CoinScrum’s Bitcoin Bootcamp in London

I was very excited to take part in the first official CoinScrum Bitcoin Bootcamp in London yesterday. Lots of great people, I felt honoured to present alongside Hakim Mamoni and Edd Harpham. 

Before you ask yourself “what is Bitcoin?” ask yourself “what is Money?”

Yesterday’s talk reinforced my belief that in order to really understand Bitcoin or virtual currencies to that matter, one has to really understand what is Money, and what is Currency (Money is a concept and Currency is a tool). We can of course use Money and Currency without understanding them, just like we can make babies without really understanding what’s going on, but using something and understanding something is not the same thing.

Understanding Money and Currency is quite abstract and takes time to grasp, but if you really what to understand how virtual currencies can change the world, you should really understand Money and Currency.

You can view the slides from last night here:

Money 101 February 18, 2014

It’s a 50 years project…

The other thing that got stuck in my head yesterday was what Paul Gordon, who runs CoinScrum, told me as a passing comment, it was something along the lines of “it’s a 50 years project and we need to be careful when speaking about Bitcoin. Until the currency is stable, it’s a risky investment…”

Apologies Paul if I miss quoted you, but that was the gist of it, and I totally agree.

Visiting Ecofiltro’s factory in Antigua Guatemala

Clean Water

Clean Water is a challenge for millions of poor rural Guatemalan families and many more millions of poor families around the world. These families don’t have access to clean water, they need to boil water in order to purify it, but they can’t always boil water. When these families do boil the water the smoke of the bonfire they light can hurt them, while the fire itself releases CO2 and and cost these poor families 10 precious dollars per month.

Purifying Water With Clay

Purifying water can be actually done with very basic materials. The Same clay ancient civilisations used to create their plates and cups when treated smartly can use as a filter to remove dirt. Together with two other common materials: sawdust that removes smells and bad tastes, and colloidal silver that kills bacteria one gets a very effective filter. In 1981 Mr. Fernando Mazariegos, a Guatemalan engineer, developed a clever way to use clay, pinewood, and colloidal silver in order to produce a super effective water filter, the Ceramic Pot Filter. It is simple to use and can be produced by locals, using local material, thus creating jobs in poor areas, providing clean water to poor families, and protecting the environment by eliminating the need to use bonfire to boil water.

How Does It Work?

A clay Ecofiltro filter looks like a large clay planter. You put the filter into a bigger container, pure water into the filter and clean water drip into the larger container in a rate of one litter per 2 hours. Each container has a little faucet at the bottom, and that’s it. Easy. Cheap. Environmental.

Ecofiltro

Good ideas are just good ideas. It takes a bold entrepreneur to make them happen, Philip Wilson is such an entrepreneur.  I’m meeting Mr. Wilson at his third Ecofiltro Factory at the outskirts of the beautiful colonial Antigua. It’s a state of the art factory. Looking like a combination of a museum, a workshop, and a warehouse, the factory may look vey nice, but it is also very efficient, producing almost 100,000 filters a year. Improving the lives of 100,000 poor families a year.

Social Business

Mr. Wilson is a new type of entrepreneur. He wants to make the world a better place, but he knows that great businesses have better chances to make an impact. Social business entrepreneurs are not social entrepreneurs and not your average exit seekers, they are a new type.

Young, ambitious, with contagious enthusiasm, Mr. Wilson is determined to provide 1M filters to 1M poor Guatemalan families by 2020 while building a multi million dollar business. Mr. Wilson has already won numerous prizes, but one visit at his new Ecofiltro factory is enough to convince even the most sceptics that he is very serious about his plans.

Manufacturing The Filters

The clay is being dug at local pots, dusted at the factory and then mixed with pinewood sawdust. The mixture is being watered and then pressed to form a new filter. The clay filters are then finished by a qualified artisan and then burnt for exactly 6 minutes. The next stage is quality control to make sure that it takes exactly 2 hours for one litter of water to filter through, not more (too slow production of water which is not practical for families to use) and not less (If the water is filtering too quickly, it means that the filter holes are too large and that dirt can go through). Only 65% of the filters pass the quality test as the process itself requires some skill and knowhow. The rest of the filters are being sold as planters while those filters who pass the quality test are being painted with colloidal silver to become a finished good. A new filter costs $25 together with the simplest container and can serve a family to purify its water for two years.

