Why This Has Happened

Trade Replaces Trust

In tribes of less than 150 people, money is not necessary. Such small tribes can function like family households. Just as you likely do not barter or buy and sell things to your family members, members of a small tribe like this would not either.

However, such communal tribes rarely grow larger than 150 members because of the cognitive limit of the human brain for maintaining relationships. Beyond 150 members, we don’t know each other, and therefore don’t know if we can trust each other.

Two such 150 member tribes who encounter each other for the first time will likely be very distrusting of each other. Unbridled altruism towards the other tribe opens them up to being exploited, raided, robbed, slaughtered, etc. It would clearly be better if they were both altruistic towards each other, but the risk that the other is not is just too high, viz Prisoner’s Dilemma.

This seems to suggest that two 150 member tribes cannot cooperate with each other. They cannot exchange services, nor goods, nor benefit from the other’s specialized skills or advantages. However, they are not doomed to be isolated and uncooperative forever. If they learn to trade with each other, they can cooperate with each other without having to trust each other.

Trade Births Money

Trade allows for cooperation with strangers who are not part of your family or tribe. If one tribe specializes in making sturdy hand axes, and another specializes in hunting buffalo, they can trade buffalo products for hand axes and now they are both better off. The one will not starve in the winter, and the other will have better hand axes to use.

However, some goods will be more tradeable than others. For instance, hand axes can be manufactured by a tribe that specializes in making them, and then stored for decades and still be useful, while buffalo meat will eventually spoil. And axes are also easy to transport in large numbers, while buffalo meat can be combursome and must be guarded against preditors while travelling. Hand axes would be more tradeable than buffalo meat, therefore.

Suppose the buffalo hunting tribe has all the hand axes it can use after trading with the hand axe producing tribe, but comes in contact with a vegatarian tribe that harvests sweet berries. This tribe does not want buffalo meat, but is willing to trade their sweet berries in exchange for some hand axes. The buffalo hunting tribe can now trade all of its buffalo meat to the hand axe manufacturing tribe, stockpiling many more hand axes than it can actually use, because it knows it will be able to exchange those hand axes for delicious sweet berries later.

Thus, indirect exchange is born. The buffalo tribe exchanged its goods for something it had no direct use for, only because they expected to be able to exchange it later for something else. In using the hand axes as an intermediate commodity, or exchange good, the hand axes have become a form of proto money, allowing for much more complex forms of exchange/cooperation.

Specialization Births Community

The berry picking tribe, recognizing it can acquire other things it needs by exchanging its plant products, will likely begin searching for ways of increasing its production. Since its members have more leisure time with better tools and other goods it has acquired through trade, they have more time to think, and try new methods of increasing their harvests.

Agriculture may arrise as a new technological innovation, perhaps with irregation techniques and theories of seed planting and cultivation. The tribe may transition from nomadic to stationary, building permenant residences near their fields of plants.

Their intent will be to harvest as much food as possible, not merely for their direct consumption, but in order to trade for other goods that they need. They will be highly incentivized to trade their food harvests for the most tradeable goods available, because this will put them in a better position to trade for an even wider range of goods they may need.

The buffalo hunting tribe and the hand axe manufacturing tribe will likely follow suite. The buffalo hunting tribe may innovate in the technology of producing buffalo meat by domesticating the buffalo, and keeping them in grazing feilds. And the hand axe manufacturing tribe may come up with an assembly line system in which each member performs specific parts of the hand axe making process.

But all three will run into the same problem: secure storage of surpluses.

Because of the increased production by all three and the gains from specialization, each tribe will likely have a surplus of fruits, and grains, and hand axes, and meats, and furs, and many other things. Just leaving piles of these valuable items around comes with the obvious risk of theft by roaming bandits, or other tribes, or rogue members of other tribes, etc.

To solve this problem, they will each likely build storage silos of some kind. Keeping their valuables safe inside and protected by the watchful eye of all. It will probably be placed in the center of each tribes respective village. One may be an elevated granary of sorts, another may be a pit with a mound over it, another may be a storage house.

A new tribe may come along and specialize in building the most secure storage facilities. It may build a very large storage facility, made of stone and high above the ground, and allow any tribe to store their valuables in their storage facility in exchange for an agreed amount of goods.

