The Bitcoin Parable
[Author’s note: I think this might be the most insightful thing I ever wrote, so I’m separating it out from my longer article on Bitcoin. It’s an explanation of how money is only about belief, not intrinsic value.]
There once was a village called Nioctib (sounds Inuit or pharmaceutical but was actually in Nebraska). They mostly grew wheat, and bored. They didn’t know nothin about money, but they knew about wheat. What with their advanced technology, they were soon growing more wheat than they could eat. So Mary, who owned a big unused warehouse over on Ihsotas Valley Drive offered to take the excess wheat bags and store them. She vacuum sealed them so they’d last a lonnnng time. And Mary would keep a log of who gave her how many bags.
One Day Jim was over at Larry’s farm and when he saw what a beautiful, big fat pig Larry had, he offered to buy it. Not having any money — no one had invented it yet — he offered to trade some wheat for the pig. After some haggling, Larry agreed to a price of 4 bags for the pig. But rather than run home and make the extra trips, they just called Mary by talking to the walls — omnicom had been invented — and told her to give 4 of Jim’s bags to Larry. They all had more wheat than they knew what to do with anyway. Mary jotted it down on a Postit note, stuck it to the fridge, and that was that. Gosh-darnit, the Nioctib’s now had a monetary system! They dinn’t have no coins or currency, just money… namely, Mary, her bags, her trusty log book, her fridge, her Postit notes, and a warehouse fulla vacuum-sealed wheat bags. You can make ‘money’ more complicated than that but not really. You can throw in bigger computerized log books, more people and buildings, fancy-named intermediary stuff like mortgage-backed derivatives, and enough changes of hands that you have no idea where the bags of wheat are, but no matter what complexity you add, ‘money’ only consists of wealth stored somewhere… and managed by a trusted third party. (And if anyone deserved to be called a “third party” it was Mary, but more on that later.) Money is wealth stored by a trusted party.
[Narrator: So there’s our two-word (a.k.a, “crossword”) definition of money: ‘entrusted wealth.’ Think about it. When you say someone has a lot of money, you’re not implying they have a lot of cash or coins; you mean they are wealthy. And you also don’t mean they have JUST a big house and car (the tangible purchases of that wealth). You mean they have wealth that is stored somewhere, even in the rarest case that almost all of it might be ‘entrusted’ to something like real estate. But back to our story.]
One day, Mary got a little tired of keeping up the log book, so she thought she’d hand out IOUs instead. Brilliant! Her uncle across the road had a sheep farm so she got him to make some fancy sheepskin papers and from that point on she mostly handed out little parchment IOUs that said “Good for One Bag of Mary’s Wheat.” The next time Jim needed to buy a pig or goat or whatever, he didn’t need to call Mary… he just handed over some of those new IOUs, and everyone was happy as a pig in… a sty. Well, wasn’t this quite a development? The Nioctibs now had not just a monetary system but a currency system to boot! Woohoo. It worked so well that once wheat production leveled off a bit, people rarely even visited Mary. But them parchment bills continued doing their job just fine.
Well, lotsa years passed happily in Nioctib when one day, Jim Jr. asked his dad, “How does that money stuff work?” Jim explained that each bill was equal to a bag of wheat in good ol’ Mary’s warehouse, so when you paid someone two bills it was worth the same as the food you could get from two bags of wheat. Little Jimmy asked if they could go see this incredible warehouse some day. So they got in the buggy and took a ride. When they got to Ihsotas Valley Drive they could barely believe their eyes. Right where the warehouse used to stand, all they saw was a couple of rusted bulldozers surrounded by the tallest, densest packed wheat field you ever saw. Jim was dumbfounded. But right across the street was the most beautiful mansion you’ ever seen. The driveway was lined with fancy Italian sports cars and the building looked like it was gold-plated. Jim and Junior Jim walked up to a nice-looking man on the porch, who was sipping at some lemonade, to ask what happened. The man explained that a real-estate developer offered Mary a huge home on Biscayne Bay in exchange for the whole property to build a mall or somethin’. Well, he bulldozed down the whole affair but musta run outa money before he could build the mall. So all that wheat seems to have come back tall as can be, but that’s about it. The Jims started walking away, in a disbelieving stupor, when the man yelled out at them, “Here, take this,” and threw what looked like a brick of paper at them. Sure enough it was real live, perfectly usable Mary Money, maybe a thousand. He continued, “Long as people have a warm home and food on the table, seems I can print this stuff as fast as I want and there’s never really any problem. But don’t tell no one where you got it or it will be worthless faster ‘n you can spit.” They turned again to leave but asked, “What’s your name?” “Oh, it’s Sam. I’m Mary’s Uncle Sam.”