Before starting this blog late 2014, I had prepared a text that lightly describes an ancient village’s economic life. The self-sufficient village runs on barter trade between its citizens: Goods are exchanged for other goods. Later in that story we see the emergence of money: small pieces of rare stuff which represent value to those who trust the village chief who introduced them. Goods can be exchanged for coins which are easy to bring to the buying market compared to other tradable goods.
Today, I want to take the story one step beyond: the emergence of debt!
So, we are back in our ancient village which has done well for itself, no wars, no disease, decent growth. The woodcutter and his mates cut more and more wood, the farmer has a lot of wheat. The baker bakes a lot of bread. There are many more children and more food is needed. The baker is a rather visionary guy. He sees that a third baking oven will be great for him and by the way great for the village. He has a few coins in reserve, but by far not enough.
Last time round he got other villagers to lend him wood and other goods to travel to the next village where there is a guy who builds ovens.
He paid with extra bread when he was back and had started to bake more.
By now, the village uses coins to buy and sell goods between them at the market. If he had enough coins, he could buy what is needed to trade with the oven builder and get his new oven more easily. He would not have to deal with many goods-producers, just buy what he needs on the market in one go and travel to the next village.
Talking to the village chief about his idea, the chief sends him to John, a villager known for his cleverness and status among the villagers. John is a bit stingy and tells him, he has quiet some coins under his bed from buying cheap and selling high across the harvest seasons. John says he knows of a few others who have saved coins under their beds.
Clever John spots an opportunity: The baker has a good idea, it will make him earn many more coins. Some others keep their coins uselessly under their beds. John will talk to them, propose to take their coins and give them to the baker to buy his oven. The coin savers will get an extra coin for every ten they gave during every year of the deal. John will ask the baker two coins for every ten he gives to the baker during every year the deal runs. The baker will also return the coins he got, three of every ten he got for the 3.3 years to come.
Coin savers trust John, John trusts the baker. Coin savers give coins to John, John gives to the baker. The village chief approves of the deal and promises he will take action if things go wrong.
John gives the coins to the baker who buys what he needs to travel to the next village and exchange for his new, third oven.
He returns with a new oven, sells many more breads for coins and pays back the loan plus interest. The village enjoys more bread, the coin savers get even more coins (some extend their house) and John has become the banker.
Trust in a business, trust in an institution, trust in a regulator, trust in the future have made it possible that accumulated wealth under the beds has been used for economic growth. Everybody benefitted, some more than others. The oven could be installed years before the baker on his own would have been able to buy it with his own coins alone. Growth accelerated due to trust in the system and in the future.
The story has remained the same up until today. You can be the banker, the baker of the coin saver. We are all one or more of them today. My posts about interest rates, the future of work and banking are all about this.
Trust is the glue that keeps it all together. Lack of it is the basis of our current problems.
Which one are you, banker, baker or a saver?