// HACKER NEWS — CYBERSECURITY
The Hierarchy of Money
Money. The villagers are tired of bartering. The dairy farmer wants to buy corn, even when he does not have milk to trade, and the corn farmer wants to buy meat, even when the butcher does not want corn. So they decide that special gray stones that they can collect from a nearby riverbed will represent an abstract unit of value, called money. They reason that if everyone uses stones to represent value, then people can transact when they would like, rather than when both parties are willing and able to barter. The villagers have abstracted value.
Supply. The villagers picked special gray stones to be money because the stones were portable, durable, and most importantly hard to collect. The only way to get them was to walk an hour outside of town and spend all day sifting through the riverbed. Sometimes, a villager would do this and only find one or two special stones. And so like any other job—winemaking, farming, cobbling—the job of collecting stones was self-regulated by the value of the activity. If the villagers collected too many stones, like they did after a flood cut open a new seam of special stones in the riverbed, then the cost of goods would go up and the relative value of stones, and thus collecting them, would go down. Or vice versa. So the villagers decided that anyone could collect stones, just as anyone could forage for berries or dye cloth. More or fewer people would do it as demand changed.
Debt. The rancher has a problem with money. He raises cows, but this takes a long time, much longer than it takes the dairy farmer to gather fresh eggs. He must go long periods of time without earning more stones. So the villagers decide that some people can simply pay for goods later. The two parties just record the details of the trade on a piece of paper and settle up later. The person who owes money is said to have debt, while the person who is owed money is said to have credit. For example, the woman who owns the general store in town is happy to let the rancher buy on credit, since she has known him since they were both children. However, she does not sell on credit to strangers or to people who do not pay their debts.
Interest. While the general store owner is happy for the rancher to buy on credit, the shoemaker is not. He too trusts the rancher, but he wants money now to expand his business. Since the shoemaker would not be paid in stones for a year—it takes a long time to raise a cow—, the shoemaker cannot use that money to buy new tools or hire an assistant in the meantime. Having stones today is better than having stones in a year. So the shoemaker makes a deal with the rancher: the rancher can have boots today but pay for them in a year; however, rather than paying one hundred stones for the new boots, the rancher must pay one hundred and five stones. The extra five stones are for the lost value of not having money sooner. The villagers like this idea and adopt it. Soon, all debt is repaid with excess stones, which the villagers call interest. The villagers have created the time-value of money.
Bank. The rancher still has a problem. He can buy on credit from the general store and from the shoemaker, but most stores in town will not lend to him, since they do not know or trust him. One entrepreneur in the village wonders about this problem. He notices that the rancher needs to buy on credit, but none of the stores he needs to buy from will lend, while the widow across town keeps a hundred stones in a jar in her cupboard, but has no friends who need the money. The entrepreneur has a clever idea. First, he borrows the stones from the widow, and he promises to return them in one year with an interest of three stones. And then he lends these stones to the rancher, on the condition that the rancher pays him five stones of interest in a year. The business plan is to make the spread, two stones, in a year’s time. This works because the entrepreneur knows both the widow and the rancher. Over time, word spreads, and