A demonstration transparent container, with the clay filter inside:

And a filter that didn’t pass quality control…

The Business Of The Social Business

Ecofiltro has two types of filters: Rural Filters and Urban Filters. They sell the Rural Filters to poor families on a subscription base for $2 a month and they sell the Urban Filters for anything between $60 and $150 depending on how pretty is the container. Both Rural and Urban filters do the same thing, purifying water. The Rural ones save lives and are being sold on a break-even price while the Urban filters are being sold for a profit which subsidises the Rural filters. But the really nice thing about the Urban filters is that even an urban family can save money by using Ecofiltro instead of buying bottled water. Social Business Ventures seems like the 21^st century new way of making an impact.

Distributing The Filters

Ecofiltro has two very distinctive markets: The Rural Market and The Urban Market.

Rural Market:

In order to market the Rural Filters to the poorest communities, Ecofilitro has built a team of representatives who travel to the remotest villages in Gutemala and recruict local “Water Boards”.  A Water Board is a group of 3 locals, usually females who are trained to educate locals about the program and encourage them to sign for the initial subsidised $2.5 payment and the $2 per month subscription for a filter. Surprisingly enough, some locals, don’t even know that they have water problem and think that regular stomach ache and high child mortality rates are normal. The families will be then trained to use the Ecofiltro hygienically, as if the filter is fractured or being touched with dirty hands its effectiveness could be damaged significantly.

Families who sign for the program will pay an initial fee of $2.5 for the first filter and a container and then will pay $2 monthly to be entitled for a new filter after two years. Just for comparison, local families spend every month about $10 on fire woods and another $8 on medicine for contaminated water and smoke related diseases.  Since poor families pay only $2.5 for the first filter and container, Ecofiltro has to finance the additional $22.5 to get to the $25 price of the filter and most basic container.For that end, Mr. Wilson established the Ecofiltro foundation, an NGO financed by donations, which pays the $22.5 additional sum needed to purchase the first filter and container. The Water Boards are a brilliant social invention that puts peer pressure on local families to participate, to pay the fees, and also helps Ecofiltro to collect the monthly subscription fees. If only 75% of families pay the monthly fee this social operation can break even.  As mentioned, Ecofiltor’s goal is to reach 1M rural families by 2020 and to essentially solve the water problem in Guatemala.

Urban Market:

Urban Market filters are exactly the same filters like the Rural ones, but come with fancier containers. The filters are sold to businesses that are excited to take part in protecting the environment, while saving money on bottled water. The filters are also sold to households that like the idea and also like the clear water great taste. Finally a more expensive filters are being sold to fashionable wealthy Guatemalan that are happy to take part and purchase one of Ecofiltro’s collectable and uniquely designed containers that are being sold on a regular action around Guatemala. For Ecofiltro the Urban Market serves three goals: (a) it subsidises the entire operation, (b) it helps fund the Ecofiltro foundations as 5% of the proceedings of any Urban Filter sold are being donated to the Ecofiltro foundation, and (c) it is a great marketing channel that helps the Ecofiltro team to spread the idea, raise awareness, and raise donations.

Solving The World’s Water Problem

Mr. Wilson is dream is to solve the world’s water problem, he is working on standardising the manufacturing of Ceramic Pot Filtering, and he is also working on Improving the filters themselves, improving its go to market channels, and on spreading the technology to more countries around the world. All that while protecting the environment, selling carbon credit worth millions of dollars, and building a multi million dollar social business enterprise. Walking around Ecofiltro’s implacable factory and listening to Mr. Wilson passionate plans, solving the world’s water problems doesn’t sound such an unrealistic goal anymore.

For More Information

If you wish to know more, get involved, volunteer, or donate a new filter and container through the Ecofiltro foundation, visit Ecofiltro’s website at www.ecofiltro.com or contact Ilse Verhaert at iverhaert@ecofiltro.com

Payments innovation vs. Money innovation

Paypal. Square. M-Pesa. iZettle. Mobile payments. Mobile Cash. Barclays Pingit. These are some of the buzz companies that change the way we are going to transact. But these companies are disrupting only the payment space, which is a sub section of the social tool Money.

Money is a concept. It’s like Language. It’s not really possible to “innovate” the concept. Language is a social tool for communication, Money is a social tool for commerce. Currency is the thing that enables the use of the concept Money the same way words enable the use of Language. How do you transmit words from one person to another? Using your voice. Using a written documents. Etc. Telephone was an innovation that changed the way we can transmit words from one another. The text message changed the way we transmit words from one another. But neither the telephone nor the text message changes the concept of Language nor the words themselves. There was some change to words, for example the extensive use of shortcuts, like “how R U ?” etc. but these are minor modifications.

