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Friday, February 17, 2017

Yap, that's it!

Riverbend's version of the wooden nickel, 1 metre across
Don't ask me for the circumference; work it out yourself: think π
(but not the steak-and-kidney one!)


There's a tiny island called Yap out in the Pacific Ocean. Economists love it because it helps answer this really basic question: What is money? In fact, the economist Milton Friedman, who compared Yap's monetary system to the gold standard, wrote a 1991 paper about it.

There's no gold or silver on Yap. But hundreds of years ago, explorers from Yap found limestone deposits on an island hundreds of miles away. And they carved this limestone into huge stone discs, which they brought back across the sea on their small bamboo boats.

Then, at some point, the people on Yap realised what most societies realise: they needed something that everyone agrees on you can use to pay for stuff. And like many societies, the people of Yap took the thing they had that was pretty — their version of gold — and decided that was going to be their money - huge stone discs.

One thing about this money was that it was really heavy. A big piece could weigh more than a car. As a result, this very concrete form of money quickly made the jump to being something very abstract. So imagine there's this great big stone disc sitting in a village. One person gives it to another person. But the stone doesn't move. It's just that everybody in the village knows the stone now has a new owner. In fact, the stone doesn't even need to be on the island to count as money.

Seems crazy? Why? We do the same thing! We don't actually trade gold bars. We just trade ownership over the gold bars! When we write a cheque or use a credit card, the physical money doesn't actually move. It's just the ownership of that money that transfers.

So you could say the people of the island of Yap, being truly 'yappies', were a couple of thousand years ahead of us. But I'm catching up with them fast: I've just started my own version of the 'wooden nickel'.