This most secure storage facility may be placed in the center of all of the various tribes, so that all can keep a watchful eye on the accumulation of everyone’s valuables. Agricultural fields, manufacturing facilities, domesticated animals, and all other manner of tribes may begin to settle around this most secure storage facility. Each tribe able to live in close proximity with the other, producing and exchanging with each other without having to trust each other, and storing their valuables in the one communal storage facility.

The Bank Is A Temple

The communal storage facility takes on a great significance among all tribes. It acquires a name, songs are made about it which give it a personality. Eventually it becomes a diety in its own right, as all tribes pray for it to keep their life savings secure from dangers. It becomes a sacred temple of a god.

The tribe which specializes in administrating the temple comes up with a sophistocated accounting system. To keep track of who owns what, deposits of various goods are recorded on sticks by scratching tally marks that represent the kind and quantity of goods deposited. Upon bringing valuables to be stored, an administator counts the goods, tallies them on a stick, and then splits the stick down the middle, keeping one half in the temple’s records, and allowing the depositor to keep the other half.

To withdrawal goods from the temple one must present their half of the stick to a temple administrator, who will go to the records and match it to the corresponding half, and then allow the withdrawal.

This evolves into using clay tokens sealed in clay balls, or strung onto strings with a clay seal. The tokens are different shapes which represent different goods. And eventually this evolves further into using clay tablets with the symbols of the tokens written instead of physically held.

People can trade the tally sticks, or the tokens, or the clay tablets, and they are as good as the goods they represent, because anyone can bring them to the temple and withdrawal the actual goods at any time.

Whether the most tradable good is still hand axes, or has become grain, or cows, or silver ingots, the goods themselves are stored in the temple, and the items exchanged as money are the tally sticks, or the clay tokens, or the clay tablets. These are “backed” by the goods held in the temple.

The Return Of Trust

The temple administrators gradually realize that they do not have to keep all of the goods in storage, because most people are happy to exchange clay tablets with each other for their daily needs. Someone who has sold their hand axes in exchange for a clay tablet representing a sack of grain held in the temple, can go to the clothing merchant and buy a new robe with the clay tablet. And then the clothing merchant can buy some more wool with the clay tablet, etc.

The tablets can circulate in the economy indefinitely without ever being redeemed for the actual grain held in the temple. And as this becomes more and more common, the temple adminstrators devise ways of using the grain that is sitting in the temple storerooms “productively.” And so, they begin loaning it out at interest.

At first they begin loaning it out to traveling merchants, who will travel to a distant city-state and sell it at great profit. When the merchant returns, the merchant will have to pay back the loan plus the interest, and will have hopefully made a profit from the deal. Later, temples begin making loans to other temples, and more merchants, and begin to become extremely wealthy, building even larger and more secure temples to replace the old ones.

Some merchants will borrow from the temple and then make loans to others at a higher interest rate than what they will owe to the temple. These merchants become defacto retail and investment banks. And eventually, the loans will begin to be given to the peasants, farmers, and other workers, but only in the form of clay tablets.

The banking merchants will borrow clay tablets, manufactured by the temple, with the seal of the temple god, at a certain interest rate. And then they will loan those clay tablets to peasants, farmers, and workers at a slightly higher interest rate. And once they are repaid, they pay back the temple, and earn a profit from being the middle man.

The banking merchants must trust that the peasants, farmers, and workers will repay their debts, and the temple must trust that the merchants will repay theirs, and everyone must trust that the temple will allow withdrawals of the actual goods it holds in its reserves. A circle of trust has emerged.

When The Money Fails

The banking merchants get richer and richer thanks to their priviledged relationship with the temple, while the peasants, farmers, and workers must work longer and longer hours to produce enough to repay their debts. For they know that the penalty for not repaying debt is slavery.

But one year it does not rain, and so there is not as much food produced. This means there is not enough food to sell, and so those who are heavily in debt are struggling to repay their debts. Soon there is a threat that nearly all of the farmers are not going to be able to repay their debts, and so the banking merchants are not going to be able to repay the temple.

