True But Terribly Written Illustration Of How Fiat Money Is Already Digital Money!
Money is nothing more than an accounting system; it’s a system for keeping track of who owns what.
Check out…what started as a short then ended up being a longer (with some discontinuity, haha!), almost good but terribly written fictional illustration on how money has already become digital. It’s just lacking that decentralized “it” factor. Bitcoin is the answer.
Early days
To illustrate this, let’s imagine a small fictional village called Dollarville. For simplicity’s sake there are a total of 4 buildings in the village, all of which are houses and each house only produces a single good. House 1 produces only rice, house 2 — pigs, house 3 — cattle, and house 4 — oranges. If house 2 wants rice and house 1 wants pigs they can agree upon a trade, for example, 3 bags of rice for 1 pig. After the trade, house 1 will have 3 less bags of rice but have gained 1 pig and house 2 will have 1 less pig but have gained 3 bags of rice.
Each house keeps track of what they own by subtracting/adding and recording trades in a book. Easy enough right? Not so fast! If house 2 wants more rice, but house 1 prefers cattle instead of pigs they would either need to agree on a three way trade including house 3, or house 2 would need to first trade with house 3 to get cattle before trading with house 1. But if house 3 prefers oranges instead of pigs, then house 4 would need to be involved as well. As you can guess, this became more and more complicated as more houses are involved.
Money days
Dollarville grew to 9 houses, equally dispersed among the 3 areas — west, east and south. Some of the new houses focused on providing a service (ex. House 5 — helped in killing mammoths) rather than producing a good. After some time the villagers all agreed that trading was becoming too complicated and inconvenient at times. They then selected 1 representative from each area — west, east and south to come together and solve this issue. The three representatives decided to create the first ever Dollarville Reserve System (also known as the Dollarville Reserve or simply the Doll).
They agreed to each contribute a piece land from each of the three areas, to make a neutral area and add a 10th building in the center of the village, named Dollarville Bank. The Dollarville Reserve created the first form of money which were bank notes known as dollars with numbers on them representing value (ex. $1, $5, or $10) and another set of numbers (known as the serial number) which identified the dollar as being unique. The Doll then passed a village law deeming dollars a legal tender meaning that dollars must be accepted if offered as payment of a debt. Since these reps were spending time away from their normal house work to run the Dollarville Reserve (which led to less personal income), they decided that a village tax was to be added on all trades as a salary for the Doll reps. That tax was to be paid in dollars only.
The Doll believed this new accounting system of dollars would ease the inconvenience that directly trading goods and services posed. At the time, $5 = 1 cattle = 3 pigs = 9 bags of rice = 5 bags of oranges = help killing 1 mammoth. So if someone from house 1 took $5 to house 4 they could get 6 bags of oranges or go to house 2 and get 3 pigs. The initial stimulus package provided by the bank granted each house a free bank account as well as a beginning balance of 10 dollars. A house could borrow from the bank and in exchange would have to pay interest and sign a contract that if they did not pay by a certain date they would forfeit a good. For example, if house 3 borrowed $5 and didn’t pay back the full amount (including interest) within two weeks, the bank would seize 1 cattle (plus the interest equivalent of cattle) or the equivalent of another good if they didn’t have enough cattle at the time.
From then on, the main form of exchange (trade) or payment became the dollar for goods and services since this was how the villagers were required to pay their taxes. Also, since these dollars were easy to carry and could buy any good or service it became extremely convenient to have them. People knew that dollars could be saved and retrieved at a later time and still be useful. Houses, in addition to keeping track of their inventory (what they own), now also recorded subtractions (debits) and additions (credits) of their dollars (measure of value for current goods and services) in their book.
The Dollarville Bank kept a central record of the total dollars as well as every dollar transaction every made in a book — they called it a ledger. The ledger was nothing more than a bunch of debits and credits to various accounts and also kept track of account balances. They also kept records of every dollar transaction (trade) for each house. The bank insured all money that was deposited as well as ensured that the dollars were impossible to make copies of.
After sometime the village grew with the addition of a 10th house which was the 11th building. House 10 revolutionized the village with the invention of computers and then the internet, connecting every building in the village.
Soon a younger set of reps were elected to run the Dollarville Reserve and decided that they were tired of carrying all their dollars around and wanted to utilize the new technology of the internet. They figured that since the banks already kept track of accounts online, there could be a card linked to an account that when read by a card reader would automatically debit the amount from the buyers account (person using the card) and credit the amount to the sellers account (place accepting the card as payment).
This caused so much excitement, providers of goods and services began to equip their houses with the technology to read the cards. Within no time cards became the preferred way to transfer dollar amounts instead of using actual dollar bank notes.
Houses still measured wealth by what goods they owned (ex. Cattle, pigs, rice) but put more emphasis on amount of dollars they owned in their bank account since it was more liquid and dollars were accepted everywhere.
At this point in time, money is just an accounting system to keep track of how many dollars someone in the village owns. The drawback to the current system is that everything goes through the Doll bank and therefore the Doll has autonomy to make all the rules. They control bank hours, interest rates, the power to freeze or seize accounts in the event that “think” an account holder committed a village crime, etc. Today the only real edge between digital money and the dollar is the dollar is deemed legal tender by the US Govt.
Imagine if the village used their computers on the internet and came up with digital money. Instead of the Dollarville Reserve System which is already now entirely digital and centralized; they created a new decentralized system on a secure digital network made up of computers (miners) in the village running the same software to verify transactions and secure the network. Imagine each miner would receive rewards from the network in the form of its digital money. Imagine each miner had a vote on how the system would work and a consensus determined any changes to the digital money instead of a central monarch? And since each miner was receiving rewards, in order to maximize the value of those rewards they would ensure their participation in the network is honest. Imagine digital money that worked just like the dollar but was not centrally controlled. Imagine this digital money had no bank hours, had low fees and could not be frozen or seized by any government or anyone? Luckily for you reading this, you don’t live in Dollarville and so you don’t need to imagine what the world already has…
Bitcoin!
Do you think this is full of sh*t or does this make sense? Do you agree or disagree? Do you want to give me writing lessons? Should I write an article describing in simple terms what Bitcoin is? If so, comment below!
