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So there is this village, somewhere in a fertile area with some people who have started to specialize into different professions. There are the farmers who grow crops. There is the baker, the wood cutter, the chief. They all know each other since childhood.
Let’s look at the baker. He has an oven, he needs to get wood to burn, wheat to bake. He agrees with the farmer that he will get wheat to bake and will give him bread to eat. He agrees with the wood cutter that he will get wood to burn and will give bread to eat. All is based on trust. He fulfils his promise and manages to give bread to all in the village who bring him either wood or wheat. Everybody works for either the farmer or the wood cutter. They all give some bread to the chief who they trust to resolve conflicts. All of them try to keep some wood, some wheat to get bread when they are sick. They are saving some stuff for a rainy day. They baker does the same. He tries to keep some wood and some wheat, just in case there is a disruption of supplies. All villagers give some stuff to the chief so he can live well as well since they value his effort to resolve conflicts.
The village grows well, fertile lands, no attacks from other villages, the population grows. The wood cutter has more people cutting, the farmer has more people working the fields, the baker saves more stuff and looks at getting a second oven.
For the second oven he needs to go to the next village. It is bigger and a bit far away. The oven does not come for free. The oven builder in the next village wants one month’s worth of wheat and wood to be paid. The baker can not do this on his own. He needs the guy with horse and cart, he needs wood, wheat and he needs time off to go and buy the oven. A week. The chief organizes a meeting where the baker presents his plan. All like the idea to have more bread. They understand that the baker alone can not do it. He needs their help. They all have to take a risk. And they agree: Everyone gives extra wheat, wood for a couple of months. The chief stores it in his barn. No one gets paid. They accumulate. After two months of hard work, the wood and wheat is there, some extra to give to the horse and cart guy, and the baker plus some friends undertake the journey. They risk robbers. No bread during one week. And they return with the new oven.
Party time. All the wheat and wood is used to bake more bread than ever. The people who helped get even more bread. They get paid. They feed their workers more, the bigger population provides for more workers, producing more wood, more wheat, eating more bread and growing further. The economy is booming. The trust they had in the baker has paid off. Personally for those who helped, for all the village, for the chief who did a good job.
Next: Currency
We come back to the village one hundred years later. By now it has grown further. New people have taken up new professions. There is the cattle rancher, the fisherman (there s a river), the tailor, the trader (our horse and cart man expended). People exchange goods do get food, or get food for goods. Some give food for services. The next village has textiles, the trader does good business. Each time a good or food or a service changes hand, the parties have to bring a cow, some wheat, wood etc. Everybody needs a barn to store. A lot of effort is spent to move stuff. A market is there where everybody brings stuff once a week, so at least any one only needs to go to the centre of the village. But still…it s a lot of effort.
People trust each other, but waiting for the other guy pay a few months later, well, that is often too much.
So the chief has this idea and says: You have known me as a reliable person of power for quite some time. I keep promises, I mediate conflicts, you have learned to trust me.
I found these rare stones far away from here and will put a stamp with my ugly face on them. For each such stone, I will keep a small stack of wood in my barn. In fact, when you bring me the stack of wood, I propose to give you a stone. If you trust me that I will make everybody obey the rule, you can use the stones to buy a cow, or a bushel of wheat, or a day s supply of bread etc. I observed that a cow is 50 stacks of wood or 50 stones, a bushel of wheat is 1 stone etc. Within our village, you will be able buy and pay without carrying the wheat, the wood etc. And remember, for every stone there will be a stack of wood in my barn.
Some people do bring wood, they get a stone. Some others do not trust this. The ones who trusted start to see the benefit and convince others. They enjoy free time since they have to carry less or spend that time to build more. The transport guy does not like it, but, hey…
A currency has been born. Based on trust that the chief has wood in his barn, that he will not run away with it. A few people find similar stones and stamp similar ugly faces on it and get away with it for some time. But most just enjoy the efficiency of carrying a few stones to buy a cow instead of 50 stacks of wood. Some cows start to cost more, others less. Currency trade has replaced barter trade.
The benefits are huge. People who used to spend time and effort to carry goods around to exchange them now work on the fields. New professions arise. Now there are some policemen and security to guard the chief’s barn and run after cheaters. They provide services to the community. The chief asks people to give some stones to him to pay these people. Taxes are born.