The Story of Money Part 2

            As promised, I am back with a sequel to the last piece about the story of money.  I mentioned that the main features of money are durability, divisibility, and wide acceptance as having value.  I also mentioned that these have not always been the case and that there is at least one notable exception that comes to mind, in the area of divisibility.  But this story in turn will take us to the more valuable insight about the nature of money in modern times, the concept of fiat money.    

"I'll need some help with getting this to the grocery store."

              There is an island in the South Pacific called Yap which until recent times has used large round blocks of stone as their currency, called Rai.  The origin of this money is unknown but essentially the scarcity of these stones (quarried and milled on another island), the difficulty associated with transportation (20+ men were required to move the largest ones), and the propensity for the movers to die with stones in tow when storms struck on the open sea made them sufficiently valuable to use as currency.

              While not all stone money items were gargantuan, it does not take much imagination to realize that having stone money of any size is not conducive to easy commerce between citizens.  This is where the story becomes even more interesting.  Once people realized that moving the Rai around was not practical, they started writing promissory notes that entitled the bearer to a particular stone stored in some location on the island.  Tangentially, the parallel between this kind of money and gold or silver certificates is easily seen.  This allowed easy transactions between people since a stone could be retrieved by anyone bearing the certificate.  Theft was out of the question because of the level of trust on the island and the fact that stealing boulders is no mean feat.

               On one fateful voyage, a very large and accordingly valuable stone was lost to the sea.  But as the inhabitants had grown accustomed to dealing in paper that represented stones, and the representative paper was still in existence, the populace agreed that the stone was out there somewhere and that its document was still valid money.  Thus fiat money was born for the island of Yap.

                “Fiat” is the Latin word for “it shall be” or “let it be done” and fiat money is money whose value is not derived from an underlying asset like gold, silver, or stone.  Rather its legitimacy comes entirely from the faith of the people who use it and, more often that not, the government that decrees it as the legitimate currency of the land.

                In modern times, the rise of Bitcoins has been an endlessly fascinating form of currency because it is backed by no government at all.  I recommend reading up on it because it is much too involved to deal with sufficiently here.  Yet even though there is no ruling authority that mandates it as having value, the faith and trust of those who deal in it online has elevated it to the status of money that is widely accepted in many stores (mostly online) across the globe.  But what makes it even more spectacular is the fact that it does not even have a physical presence.  In truth, it is the most fiat of money of all.