Focal Point: Gold


I want you to imagine a tiny micro economy. Just two guys stranded on a tiny island. Let’s call the guys Ben and Chen. They have divided the island in half and each owns his half. They each have a tree which bears fruit and three tools for fishing, a spear, a net and a fishing pole. For a while they both fished often. Fish were the main trade item between Ben and Chen. Sometimes Ben would take a vacation from fishing and Chen would provide him with fish to eat. Other times Chen would take a break.

But after a while Ben got lazy, and Chen got tired of giving Ben free fish to eat. At first they used sea shells as money to keep track of how many fish Ben owed Chen. Then they switched to leaves from the tree. Finally they just broke a stick off the tree and drew little lines in the sand. If Chen gave Ben a fish, Ben drew (issued) a line in the sand on Chen’s side of the island. There were only two of them, so it was easy to avoid cheating.

These lines sort of became Chen’s bank account. Each one represented the debt of one fish that Ben owed to Chen. But after a while they started adding up, and Chen worried that he would never get that many fish back from Lazy Ben. So Chen cut a deal with Ben. Chen said he would keep accepting lines drawn in the sand for fish, but he wanted to be able to use them to purchase some of Ben’s other stuff (since Ben didn’t like to fish).

At first he used them to purchase fruit from Ben’s tree. But after a while the pile of fruit just rotted on Chen’s beach. Next he started purchasing Ben’s tools. First the spear, then the net and lastly the fishing pole. But at this point Chen realized that Ben would NEVER be able to repay those fish without his fishing tools. So Chen rented them back to Lazy Ben.

Of course Ben was still lazy, and now he owed rent on top of the fish he already owed. The lines in the sand grew even more rapidly as lines were added to pay for rent even when Chen hadn’t given Ben a fish. Then Ben had a great idea. Why even go through the charade of selling the fishing pole and then renting it? Ben could just sell Chen some “special lines” which had a “yield.” For ten one-fish lines, Chen could buy a special “bond” that would mature into 11 lines in a year’s time. They tried this for a while, but all that happened were more lines in the sand. So many lines! Nowhere to walk. Chen’s “bank account” was taking up all of his real estate!

Finally Chen had had enough. He called Ben over and said, “Okay, since you refuse to fish for yourself, let alone to pay me back, I want to use these lines to buy some of your gold coins.” Oh, did I mention that Ben had a treasure chest of gold coins that had washed ashore? Of course these gold coins were the last thing that Chen wanted, because what good are gold coins on a tiny island with only two inhabitants?

But actually, they turned out to be an excellent record of the debt Lazy Ben owed to Chen the fisherman. You see, at first, Chen bought half of Ben’s gold with the lines he had already accumulated, transferring his “bank account” over to Ben’s side of the island and consolidating his “wealth” into gold. It worked out to 100 lines for one gold coin, or 100 fish per ounce.

But after a while, Ben realized that he was running out of gold. He knew it would only be a short matter of time until he ran out, so he closed the gold window. And once again, Chen started accumulating lines and special yielding “bond” lines. Finally, they agreed that the value of the gold coins had to be raised higher than 100 fish per ounce. Ben suggested 500/oz., but Chen saw the short-sighted flaw in his thinking. So Chen said that the value of ounces should float against the number of lines issued by Ben. This way, Ben would never run out of gold, and his lines would always and forever be exchangeable for gold coins. Finally, a sustainable accounting system!