So the banking merchants talk with the temple administrators and put their heads together to figure out what to do. The solution is for the temple to give the banking merchants more loans so that it will have enough to pay the temple back. And the banking merchants can take this new money and loan it to other merchants who will hire the out of work farmers to do some other form of work, so that they can pay the banking merchants back.

This works for a while, but the famine continues. And the next grain harvest is even less than the previous. Even more farmers are not going to be able to pay back their loans, and there is also even the threat of not enough food to eat.

Again the banking merchants consult with the temple administrators. This time, they come up with an even bolder plan. They are going to give all of the peasants, and farmers, and workers free money. They will each receive a monthly “check” in the form of clay tablets, which they can use to buy whatever they need until the famine is over.

However, once the people receive their clay tablets, they are unable to use it to purchase food, because there simply isn’t any new food being produced during the famine. The money is worthless. What they need now is the food that was stored in the communal storage facility. They need society’s collective savings!

The Looting of Society

Everyone all at once runs to the temple trying to redeem their clay tablets for stores of grain. But the administrators tell them that they cannot all be redeemed at once. You see, the whole premise of the system depends on not everyone redeeming their tablets all at once. There simply isn’t enough grain in the stores. Most of it was leant to merchants who sold it, or leant to other temples who have now defaulted. Society’s savings and surpluses are gone!

The temple decides it will give everyone a small ration of grain every day. The clay tablets now are worth even less than clay. The small ration is barely enough for people to stay alive. Many have become slaves. And the grain is running out. Then another city-state’s army invades, slaughters everyone unfit to work, rapes the women, and loots the temple of all of its valuables.

They too had run into the same problem with their city-state’s savings running out, and their solution was to raid a neighboring city-state to acquire the resources they needed. Tribalism returned, but at a much larger scale than before. A new temple is made, with a new system. A new order of the world.

The New World Order

Gold coins have become the most tradeable good in the new economy. It is the money of choice. But it is difficult to securely store and transfer. So most people deposit their gold coins into banks. The banks give a note as a receipt that the deposit was made, and people can withdrawal their gold by bringing the receipt back to the bank that issued it.

Eventually everyone is just trading the paper notes that represent gold deposits instead of trading the actual gold coins. The paper notes can circulate indefinitely, without ever being redeemed. The banks are therefore in need of a way to make use of all of the gold in their vaults. They decide to loan it out at interest.

The banks make loans of gold, people use the loans to buy things or to build companies. The economy booms, and then something happens such that someone cannot pay back their loan. And this dominos into others not being able to pay back their loans, businesses close, people go bankrupt, and the banks are not going to get their gold back.

People hearing this rush all at once to the banks in order to redeem their paper notes for actual gold coins. But the banks tell them that they cant redeem everybody’s notes all at once. The whole system is predicated on the fact that not everyone redeems their notes all at once!

The notes rapidly lose their value, the economy is in free fall and everyone is in a panic. So the bankers go to the government and brain storm a solution. The solution will be to create a central bank that will hold reserves of gold in case of emergencies. That way this sort of thing wont ever happen again, because the banks will be able to get gold from the central bank in the event of another bust.

The Secular Temple

The central bank makes loans to the retail banks at a small interest rate, and the retail banks make loans to others at a slightly higher interest rate. The economy booms as people use the loans to buy things and build businesses. Then something happens and somebody can’t pay their loan. This dominoes into businesses going bankrupt, people losing their jobs, and the banks are not getting paid back their loans.

People panic and rush to the banks to redeem their notes for physical gold, and at first they are given the gold. This increases the value of the notes, because they really are as good as gold. But the deflation makes it even more difficult for people to repay their loans. So the economy is in a depression, and the banks are all going bankrupt as people default on their loans.

So the banks consult with the central bank and try to come up with a solution. The solution is to make it illegal for anyone to hold gold. By law everyone has to sell their gold to the government in exchange for notes. The only money allowed now is notes, and no citizens can redeem their notes for gold.

The central bank then gives more notes to the banks, and the banks make more loans for more businesses so they can hire people, so they can pay back their loans. The value of the notes decreases, but this makes it easier for people to pay back their loans.

