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Commerce · III.01 · MMXXVI · daylight

La Bourse  /  Volume III  /  Nº III.01  /  Workbook — the student

WORKBOOK — THE STUDENT

Chapter III.01 · What a Currency Is Made Of

For the person studying this alone, or in a seminar, with no balance sheet to change yet. You already operate a monetary system. It has a unit of account, a settlement layer and a store of value, and you have never written them down. This term you will.

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WHY THIS WORKBOOK IS DIFFERENT

The chapter was written for someone who can sign a term sheet. You may have a current account, a phone, an overdraft and a part-time job.

That is not a smaller version of the problem. It is the same problem at a scale where you can see the whole thing at once, which is a genuine research advantage and the reason economists keep going back to prisoner-of-war camps and island communities. Radford's 1945 study of a POW camp is still cited because a camp is small enough to observe completely.

So is your life. Over one term you will document a working monetary system in full — every function, every layer, every failure mode — from the inside, with primary data nobody else has. That is not an exercise. It is fieldwork.

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PART ONE — DISCOVERY

Weeks 1–4: find the four functions in your own life

Exercise 1.1 — The four-function audit (90 minutes)

Take a sheet of paper and rule four columns: unit of account, medium of exchange, means of settlement, store of value. Now fill them with things that are not the pound, the euro or the dollar.

Prompts, to get you past the obvious:

• What do you price your own time in? Hours? Sessions? Essays? A "day's work"?
• What settles a debt with a housemate — cash, a returned favour, doing the washing-up, a transfer?
• Where do you store value that is not money? A skill you are building. A friendship you maintain. A tool you keep sharp. A reputation with a tutor.
• What unit does your seminar group price effort in?

You will find at least six non-monetary instruments doing monetary work.

Exercise 1.2 — Your personal velocity (45 minutes)

Open your bank statements for three months. Compute two numbers.

  monthly money passing through              GBP   1,450
  average balance held                       GBP     620
  annual through-flow  1,450 x 12            GBP  17,400
  ------------------------------------------------------
  personal velocity  17,400 / 620                  28.06 x/yr

Those are illustrative figures — run your own. Your personal velocity is how many times your average balance turns over in a year. Compare it to US M2 velocity, which was about 2.2 in 1997, about 1.1 in 2020 and about 1.35 in 2023.

You will find yours is an order of magnitude higher, and there is nothing wrong with either number. It is the clearest possible demonstration that velocity is a property of a holder's situation, not of the money. Someone with a buffer holds; someone without one circulates. Any monetary design that treats velocity as a virtue has quietly made a judgement about who is holding, and why.

Exercise 1.3 — The appreciative interview (45 minutes, with another person)

Find someone at least thirty years older than you and ask exactly this:

"Tell me about a time when money was not the thing that got something done — when it was credit, or a favour, or a promise, or a system nobody wrote down. What made it work? Who kept the record?"

Take notes on who held the information, not on the amounts. This is the Irish 1970 question asked of a life, and the answers are consistently richer than any textbook case.

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PART TWO — THE ARITHMETIC

Weeks 5–8: compute before you argue

Exercise 2.1 — Reproduce every figure in the chapter (2 hours)

Do not take the numbers on trust. Run:

python3 lib/verify.py III.01

Read the inputs before the results. Then, on paper, reproduce three of them independently:

1. The composition check: 82 / 2,920 = 2.81 per cent, so 97.19 per cent deposits.
2. The capital ratio: 200,000 × 0.35 × 0.105 = £7,350, so 27.21×.
3. The deflation burden: 1.02³⁰ = 1.8114, so 81.1 per cent more in real terms.

Then break one deliberately. Change the risk weight from 35 per cent to 50 per cent and recompute. You should get £10,500 of capital and a ratio of 19.05×. If your arithmetic does not move the way you expected, you have found something you did not understand, which is the entire purpose of the exercise.

Exercise 2.2 — The demurrage sinking fund (90 minutes)

This is the chapter's honest negative and you should be able to derive it.

  demurrage  1 %/month  ->  1.01^12 - 1  =  12.6825 %/yr
  i = -0.126825 ,  n = 20
  (1 + i)^20 = 0.06638
  annuity factor = (0.06638 - 1) / -0.126825 = 7.3615
  annual contribution = 1,000,000 / 7.3615 = GBP 135,842
  total contributed    = 20 x 135,842      = GBP 2,716,840
  penalty factor       = 2,716,840 / 1,000,000 = 2.717 x

Now do it for your own horizon. Replace the million with what you would need for the thing you actually want to build in twenty years, and replace the demurrage with 3 per cent a year — which is roughly what ordinary inflation does to an uninvested balance. The penalty factor is smaller but it is not one, and that is the single most useful piece of personal finance in this book.

