Imagine, if you will, a group of coworkers who in the midst of a relaxing work retreat on a yacht, are marooned on an island and forced to shelter there for an indefinite period of time. Faced with this unforeseen situation, these weary travellers need to decide how to function peaceably in their new micro-economy. This would immediately present a dilemma - what will they use as a form of money to facilitate trade amongst themselves?
Q: I imagine that like most small societal groups, they would start with barter, correct?
A: Bartering is a good temporary holdover, but it cripples economic activity.
Q: Then I imagine they would consider using any available resource including sand or coconuts or rocks or seashells?
A: Resources like sand or coconuts are not scarce enough. And rocks or seashells are not similar enough to be used interchangeably – they are not fungible, nor are they divisible.
Q: Good point, sea shells are also not very durable. So, what did they decide to use?
A: They decided that they could solve the problem by keeping a written ledger.
Being employees of a paper company, the one resource they had in excess was paper. In the center of the communal area, they placed a notebook. In order to fairly inject the first money into the community, they decided to award it according to the work being done. Every day, there would be 50 units of money issued. Whoever did the most work that day would be awarded the money.
Q: Wouldn’t issuing new money every day inflate the money supply and reduce the value of the previously issued money?
A: That’s correct and so they mutually agreed that the reward would be reduced by 10 units every 7 days, so that they could seed money into the economy, but then phase out the reward in order to encourage interpersonal trade.
Things started well as Jim built a community shelter the first day, and he was paid 50 units. Dwight caught a dozen fish and some crabs the following day, and thus was also paid 50 units. They were paid by writing down a transaction in the ledger as follows:
From “Community” to “Jim,” 50 units.
From “Community” to “Dwight,” 50 units.
This process carried on for a few days, until some money had started to be seeded into the economy. On the fifth day, Jim wanted berries that Angela had gathered, so he paid her 5 units for them.
Q: What would prevent someone from just writing a fake transaction in the ledger?
A: Toby asked that very question. So they decided that the person who was paying should put their signature next to the transaction. That way everyone could see that they did indeed authorize it.
Transactions continued in this way for a while, until a crisis occurred in the village - there was accusation of theft. Dwight claimed that Jim had paid him for fish, and signed the transaction. But it had been the first transaction on a new page of the notebook, and now the page was missing. Jim claimed that it never happened, but Dwight was insistent that he must have torn out the page.
Q: How did they resolve the crisis?
A: The group sat down and thought about the issue. They were faced with the question of “How could you prove that a transaction had actually taken place?” They came up with a radical idea. They decided to give everyone in the community the opportunity to keep their own copy of the ledger.
In order to facilitate this, they decided to come together every evening, and everyone would write down the transactions that had been done that day, and sign them in everyone’s personal copy of the journal.
Now a transaction was not considered finalized until it had been written to everyone’s journal and signed for.
Q: This sounds increasingly complex. How would they ensure that every page was in order, and didn’t get mixed up?
A: They numbered every page, which allowed everyone the ability to quickly check that the pages were in order, and that none were missing.
These new changes allowed Dwight to feel confident that in order for his transaction to be reversed again, Jim would have to coerce everyone in the group to pretend that it hadn’t happened, including Dwight. Since Dwight had his own copy of the ledger, he had signed proof of what had happened. Others, like Angela, were willing to rely on the copies of the ledger that other people kept. As long as they cross-checked and ensured that people were in agreement, they had a measure of confidence that they could trust what they were seeing.
Q: This makes me think they are going to encounter a bottleneck in the process. What if one individual wants to receive and spend the same money on the same day before the nightly reconciliation?
A: Yes, imagine if Jim paid Pam, but Pam wanted to turn around and spend that money the same day to buy something from Angela? Instead of settling the ledger once a day, they decided that they would settle it once an hour.
Every hour, some of the community members would gather and accept the transactions that had occurred in that block of time. Other members who were busy and couldn’t be there every hour would simply need to ask for the latest changes, and wait to see who had the most up to date history. Because every transaction was signed for, they didn’t have to worry that they were receiving false information.
These changes provided the community with a monetary system that had the capacity to improve iteratively based upon collective consensus, without losing the value of the individual currency units. Nobody is imposing authority over how it can or cannot change. After the changes were implemented, people were able to come and go from the community shelter, while rapidly improving commerce.
Then Michael had a bright idea. He was willing to sit in the town square all day, and he would take whatever transactions came in during that ten minute period. In exchange for being willing to keep track of all transactions, it became customary for the community members to pay him a tip alongside their transaction. If there were few transactions that hour, they would tip him less. At the end of the day however, the competition to be included in that hour’s transactions grew. In order to prioritize their own transactions, people started offering larger tips. Being the smart businessman that he was, Michael always took the best tips first, and if he had time to work his way down to the small tips, he would. But if not, those would always be waiting for the next hour. Powered by their new economic system, they began to trade with one another, and increasingly added value to their society as a whole. When they were finally rescued, they were sad to say goodbye to their little island paradise. It was an experience they would never forget - least of all the quiet intern named Satoshi.