A Short Story About Asset-backed Currencies
Tags: assets, money, economics, fiat
Published: 2022-12-14 07:58:47

## A Short Story..
There is a [story](https://www.quora.com/Why-cant-government-print-money-and-get-rich) often used to describe the rise of money. It involves a landowner who employed a farmer, carpenter, tailor, health worker and cobbler. At the end of the year, he pays them in terms of the rice produced on the farm. Let's say the farm yielded 1000 bags of rice; he may pay 200 kg to the farmer, 200kg to the carpenter and 100 kg each to the tailor, cobbler and health worker as their salary.  The remaining 300 kg of rice he kept for himself for consumption. These folks could now exchange goods and services between themselves using rice. 

![An image describing the use of rice as money](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/4zyq4az7dldmucd2xjin.jpeg)

Of course, at some point, because of efficiency, the landlord figures he can use stamped paper in place of the rice as a medium of exchange. All he had to do was create a standard unit of account using the rice as a store of value backing the stamped paper. 

Thus 100 stamped paper = 1000 kg of rice.
1 kg of rice = 100/1000 = 1/10 of stamped paper.
10 kg of rice = (1/10) * 10 = 1 stamped paper.
200 kg of rice = (1/10) * 200 = 20 stamped papers.

Thus, on the next payday the landowner distributed 20 stamped papers each to a farmer and the carpenter. Instead of providing 200 kg of rice to each of them. Similarly, he distributed 10 stamped papers each to the tailor, cobbler and health worker. Anyone who had stamped paper could choose to redeem it for rice.  Showing that the rice was fully backed and exchangeable with the rice.


![Image showing the use of stamped paper in place of rice](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/2nn2ulzxd1pyaqiy7qjx.jpeg)

Of course the problem comes, when for one reason or the other, the farm suffers a loss. Say, the farm has produced much less, like just 800 bags of rice; The landowner is faced with a challenge, does he pay them lesser this year or does he maintain the status quo even as the employees have worked just as hard this year, if he pays lesser there is less money in supply and this places a limit on how much business people can do and may further exacerbate the economy, if he maintains the status quo, he is invariably pumping in more money into the economy than the assets in store. This will become a problem when folks want to exchange their stamped paper for rice and the rice in store has run out. Something similar will happen if the landowner in a period of glut, expecting the farm to keep yielding bountiful harvest and keeps pumping stamped paper into the economy. 

## The Case For Asset-Backed Currencies
The underlying problem here is that asset backed currencies are inherently tied to their assets for better or worse. Here we can also see how production is linked to the supply of money. The more productive an economy, the likely increase in money supply.

It's important to note that food items stopped being used as assets backing currencies a long time ago and were replaced by minerals like gold/silver which were more scarce and fungible. 

However, they too were replaced a while ago by fiat money. Fiat money is simply paper money used in good-faith for transactions. There is nothing backing it like asset-backed currencies and they are quite prone to inflation.

So why did we start using them? Well, for one it is easier to manipulate fiat currency than asset backed currencies. Also, as the world economy got bigger, it became painfully obvious that the gold-standard wasn't going to be enough because there is a limited supply of gold in the world. In short there is not enough gold in the world to back our currencies. 

So what about the land and its produce, well that is a good argument, but the law of diminishing returns states that even land will start giving you diminishing returns over time, which is why traditional farmers practice shifting cultivation to another land, while the present one regains it fertility. The point is most resources, being commodities are exhaustible even though they are renewable over long spans periods of time. 

If we are going to use asset-backed currencies again, we cannot use just a singular asset. We need a basket of assets. A basket of assets is a more diverse, beneficial and optically abundant system that promotes a resilient economy. Something like this :) 

![A pie chart showing a basket of assets](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/y0bm88mm1ilin998x8zi.png)

This chart is from a [Reserve](https://reserve.org/) protocol launch talk by Tom Currier. In here he goes in depth to how asset backed currencies work and how a basket of assets is the way forward. Give it a look! {% embed https://www.youtube.com/watch?v=YyNon1bx8A8&list=PLsGy6XUusXQNmuRlkLOw9mMmLLTK-Zyru&index=2 %}