The idea for this post came from an awesome podcast from Planet Money. I have embedded the podcast at the end of this post. I highly recommend listening to it. Your mind will be blown. Guaranteed.
Money is such a strange concept. It seems as if we all just arbitrarily agree that a dollar is worth something and that we all accept it its worth as a universal truth.
It wasn't always so. And to illustrate this fact, I would like to talk about the island of Yap. People in Yap use huge stone disks as currency. At least they used to, until recently. They actually use the dollar now. The huge stone disks or coins look something like this:
When he came back with this huge "coin," everyone loved it. And everyone wanted one. So they got some more moon coins and people would have these huge coins in front of their homes. They came to signify wealth and prosperity. The more you had, the more wealthy you were.
There was just one problem: they were too heavy to move. So what ended up happening is that instead of the coin actually switching hands or locations when you bought something, people just knew which coin was theirs. If you bought a new house, to give him your money you would just say "OK, you see that stone to the left over there? That used to be mine, but it's yours now."
And do you know what's crazier?! We do the same thing! We don't actually trade gold bars. We just trade ownership over the gold bars! (Well...not really. But not so long ago we used to.)
I mean, think about writing a check. The physical money doesn't actually move. If I write you a check for $100, the guy at the bank doesn't pull $100 out of my slot and put it in your slot. No, it's just the ownership of that money that transfers.