Welcome to the first edition of this newsletter thing I’m trying. It’s blazing hot here in Texas so grab a lemonade and cool off while you read the report.
I want this to be something my grandparents could understand. Most people are hung up on the intangible nature of Bitcoin, and it was something that took me a while to wrap my head around as well. I also think it’s one of the best things for society because it forces us to acknowledge the question “what is money?”. So let’s go to the bottomest bottom shelf there is and examine our foundational understanding of money.
What makes money…money? Why do we want those green pieces of paper? The easy answer is because other people will accept that paper and you can trade it for something you actually want. But you can’t eat a dollar bill. There’s very little you can actually do with it besides trade it for other goods or services. That’s actually a great thing, as long as it keeps its purchasing power, that is, the ability to buy a certain amount of stuff. If the purchasing power goes down, your dollar doesn’t go as far and it becomes a “worse” money. If it loses its ability to store and transfer wealth, to be exchanged for goods and services tomorrow or a year from now, it becomes simply paper and its value reverts to the value of paper.
So why do we need money? For a great basic understanding of this, I highly recommend the book Bitcoin Money.
Yes, it is written and illustrated as a children’s book, but we’re on the bottom shelf here guys. Swallow your pride and read it. If you want a little taste you can listen to the interview I did with the author on Bottomshelf Bitcoin.
The short version is that money solves the “coincidence of wants” problem. Barter or “direct trade” where I give you chicken eggs in return for milk from your cow only works if you and I are in agreement about the amount and time of both of those. For instance if you run out of eggs and need more, but I’m full up on milk, I have no need for your milk and the trade ain’t happening. We need something to serve as an intermediary that we both think the other person (or more people ideally) will value later.
Now when your friend that gets everything from swap meets and craigslist asks why we don’t just barter everything, you can explain that’s why we have money. Next week we’ll talk about what makes a money “good” or “bad” and why, even in a free competition, society trends towards one type of money.
Extra credit: The Tuttle Twins and the Creature from Jekyll Island
Thanks for reading. Enjoy your weekend!