An article published in 1978, by Joan and Richard Sweeney, titled “Monetary Theory and the Great Capitol Hill Baby-sitting Co-op Crisis,” offers surprising insights into what crypto is and the functions of “money” it may fulfill.
The story is this: in the 1970s a baby-sitting co-operative with 150 couples as members decided to issue coupons allowing the bearer to one-hour of baby-sitting. It turns out that, after a while, few coupons were in circulation to sustain their liquidity. People were accumulating coupons, rather than spending them and exchanging baby-sitting services. Then, the governing board decided to issue more coupons and, presto, the number of baby-sitting hours soared.
Issuing coupons meant that a central authority, having monopoly powers - the co-op in this case - decided to issue a new currency, which could be used only to barter baby-sitting time, but only among a pre-selected network of families. How many coupons should have been issued to enable a liquid market?
Assume that 75 couples wanted to go out Friday nights, the other 75 Saturday night, all at the same time. If only 75 coupons were issued, and nobody knew who owned them on a particular Friday or Saturday morning, many transactions would be foregone because of the time-consuming search to make the matches. The Internet did not exist then to solve this problem. The outcome was a baby-sitting depression. However, if 225 coupons were issued, on average, half of the couples would be holding one, the other half two coupons, and less transactions would be foregone.
The printing of coupons solves the liquidity problem because: The “central bank” made first the mistake of issuing too few coupons; The “bank” had monopoly powers regulating the issue of this coupon and creating derivatives based on them, by, say, creating rights to such coupons; That people preferred to forego the pleasure of going out rather than pay cash for baby-sitting services, which would come from their after-tax income. (Otherwise, total baby-sitting hours exchanged would not have changed).
This example has applications for the crypto markets and points to their potential and their limitations.
Start with “unit of account.” The “baby-sitting” coupons had one, namely, the one hour of providing such services. Crypto currencies – unless like Tether, anchored to the U.S. dollar – do not have one. To eventually play such a role millions of buyers and sellers of variety of goods and services would have to accept crypto currencies – as accepted government-backed fiat moneys did when anchored in “gold”; in central banks’ mandates of no inflation; or when sustaining stable exchange rates. The resulting liquidity and velocity would then turn crypto into a reliable “medium of exchange,” creating the basket which would define its value, and serve as “unit of account” too.
However, creating a trusted co-op of 150 families in a neighborhood – trusting them baby-sitting your kids - is one thing. Creating a trusted network, consisting of millions of people around the world, is a complicated and costly affair, even with the ability to trace back ownership of a crypto-coin.
True, POW (Proof of Work) is part of Bitcoin's core process designed to prevent the fraud of double-spending the same coin, the “miners” doing this job – for a fee. But POW does not prevent drastic fluctuations in crypto values. There are no barriers to entry coming up with alternatives, such as Tether or others, each crypto having different features – just as the dollar does not prevent other fiat currencies being printed, backed by different models of society. Or, as neighborhoods too could have overlapping co-ops, each issuing their own coupons.
Which brings us to a much-misunderstood monetary experiment that bears both on the present crypto and fiat money experiments from additional angles.
At the end of the nineteenth century, a tribe on a small isolated Micronesian island, used large limestones that they reshaped as wheels, as both a monetary yardstick and as collateral for commerce. The stones were in relatively fixed supply, as the Yap had to bring them from other islands.
Though the German colonial government accepted the stones for paying taxes, when they wanted to pay the locals in German currency, the Yap refused. The German authorities then taxed the tribe, painting black crosses on stone wheels, indicating their confiscation. The tribe could no longer use them either to pay taxes or as collateral. When the German authorities promised paying by erasing the black crosses and thus restoring the locals their unit of account and their collateral, the impoverished Yaps agreed to build roads the Germans wanted. Stability was restored: The Yap had collective memories of prices and who owned what before the confiscation.
For crypto, in an 8 billion populated world, it’s the technology that would have to sustain such information. For the Yaps, the use of stones was no different from gold’s centuries-long use in Europe, and for silver’s centuries-long use in China. The difference with crypto is that these two metals and the stones were in scarce supply, whereas cryptos are not, competing with different technologies and being differently anchored.
The above sequence of events points to the crypto’s potential crucial advantage relative to fiat money – if properly managed. The loss and the destabilization of their customary monetary yardstick made the Yaps poorer. Reacting peacefully, they worked harder to restore their yardstick. In many societies, drastic devaluations, inflation and confiscations have brought about not only flaky theories rationalizing similar placid reactions (Phillips Curves), but also political upheavals - not in these theories' scope.
In principle, crypto could prevent such upheavals, which brings us back to where we started: How many crypto currencies could be issued to create a liquid market and be a medium of exchange, a unit of account and a store of value - without having their values collapse?
Here is a Fermi Calculation: Say 12.5% of the world’s population, that is 1 billion, each need to hold $300 of crypto for daily transactions. Taking Tether’s $1 price (Tether has the largest trading volume, double that of Bitcoin, whose trading and holding patterns are far less transparent), this would mean holding $3 trillion of cryptos. Which is roughly the total market value of all cryptos. If only 500 million people would hold just $100 of crypto on average for daily transaction, then the present $3 trillion of market value appears very optimistic - in spite of its already proven role of saving on transaction costs.
