintained. This could be done simply by bartering goods for an agreed value, two chickens might be equivalent to a bag of potatoes, that may be equal to a small Knife, etc. So, money in this case is an “agreed value of exchange”, the value of the money is “backed by the worth of the item being traded”.

This works fine to point, however not in every case would both parties need the item that was on offer for trade, then it gets a little more complicated, the farmer might not need a bag of potatoes but he does need a knife, the blacksmith needs some potatoes so the farmer takes them from the Grower in exchange for chickens so he can trade for a knife with the blacksmith! Phew!

So, the group may decide to introduce a form of currency that can be traded on the island, this needs to again be backed with the value of the islands goods and services as agreed according to them. The considerations for the physical form of exchange (Money) needs to consider, durability – it’s no good if the money gets destroyed easily as once it’s gone – it’s gone! Also, it’s no good if the money can be easily copied otherwise people would just make their own, however there is a certain amount of trust assumed in a small group.

This is nothing new, past civilisations have used salt, yak dung, leather, shells, minted coins, and even prisons develop their own system of coinage like cigarettes.

For arguments sake let’s assume that the islanders have their blacksmith knock up some basic coinage, 5 sizes of coin and they have commissioned, 1000 – Size 5, 800 – Size 4, 2000 – size 3, 4000 – size 2, and 4000 – size 1.

The islanders may decide that the value for the coins is to be based upon the value of the potato? Perhaps, if 1 bag of potatoes is equal to 2 chickens or one small knife, and one bag contains 200 potatoes, and it takes 1 minute to dig 6 potatoes, therefore 360 potatoes could be dug in one hour. So, 360 potatoes = 1 hour’s work, and basing their smallest denomination upon 1 minute of work and deciding that 1 minutes work = 1 small coin. They may also decide that;

- 5 – size 1 coins = 1 – Size 2 coin
- 2 – size 2 coins = 1 – size 3 coin
- 10 size 3 coins = 1 – size 4 coin
- 10 size 4 coins = 1 – size 5 coin

So in total we have

- Size 1 – 4000 = 4000 coins
- Size 2 – 4000 = 20,000 coins
- Size 3 – 2000 = 20,000 coins
- Size 4 – 800 = 80,000 coins
- Size 5 – 1000 = 1,000,000 coins

Total value of coins = 1,124,000 – for short I’ll call these #’s – therefore #1,124,000 worth for the island which equates to 5620 bags of potatoes, 18,733 hours of work, 11,240 Chickens, etc.

This probably has many flaws but it’s a start and we’ll revisit this later.

In part 3 we will analyse our societies and how our money has progressed to modern day.

Pingback: Understanding Crypto Currencies – Part 1 A beginner’s challenge | Prepare to Survive

Pingback: Understanding Crypto Currencies – Part 3 So how did we get to where we are in our society today? | Prepare to Survive

Pingback: Understanding Crypto Currencies – Part 4 Blockchain basics and what is a Bitcoin? | Prepare to Survive