As I studied economics, I ran across this story a number of times. Perhaps you have heard it. It helps me think about the nature of money and valuation.
The indigenous people on the island of Yap developed money that consisted of enormous round slabs of limestone, up to 12 feet in diameter, with holes in the middle. Limestone was not found on Yap, but on a neighboring island. Quarry and transport costs accentuated its value. Of course, nobody owned very many of these huge stones, called rai, but they did change hands for dowries, or as a last resort after a failed crop (though hopefully your crop was the only one that failed, otherwise you might be facing rai inflation).
But rai did not change hands per se. They were too big. Instead, when you acquired rai, it was merely acknowledged that the stone now belonged to you. You left it in the town square, or marking the path, or wherever it lay. It was yours and everyone knew it. Now you had enduring stored value, ready for you when you needed it.
Once, while transporting a large rai stone, it fell into a deep part of the sea. Oh no! But after some discussion, everyone concluded it must be down there somewhere, and so it continued to be exchanged as if it was regular rai. It is still traded, though nobody has seen it for over 100 years.
It seems to me that the brilliance of modern finance is to say, “Why are we going through the trouble of mining and transporting these stones (or in our case, precious metals) in the first place? Seems like a waste of time. Instead, why don’t we pretend that all our rai are already lying on the bottom of the sea? We’ll just use banks, accountants, and ledgers to keep track of it all, just like we were doing already, but in order to lessen the impact of cycles of inflation and deflation, let’s create a quasi-governmental organization (the Fed) to control how much fictional rai at the bottom of the sea we are allowed to think exists.” Brilliant. If we are all going to play make-believe, we might as well ensure our make-believe world is as stable as possible.
Jer's Intellectual Adventures 
December 25th, 2011 at 2:12 AM
Hey Shaw, my name is Whit, and I don’t think you know me, and I don’t know you, but I think you’re a grade-A dumb ass. Seriously, every other sentence, literally (I went line by line) every other sentence you wrote was either straight up stupid or a lie. Now maybe you’re just a liar and that’s your thing. In that case, right on man, you’re the salt of the earth, carry on. But if you’re simply a poor lost ideologue, then please, reply back, because I’d love to through down. And I’m not just one of Jeremy’s dumb hippie friends, I’d be a Ron Paul fanatic if it weren’t for how utterly and tragically wrong he is about he Fed.
-peace.
(Jeremy, bro, how did I miss this post? Seriously, this is the kind of shit I live for.)
August 3rd, 2011 at 10:36 PM
I think the point is that Gold and many resources have value such as gold, rubies, and diamonds have had value throughout most of man’s history. For the People on Yap, the Rai had value. Money came about to have something to represent some type of value. But since going off the gold standard, the value of our money is very relative and not tied to anything but speculation which is dangerous.
The current system with the federal reserve opens up the US much more to inflation. I mean, we are printing money from nothing with no real value to back it up. Before on the gold system, there was a limit of expanding the money supply, but now there is no limit for the US to print money and that is the danger. Why else has the value of the dollar plunged since we got off the gold standard?
Other questions, how come most of the economic cycles of boom and bust have started after the federal reserve was created? Wasn’t the Federal reserve system created to stop inflation and recessions?
I know there are some issues with the Gold standard, but at least Gold is something of value that backs up money. It is harder to manipulate Gold than money in our current system. Right now money has no value except that the debt it creates will be repaid, either by us in tax dollars or as bank loans. People’s faith that the debt will be repaid is what gives value to money.
When the US runs out of money and wants more the Fed just buys bonds from the US treasury and then the US people have to pay that back with interest to the Fed. This doesn’t help the “value” of money if the government can go over budget and just get more any time it wants. It’s ripe for inflation and wars.
Another thing to understand is the problem of the banking system. To be more profitable, they lend out more than they have. This multiplies the money supply as the bank doesn’t really have everyone’s money since they loan out more than they have. In 1906, stock prices dropped and so people went to the bank to get their money back, but the banks didn’t have money for everyone and couldn’t give it back so obviously that was a problem because people lost money.
Then the bankers got together and helped to propose a law that created the federal reserve, so that when the banks didn’t have the money they could borrow from the fed. In the end, the fed helped banks lend even more money they don’t have so that the banks could become rich and wouldn’t fail.
The Banking system seems similar to a pyramid scheme, but when it fails, the Fed will bail it out. The federal reserve is set up to make the Bankers rich and always make money. I mean, even when they loan out too much money, they can always borrow money from the Fed at low rates to keep enough in their reserves.
The Bankers are using the system to remain ahead of the game and be rich and that is the problem. They have control of the money and even if they drive the “worth” of money down through inflation, they will still have an advantage over normal people, because they loan out more than they have and can borrow money from the fed at cheaper rates than the public. Banks manipulate the system and make money at our expense.
July 28th, 2011 at 3:06 PM
I agree with Shaw. The problem is that the Fed can create dollar bills arbitrarily quickly, where as the Micronesians or Yapanese or whatever you call them have to always put great effort into the creation of each rai.
July 28th, 2011 at 3:18 PM
You and Shaw are wrong methinks. A rai is not worth anything because of what the rai is. The rai is worth what it is because people think it is worth something. In other words, we disagree about worth. Worth is never ever objective. It’s not possible. Worth and value is always a subjective thing. Furthermore, money does not have to be hard to make in order for it to have value. I agree with Shaw that our money is not backed by anything, but I think that is just as true as gold, rubies, or diamonds.
I think the main point of disagreement that we have is about the fundamental nature of money. Money is a fiction. Its arbitrary. And so is any standard we might peg it to, including the gold standard. The gold standard opens us wide to vicious cycles of inflation or deflation. A Fed allows us to control those cycles. Have they been known to make matters worse? Certainly. We are new at this. But I think, over all, it has helped, and we continue to learn.
July 25th, 2011 at 5:12 PM
http://www.npr.org/blogs/money/2011/02/15/131963928/the-friday-podcast-a-giant-stone-coin-at-the-bottom-of-the-sea
July 22nd, 2011 at 8:43 PM
This is also interesting about money.
http://www.thisamericanlife.org/play_full.php?play=423
July 22nd, 2011 at 8:25 PM
I think you need to do more research on the financial system because it is not a firm financial system. First off our money is not backed by anything except debt and the promise to pay it off. That’s not at all sound. So the dollar is like the stock market and how much faith people have in it.
Banks are taking advantage of the system to make more money that they don’t have through fractional reserve banking, banks only have to 1/10 of the money they loan out and can create money through loans. That is why there is a threat of a run on a bank because the bank doesn’t physically have that money.
Also the Federal reserve is in part responsible for booms and busts. When the US uses more money than it’s budget (Usually because of wars) the Fed gives them money and they spend that into the economy. Now to make sure that money has value, someone has to pay that back, otherwise there is inflation. So the taxpayers have to pay that back.
Here is some videos to watch that better explain it.
July 28th, 2011 at 3:19 PM
Shaw, I respond to your points in a response to Alex’s comment. Might want to check it out. Take care!