Exercise 2.3 — Find the threshold yourself (60 minutes)

The chapter states that the twenty-year penalty reaches 2× at a demurrage of 8.19 per cent a year, or 0.658 per cent a month. Derive it by bisection on a spreadsheet: guess a rate, compute the penalty, halve the interval. Twenty iterations is plenty.

Then answer in writing: what does it mean that this threshold exists? A policy instrument with a computable breaking point is a different kind of object from a policy instrument with a slogan.

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PART THREE — DESIGN

Weeks 9–12: build one

Exercise 3.1 — Design a currency for a group you are actually in (3 hours)

Pick a real group: a house, a society, a band, a study cohort, a sports team. Design its three layers explicitly.

Then write the governance page: who can change the unit, with what notice, and where the change history is published. Chile's UF works because the answer to that question is a central bank and a decree from 1967. Your version needs an answer of the same shape at a smaller scale.

Exercise 3.2 — Run it for four weeks (ongoing)

Actually run it. Keep the ledger. The instruction is not to make it succeed; it is to record what happens, including the day somebody games it.

Log weekly: units in issue, transactions, disputes, and one sentence on what surprised you.

Exercise 3.3 — The failure-mode watch (30 minutes, week 12)

Against your own four weeks of ledger, check for each of the chapter's named failure modes and write one line each:

• Basket capture — did anyone try to change the unit to their own advantage?
• The savings layer becoming a currency — did claims start circulating?
• Demurrage arbitrage — if you charged carry, did balances move the day before?
• Nobody used it — the commonest outcome, and not a failure of the design so much as evidence that the binding constraint was elsewhere. Say where.

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PART FOUR — DESTINY AND DELIGHT

The term of practice, week by week

A term is twelve weeks and twelve weeks is long enough to build a habit that survives the term. The exercises above are the work; this is the rhythm that carries them, and it costs about forty minutes a week.

Exercise 4.1 — The one-page provenance statement (45 minutes)

The chapter's Dream describes a bank statement that shows what created each deposit. Build yours by hand for one month. Beside every credit, write what brought it into existence: wages paid out of a firm's operating account, a transfer from a person's existing balance, a loan advanced, a government payment, a refund reversing an earlier payment.

Most people find that two or three lines have no confident answer, and those lines are the interesting ones. A monetary system you can trace is a different object from one you merely use, and the tracing takes an hour, once.

Exercise 4.2 — Find one function running alone, in the wild (one week)

The chapter's Discovery names four historical cases. Find a fifth, living, near you. Candidates that have worked for previous cohorts:

• A gym or clinic that prices in sessions and settles in card payments
• A time bank, where the unit is an hour and the hour is not tradeable for money
• Airline miles: a unit of account and a store of value that settles almost nothing
• A university that prices in credits and settles in nothing at all
• A childminding circle with a written ledger of hours owed
• Any deposit scheme — a returnable bottle, a pallet, a keg — where the token settles and nothing prices

Write half a page: which function is running alone, what does the other work, and what would break if the two were merged. This is the single exercise previous readers report changing how they see an ordinary week.

Exercise 4.3 — The delight note (15 minutes, week 12, and no marks attached)

Write one paragraph, for yourself only, about the moment in this term when money stopped being weather. Do not make it an argument. Name the day, what you were doing, and what shifted.

Keep it. In three years it will be the most interesting page in the folder, because it is the only one that records the change rather than the content.

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THE TERM PROJECT

One monetary system, documented completely

The deliverable: eight to ten pages, and it should be publishable.

1. The system. What group, what period, what instruments.
2. The four functions. Which instrument did which job, and which jobs were performed by more than one thing at once.
3. The ledger. Your actual data, with the gaps marked as gaps.
4. One computed figure. Velocity, penalty factor, capital ratio, or a quantity of your own construction — computed, with its inputs and units printed, in the style of lib/verify/III_01.py.
5. One honest negative. Where your design lost. Not a caveat — a measured case, with the threshold if you can find it.
6. What you would build next, and why you would build it even if nothing had gone wrong.

The standard. A reader who has never met you should be able to check your central number without asking you anything. That is the only bar, and it is higher than it sounds.

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SELF-ASSESSMENT

Mark yourself honestly, at the end of the term

Score each 0–3. Zero is not yet, three is I could teach this.

Twenty-four and above: you can read Volume III at speed. Go on to III.02.

Sixteen to twenty-three: redo Exercise 2.1 and 2.2 with different numbers. The gap is almost always arithmetic rather than concept, and arithmetic closes in an afternoon.

Below sixteen: the ten briefs, one a day, for ten days, computing every figure in each as you go. Then return here. There is no hurry and nothing is lost; this is the chapter the rest of the volume stands on, and it is worth the second pass.

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WHAT TO CARRY FORWARD

One sentence, and it is the one to keep: money is a record of obligation that enough people accept, and every property you were told it has is a design decision somebody made and could have made differently.

The next chapter asks what happens when you denominate that record in energy. You will find the same three layers, wearing different clothes.