Money is like Language. Currency is like Words. And payment platforms are like the telephone or text messages.

Square and Paypal innovate the payment space. Bitcoin innovates the Currency space. Both Square and Paypal would be able to change the way we transact Fiat Currencies, and the way we transact Decentralised Crypto Currencies.

Money is Money is Money. It’s a social tool, it’s a concept that needs Currency in order to be operational in the real world. Currency is the technology, the infrastructure, the ecosystem to operate the concept of Money. Every Currency, Commodity Currency (Like gold), Fiat Currency (Like Dollar), or Decentralised Crypto Currency (Like Bitcoin) have many components, many parts of the infrastructure. Payments is just one part of this infrastructure.

 

 

“It’s the purchasing power, stupid”

What is Money? It’s a social tool to facilitate commerce at large scale. What is Currency? Currency, are chips / symbols, things that facilitate the use of the concept Money. Currency to Money is like Words to Language. Like building blocks to the concept of House. Currency are chips / symbols that represent…. represent what?

People will say that Currency units represent value, represent faith, represent some ownership of mysterious assets held by the government and back the Currency. Are they? The answer is much simpler. Currency represent purchasing power. Currency is just a ledger, an abacus, a sheet of paper with notes, signs on a tree that represent what I can claim and what you can claim.

Imagine that you and I are living on an island. We both work. We produce things that we need. We collect Coconuts. You work hard. You collect More Coconuts than me. Every day at 5pm we bring all the Coconuts to our warehouse and mark signs on a tree. On the left, you mark the Coconuts that you brought. On the right I mark the Coconuts that I brought. What we are doing is using Money! The marks are our Currency!

It’s a horrible Currency. It’s not Scarce because I can come at night and counterfeit more marks… it’s Fungible OK, because each mark is like any other mark… but it’s not really Divisible, I can’t easily divide each mark to smaller marks… it’s not Durable as the marks will disappear with time… and it’s not Transferable… if we leave the island we can’t really take the marks with us…

But it’s Currency. Whenever I feel like eating a Coconut, I go to the warehouse, take a Coconut and cross one of my marks. I used my Currency. This is obviously a simplification, don’t try to develop the analogy too much, but the idea is clear. What matters is that the marks on the tree represent the purchasing power I can command over the pile of Coconuts.

The same way the Dollars you hold represent the purchasing power you command over goods and services in the economy. The Dollars themselves are just signs, symbols, they are not part of the wealth. If you are stuck on an isolated island, one million Dollars won’t really help you… Money is a social tool, if you hold Currency, but there are no other people, then it’s useless.

People ask, well what about gold? Gold was used as a Currency and has an intrinsic value. People used if for decoration, to symbolise power, it’s a metal we use in industry, how can you say that Currency has no intrinsic value at all?

Well the answer is simple. In order to use the tool Money, people need Currency. You can’t speak without words, you can’t use Money without Currency. And you need something that is scarce, fungible, divisible, durable, and transferable. People use Gold, or sugar as Currency because they have these five properties to some extent. They don’t use Gold or Cigarettes as Currency because they have value, they use them as Currency because to some extent they are scarce, fungible, divisible, durable, and transferable. The Dollar is an invention, a very sophisticated one, a sophisticated technology that  produces tokens, symbols, things that to some extent are scarce, divisible, fungible, durable, and transferable and therefore can serve as Currency and operate the social tool Money in an economy. Bitcoin is also a technology that produces Bitcoins, Currency units that can and will serve as Currency to operate the social tool Money.

If you want to know if something is a Currency, try to think if it has, will have or had purchasing power. Don’t ask yourself if it holds any intrinsic value, if it can store value, or if anyone backs it. These are interesting questions, but not the right ones. And if you want to know what is the purchasing power of a Currency? What is the “value” of a Currency? What is the exchange rate and how is it been determined? Well “it’s the supply and demand, stupid” but this is for another post!

3 ways in which Bitcoin will change the economy

#1 Redistribution of wealth

Bitcoin is like digital gold. Early geeks adopting Bitcoins, risk taker investors buying early coins, thieves stealing unprotect wallets – they will all accumulate a great purchasing power while holders of Fiat Currencies and Fixed Income assets will lose their relative purchasing power in a great inflation. Not all the wealth in the world will be distributed. Only 5 percent of wealth is represented by Currencies. And since gold will be still gold, it’s a good assumption that a maximum of about 2.5 percent of the world wealth is likely to be represented by Bitcoins. The total world wealth is about 200Tr when denominated in 2013 Dollars, therefore, the total amount of Bitcoins will be probably worth a maximum of 5Tr 2013 Dollars (2.5% of 200Tr) which gives each Bitcoin a maximum purchasing power of about $238,000 in today’s Dollar terms (5Tr divided by the final number of 21,000,000 Bitcoins in circulation).

