In the hamlet, now grown into a village, there was a carpenter who specialized in making furniture, and there was a farmer who harvested grain to grind into flour for bread.
The village was so distant from other towns that no bank would consider locating in the village, so everyone bartered for goods. When needed, two solid chairs were usually exchanged for one bag of stone-ground flour.
When the blacksmith was asked for tools or hardware needed by the carpenter or the farmer, he had to travel a long way to buy flat-iron or bars, and coal with which to fashion things. On some of the journeys he spoke proudly to people about the pleasant life in his remote village.
One day a remarkable event occurred. Strangers came to the village from opposite directions.
From the north came a salesman whose only product was paper. It was a catalogue of goods for sale, and a wad of paper currency with which to pay for the goods.
This Northerner said that he would stop by again in two weeks to take orders from his colourful catalogue. He also said he would buy local produce at this time in exchange for his paper currency, and he would pay twice the value of the produce as listed in his catalogue. That way some people would be able to start out right away to order enticing products from the catalogue. However, he said, this special offer was only good for the few days he was to be in the village this time.
The Southern visitor told the villagers that she would leave the community the names of people in the barter network which already operated among the other villages and towns of the region.
Explaining the simple procedure, the Southerner said that when a villager needed something not found in their own village, all they had to do was put in a request and it would be sent along from where it could be found.
And, when a villager wanted to offer any of their excess products, they could place that availability onto one of the lists, and someone, somewhere would order it. There were certain trusted people who were Keepers of the Lists. After several weeks of activity, at least one person in this village would likely be asked to become a Keeper of the Lists.
With products moving into and out of the village, there would always be a traveler who could carry requests and the goods either way for the fee of a nightly room-and-board and maybe an extra slice of bread.
At the end of a year, the Southerner explained, the flow of goods into and out of the village would be totaled and any excess would be left in the ledger, while any deficit would be noted and applied against future outside requests for village products or services.
That would provide incentive for all villagers to work together a bit harder to place more desirable products into the outgoing goods, and to restrict some of the inclination to bring in unneeded outside goods to the village, thus keeping their barter account closely in balance over the long term.
Meanwhile, the Northerner saw that he had to respond. He set up a bank in the village anyway, hiring a local who was good with arithmetic to operate the bank along with the store. The Northerner secretly planned to convert the bank at a later date into a currency-lending store, which would have a much higher profit than would any simple bank.
The Northerner stocked the bank and next-door store with products made by the villagers but instead of paying with barter, he gave them pieces of paper he called “bank notes”. He explained that the bank notes could be used by anyone in the village to pay for goods amongst themselves instead of doing “old fashioned bartering”.
The bank also offered to take any amount of each villager’s bank notes and put them into a safe place to be used later, held safely for a small administration fee.
The people talked amongst themselves. There were heated arguments between family and friends such as the village had not seen in generations. Some villagers preferred to carry on with the newly modified barter system that they were getting used to, while others decided to jump onto the bank note scheme.
Gorman and Elaina pondered the issue. They agreed that one system automatically placed an arbitrary paper value on everything, creating hard categories and divisions. This made it easier to sort the different things, but it left no room for grey areas. Elaina wondered, “If I take longer to put in more love into the shirt I am making, will that be worth more than the shirt made by someone who has no skill?”
Gorman nodded. “I would prefer the shirt made by a sincere and honest craftswoman, and I would gladly offer the best of what I can make in return.”
They agreed that the older system created personal connections and more community-minded actions.
Before the Northerner came with his bank notes and flimsy paper pictures, discussions between villagers were sometimes extended, but they had been conducted in a civil fashion while working toward a consensus. Now, positions became hardened. It grew worse as one side, though they were a small group, clung to their new-found and segregated “wealth” of paper in the form of bank notes. The people on this side firmly believed that if they had control of the largest pile of bank notes, their power would increase as the years passed.
It did not take long for this village to become like all the other villages. Crafts were no longer made. Inferior goods came from far away. Some people became hoarders of bank-notes. Those who did not have the opportunity to obtain enough bank notes starved.
If you lived in that village, which system would you chose?
This is the basic difference between banks and bitcoins, versus the possibilities of Blockchain technology.