A theory of money

Have you heard the parable of the island?

A bloody conqueror invades an island. He forces everyone to mine for iron (the iron is irrelevant. They could be mining for dirt clods for all we care here. The point is that they do work).

At first, his army physically forces everyone into the mines in the morning, and lets them out in the afternoon, confiscating all their iron. That’s really exhausting. For the army, that is. They don’t really care about the islanders.

Then, they switch to taking a fixed amount of iron from people as they leave the mine. It’s much easier than searching them, and has more benefits. No more overseers making sure people are working down there. No more squinting and guessing about people’s ability to product — if someone doesn’t have enough iron, they are caged and beaten until their fellow islander ponies up the iron to free them. Things are now easier (for the army).

This is still very hard, though. How to keep track of who paid up and who didn’t? The army writes out receipts as people unload their iron as they leave the mine. Every week, the army sweeps through the island and makes everyone show their receipts to prove that they’re up to date with their iron duties. The vast majority of soldiers are freed up from guarding the mine entrance.

Parsing through receipts, manning a mine opening, that’s all still too hard. So now the army just has a depot in the middle of the town. Trade your iron for receipts. But the receipts are different. They no longer bother with writing dates or words on the receipts. Receipts are just little plastic tokens. Every week, the army sweeps through and collects 10 tokens from every islander. As long as you have the tokens, they don’t care where you got it from.

Eventually, the army gets even lazier. They sweep through every year instead of every week. They don’t bother manning many “iron for token” booths. They set up one, and let islanders set up smaller booths and do their dirty work for them. As they get lazier, they get softer. They set up a “coconuts for tokens” booth (because occupying an island is hard work, and their supplies are running low), and a “give us a massage for tokens” booth. Life is good.

Those plastic tokens are money. They have value because they’re needed to pay for those yearly sweeps. Those sweeps are taxes. The army is the state. The islanders are us. We’ve just invented money, feudalism, the state, and the transition to capitalism. Ta-dah!

(I didn’t come up with this parable. I am sure I read a version of it before. I can’t find it through casual searching, though, so I’m repeating it from memory for posterity)