#2 Momentary pause in debt driven economy

Inflationary Currencies like Fiat Currencies encourage loan taking rather than saving. In an inflationary economy, the purchasing power of a Currency diminishes with time while in an deflationary economy it increases with time. People tend to confuse growth with inflation, but human progress is driven by ambition rather than by debt. In a deflationary economy people will be encouraged to save rather than to spend, but entrepreneurs will still try to change the world. The only difference will be that more value creating projects will be financed and less value destroying project will be financed.

Even in a deflationary economy, savings will generate a maximum of only 5% returns (increase in purchasing power rather than in nominal amounts) while value creating projects will generate higher returns. Therefore, investors are still better off investing in value creating project, it’s just that the scrutiny will be thorougher.

In an inflationary economy, even value destroying projects can be financed as they destroy less value than the value destroyed by the inflationary Currency. This is an absurd which need nothing but disappear (it will be back at some point when political powers find ways to devalue decentralised crypto Currencies, but it may take many years – that’s the way of the world).

#3 Shifting risk from retailers to consumers

One of the issues in today’s e-commerce economy is that most items are delivered before the Currency changes hands. This poses risks to retails that lose about 2-5% of revenues from bad debts.

Bitcoin transactions are direct and relatively immediate. As Bitcoin transactions are nonreversible, retailers are able to send products only after receiving Currency from customers and eliminate the risk of bad debt. 

Of course that the risk will shift to consumers that may lose Bitcoins to fraudulent retailers. But even though we hear more about rough retailers because their stories are sexier and we can empathy with the poor consumers, in actuality, the loss for the economy is way larger from fraudulent consumers rather than from fraudulent retailers. Furthermore, in a digital economy the reputational risk for fraudulent retailers is huge and any misbehaviours will drive retailers out of business. Fast.

The five properties of Currency (not Money…)

In order to use the social tool, Money, we need Currency. Currency to Money is what Words are to a language. But what could serve as Currency? During history, many different things served as Currency: cigarettes, salt, feather, gold, silver, stone disks, notes, coins, digital bits, and many more. Currency is things that serve as symbols. The same way the word “Table” symbolises a physical table so a unit of Currency symbolises value. If to use the measurement of length analogy, then one meter is the symbol that symbolises the physical property of one meter length. A ruler in this case could be the analog for Currency.

What are therefore the characteristics of a Currency, and what would be considered a good Currency verses Bad Currency? Well, Currency has to have the following 5 properties:

(-) Scarcity: final number of the symbols

(-) Fungibility: all symbols are interchangeable, commodity like. Symbol A is identical to symbol B, and vice versa.

(-) Divisibility: the symbols are easily divisible, so you can divide them to smaller and smaller portions

(-) Durability: the symbols can survive the test of time and weahther and won’t be worn out or disappear

(-) Transferability: the symbols can be easily transferred between owners

SCARCITY

Currency should be scarce. The amount of Currency you hold represents your purchasing power. The more Currency you have the more you are likely to be able to purchase. But this is a relative game. The amount of things that can be bought is final and equal the total wealth in the economy. All the Currency in the economy could usually purchase 5% of the wealth in the economy. So if you have a certain amount of Currency, you don’t want your neighbour to just find / produce / counterfeit more Currency since if he does, he would be able to purchase all the wealth and your purchasing power will diminish significantly.

Let’s demonstrate this property using the differences between the Currencies Gold (Commodity Currency), USD (Digital Fiat Currency), and Bitcoin (Decentralised Crypto Digital Currency).

Gold, Commodity Currency:  indeed scarce. Hard to find, hard to produce. Seems to be of final amount on earth, very hard to counterfeit.

USD, Digital Fiat Currency: not scarce at all. It is produced by the government / central bank and can be counterfeit by them to an infinite amount at any time (the root of hyper inflations)

Bitcoin, Decentralised Crypto Digital Currency: rare. Only 21 million Bitcoins will ever exist.

FUNGIBILITY

All the symbols of the Currency should be interchangeable. You shouldn’t care if you have one symbol or the other. In order to use the Currency, owners should not be attached to one symbol. Think about Words. You and I can use the word “Table” the word you use and the word I use are not the same thing as you pronounce the one and I pronounce the other, but both represent the same thing. 