The economy booms. A new generation is skeptical of loans. They work for money, they save their money, and they buy the things they need, with as little borrowing as possible. But other countries have been selling their goods for notes, because the central bank has promised that other countries can redeem their notes for gold at any time, even though citizens cannot. Seeing the central bank print many notes to pay for wars and government programs, other countries become skeptical, and so demand their gold by returning their notes.

The central bank gives up the gold to the other countries in exchange for the notes, but now worries that other countries are going to do the same. There is not enough gold for all of the countries to redeem their notes all at once. The whole system is predicated on the fact that not every country redeems their notes all at once!

So the central bank and the government brainstorm a solution. The solution is to announce that no countries can redeem their notes for gold any longer. Only the notes are money now, no citizens, no governments, can redeem them for gold.

This results in a rapid decrease in the value of the notes. Prices for gasoline and bread and other items skyrocket. Price controls are put into place to stop the inflation, but this does not work. The solution is to make an agreement with the global oil cartel to only sell oil for the notes, in exchange for military backing from the government. Now the notes are backed by oil instead of gold, and all oil consuming counties need notes in order to get oil.

A New Famine

Many wars must be fought in order to ensure that the global oil cartel continues backing the notes with oil. But the central bank gives loans to the banks at small interest, and they in turn give loans at higher interest, earning profits.

The economy booms. The notes maintain their value. People use the loans to buy things and start businesses. But something happens, and someone is not able to pay back their loan. This dominoes into many, businesses close, people lose jobs, the banks are in trouble. The solution is the central bank creates more money to give to the banks, who loan it to businesses, who create more jobs, so people can repay their loans.

This works for a while, but then there is a global pandemic. People cannot leave their homes. Production of goods comes to a halt. People lose their jobs. Soon many will not be able to repay their loans. The banks are in trouble, and this time there is the real threat of no food.

The central bank decides it knows what to do. It gives money to the banks, and the businesses, and decides to also write checks to the people. But when the people get their notes, and there is no food or other products on the shelves to buy, they will realize the notes are worthless. What they need is societies savings and surpluses!

But there is no savings, and there is no surplus. The whole system is predicated on the fact that there will never be a rainy day.

The End Of The Cycle

The problem all started when we needed to securely store our surpluses. We decided to entrust a central institution to keep all of societies valuables in a vault. Instead of storing societies surpluses for a rainy day, it decided to enrich itself and its friends.

To end this vicious cycle, we need only to remove the rent-seekers in the middle who suck the wealth out of society, by making them obsolete. Those institutions that have a priviledged relationship with the central bank, that make fortunes by borrowing at a low interest rate and lending at a higher one, cause boom/bust cycles in the economy, enslave us in debt, and make us vulnerable to any slight downturn in productivity by making it impossible to save.

The service they offer is merely to securely hold our money. Everytime we deposit our checks into a bank account we put our trust into an elite group. But what if we had a money that didn’t need to be deposited into banks in order to be secure? What if we had a money that didn’t need to be issued by a central bank? What if we had a money that was easier to store and transport than gold, but just as reliably scarce in supply? What if it was even more divisible than gold so that there would always be enough to circulate regardless of how valuable it gets?

If that were the case, then we could just store our money ourselves, and for once it would be the banks going bankrupt instead of the entire society. By not having to deposit our money in banks we would starve them out as an industry. And we could have money that doesn’t need to be backed by a global oil cartel, and which isn’t based on perpetual debt, and which doesn’t decrease in value until one day its worthless.

We could have a money that grows in value so that we don’t need loans. We can work for a while and build up a savings and let it grow. We can save up to buy things outright and own them the day we get them, never having to make a single monthly payment. We can save up to retire early, and pay for college and healthcare without needing loans or insurance. We can take a year off work to do an art project. We can invest our wealth into charities and companies working to clean the oceans.

And best of all, when something unexpected happens, and we all need to stay inside for a few months to kill a pandemic, instead of debt payments, insurance payments, and rent due every month, we will have a surplus of savings there for just that purpose. The economy wont have to crash. And the money wont have to lose all of its value.

Luckily, such a money already exists. It was invented in 2008. And it is called Bitcoin. But for some reason, people still think we need the central bank to print more money to keep this horrible system alive…