Gold, Commodity Currency:  fungible. Gold is a very coherent commodity. You don’t care if you hold one portion or another portion.

USD, Digital Fiat Currency: fungible. All the digital bits are the same. All the notes, and the coins are the same.

Bitcoin, Decentralised Crypto Digital Currency: fungible. All Bitcoins are interchangeable, there are 21 million Bitcoins and they are all the same. Just strings of numbers. One string is exactly like any another string.

DIVISIBILITY

One of the biggest advantages of the Money system is that it can compare different things on an apples to apples basis, i.e. using a common denominator. It is very hard to compare cars and tomatoes, but it’s easy to denominate the cars in Currency terms i.e. $20,000 and the tomatoes in Currency terms i.e. $1 and then compare the two numbers. The same way the Currency symbols should be dividable to small units so that they can represent even very small things like a bus ticket, or a bottle of water.

If the Currency is not divisible it’s very hard to exchange items because it will not be easy to exchange the right amount of Currency with any goods and services in the economy.

Gold, Commodity Currency:  divisible but not easily. Gold is a soft metal and therefore can be divided, but not so easily. Dividing gold accurately requires the use of scales, etc.

USD, Digital Fiat Currency: very easily divisible. Every Dollar can be divide into 100 cents.

Bitcoin, Decentralised Crypto Digital Currency: infinitely divisible. Every Bitcoin can be divided into 100,000 portions to what is called a Satoshi. But the Bitcoin protocol can be extended to enable devision for even smaller portions of Bticoins.

DURABILITY 

Every Currency should survive the tests of time and weather. You don’t want to receive Currency and discover that it was dissolved, broken, or was worn out after a year. If you want to leave it to your family, you want it to survive the test of time and bad weather. You want it to stay constant.

Gold, Commodity Currency:  very durable metal. Can survive thousands of years and extreme weather condition.

USD, Digital Fiat Currency: 95% of the Currency is a digital bits and will survive as long as the network survives. Very durable Currency.

Bitcoin, Decentralised Crypto Digital Currency: 100% of the Currency is digital and will survive as long as the network survives. The network itself is decentralised and therefore is very hard to be destroyed. Very durable Currency.

TRANSFERABILITY

The whole concept of Money is based on people or entities that exchange Currencies between each other. Therefore, Currencies should be easily transferable from one person the another. Truth to be said, even if the Currency is very hard to be transferred like in the case of the Rai stones, the huge stone disks on the island Yap, it can still serve as Currency. In Yap, even though some of the disks couldn’t be moved, their ownership was transferred between individuals and / or families.

Gold, Commodity Currency:  not so easy to store and transfer. Most of the Gold is being held in huge vaults and the ownership is represented by legal documents.

USD, Digital Fiat Currency: easy to transfer. Notes and coins are pretty easy to transfer and in any case most of the Currency is held as digital bits which are very easy to be transferred by digital networks.

Bitcoin, Decentralised Crypto Digital Currency: easy to transfer. Every person with an access to the internet can transfer Bitcoins.

People confuse Money and Currency – it’s not the same thing!

Don’t confuse Money and Currency. It’s like saying that Language and Words are the same thing! Language is a social tool. It’s an abstract concept. Words are the things that comprise this tool. House is not the bricks and the windows, house is the whole thing.

Money is a social tool to facilitate commerce at large scale. How does this tool work? Well this is a little complicated, but to simplify:

(-) You define a unit – let’s say one Dollar

(-) You define a way to represent this units – let’s say physical green bucks, or green bits on a computer

That’s it. People exchange these bucks or bits because it’s easier to exchange them than to exchange sugar or cars or cheese and when they need something they exchange the bucks and bits with things that they need. They exchange the bucks and bits with a portion of the total wealth of the economy.

So Money is a concept, and green bucks and green bits are Currency. Currency is the thing that comprises Money . It’s like the Words in a Language.

Both US and China use the tool Money. And both use the type of Money that is called Fiat, but the US uses the Currency Dollar, and China uses the Currency Renminbi.

It’s important – don’t confuse Money and Currency. Don’t confuse Language with Words, it’s not the same thing!

The USD is the real Ponzi Scheme

People follow the Bitcoin development and wonder wether is’t a Ponzi Scheme or not. I follow the USD and wonder whether it’s a Ponzi Scehem or not.

The amount of Currency you have represents your purchasing power. The economy is full with things that we need (and sometime not really need) this is wealth. Wealth is owned by people, or entities, usually using a social tool that is called Law. In order to measure wealth we use another tool which is called Money.

Most wealth is not very liquid. If you take all the Currency in an economy you are likely to be able to purchase about 5% of the wealth. It’s a rule of thumb. About 5% of the economy exchanges hands on a frequent basis, the other 95% is owned by the same people or entities for a long time.

Think about a huge private company. It is not really tradable. You can’t really take Currency and buy part of this company. It’s not traded on any stock exchange. It’s part of the 95%. Think about Google shares, some of them are easily tradable on NASDQ, this is part of the 5%.

You can’t trade sugar with a Google share. You need a tool to facilitate it, this is Money. So all the Dollars in the world can buy probably 5% of the US economy. It’s a rule of thumb. What happens when there is more and more Currency in the system, can you buy more than 5% of the economy? Nope! This is exactly the tricky point, if you produce more Currency nothing happens to wealth, wealth is the same. Currency is not wealth, it’s a tool to exchange wealth between people and in its entirety represents by and large the ability to purchase about 5% of the economy. (If Money is Language and Currency is Cords, then sometime if you just talk and talk and talk it doesn’t really help to communicate better it’s just adding more words to the same message… it’s like printing Currency. More things to represent the same purchasing power to buy 5% of the economy, the economy hasn’t changed!).

To make it simple, if there are $5 is the economy, each Dollar can buy 1% of the economy. If there are $10 in the economy each Dollar can buy only 0.5% of the economy (5% / 10 = 0.5%) if there are 100$ in the economy every Dollar can buy 0.05% of the economy (5% / 100 = 0.05%). So if you have 1$ at first you could have bought 1% of the economy, then only 0.5% of the economy, and then only 0.05% of the economy. Got it? If the government prints more Currency, you are worse off! You should not hold Dollars.

But it takes time to take effect. All these Dollars are owned by Chinese, Banks, and the minute they will realise the Dollar is a bout to collapse they will buy assets like crazy, prices will rise, and your Dollars will buy less. But don’t worry, they can’t buy everything, told you, all the Dollars in the world can buy only about 5% of the Dollar economy, i.e. the US.

So is the Dollar the real Ponzi Scheme? Without getting into much of a definition effort, I would’t advise to hold all your wealth as Currency. Better stick to real assets, like gold, houses, shares in companies, or even Bticoins, they will maintain their purchasing power even if the government will print gazillion Dollars. A  house is a house is a house.

Why Money is not a store-of-value

The most common misconception about Money is that it is a store of value. Money is not a store-of-value. Money is a social tool. Try to make a mental experiment. Take an isolated island – will you find Money there? Probably not. Take an isolated island with one person – are you likely to find Money there? Probably not. Why?

If Money is a store-of-value then one person can use it to store value. He will work hard, accumulate things that he needs (i.e. wealth) and then will store them in Money. But it doesn’t make sense, isn’t it? Why? Because Money is not a store-of-value! Money is a social tool.

Take an isolated island with two people, do you think that you are likely to find Money there? Probably not. BUT, you may find Money there. Why? Because Money will help these two people to remember who entitled for what. They both work hard to create things that they need (i.e. wealth), but one worked harder and is entitled for more. But for how much more? How do you measure it? Not easy, but Money can help.

Take an isolated island with thousands of people. Are you likely to find Money there? Probably yes. In fact in 1903 an American anthropologist visiting the remote island Yap was amazed to see huge stone disks that served as Money, the Rai stones!

So on deserted island we don’t have Money. On an island with one person we don’t have Money. On an island with two people or an an island with thousands of people we do have Money. Conclusion, Money is a social tool.

But tool for what?

Money is one of the most misunderstood things is the world. We all use it. We all want it. But we don’t know what it is. (What we actually want is not Money. What we want is Currency, this thing that represents purchasing power in the real world).

Money is a social tool to facilitate commerce in large scale.

Money touches many other aspects of the economy, like denominating the value of things, or the value of financial assets. But it is not a store-of-value. Saying that money is a store-of-value is like saying that Language is the store of wisdom. It’s not. It’s just a tool for communication. It’s a social tool. Language and Money are social tools. Got it?

English and Chinese are Languages the same way Dollar and Renminbi are Money. A spoken Language and the Sign Language are a Languages the same way Commodity Money (i.e. feathers or gold) and Fiat Money (i.e. Dollar) are Money. But this is for another post.