by David Orrell
An important advantage of cash compared with such schemes, then, is its range—it is accepted not just by one employer-controlled retail outlet but also by the store down the road and a whole range of institutions. Money therefore stimulates trade, at least over the region in which it is accepted, by making transactions convenient. And it represents a kind of freedom, since a person with money in his or her pocket is someone with the freedom to choose. As Fyodor Dostoyevsky put it: “Money is coined liberty.” Or at least liberty to select from among an available selection of suppliers.
Money therefore acts as a store of value (though this does raise the question, what is value?) and a medium of exchange. Finally, its units—dollar, shekel, and other currencies—act as units of account. To compare the economic value of different items, we just need to compare their market prices. And unlike most physical objects, money can be easily divided into fractional amounts, which is useful—we don’t need to say that a chicken egg is worth one-tenth of a chicken. As discussed later, the spread of the use of money—and the need for accounting techniques—helped to inspire the development of mathematics in ancient Greece. Today, financial wizards with degrees in particle physics are employed to keep track of money’s incessant, turbulent flow around the globe.
Indeed, the adoption of money was part of a generalized shift toward the dominance of calculation in our lives. The main difference between monetary transactions and other social transactions such as gift exchange is that the former involve an exact amount—you can put a number on them. They therefore emphasize the left-brain functions of logic and quantification. As we’ll see, money has a tendency to colonize and take over everything it comes into contact with, because like mathematics it is based on reducing the world to a common, self-contained system of thought. Like pure numbers, money has shed any physical attributes—luster, texture, weight—and now exists only on the higher plane of abstraction and mathematics.
This cold rationality and exactness introduces a note of finality to transactions, because once an exchange is complete, there is nothing left over—the numbers on either side of the ledger cancel out to zero. Money builds commercial relationships, but it can terminate them in a flash. By acting as a kind of prosthetic for trust, it also removes some of our need for creating and maintaining real trust with human beings. We trust in money more than we trust in one another. Our bond is with the bank.
The multiple properties of money, which can both complement and contradict one another, mean that it often arouses conflicting and paradoxical responses. For example, we want money to be attractive as a good store of value—but if it is too attractive relative to other options, it will be hoarded rather than allowed to circulate. We want money to be available in adequate quantities—but not so easily available that it causes inflation (for a period, tobacco served as legal tender in the state of Virginia, and when tobacco production surged to over twice its normal level in 1639, it was ordered that half the crop be destroyed). People without money want to borrow it, but bankers want to loan only to those who already have it. We think money will make us happy, but studies have shown that happiness levels of lottery winners are remarkably unchanged by their wins.1 Money is “how our culture defines value,” according to author Tim Kreider, but increasingly we expect to get our culture (or “content”) from artists and authors for free, in what amounts to a modern version of a gift economy.2 Attempts to reduce financial risk often have the effect of increasing it. Economic policies have surprising and counterintuitive effects. And so on.
As discussed later, mainstream economists have traditionally sidestepped some of these issues by focusing on money’s role as what economist F. A. Harper called a “lubricant in exchange” so that money has no special or interesting powers of its own.3 We defer our own definition until chapter 2, but as a start, an obvious question is where money came from in the first place. Just as philosophers have long speculated on the origins of the universe, so economists and others have wondered about the origins of money. It didn’t just fall from the sky, so who invented it? As with other creation stories, the proposed answers are interesting not just for what they say about reality but for what they say about their authors; and for insights into not just the past but also the future.
Creation Myth
One of the first philosophers to write about the invention of money was Aristotle, who deduced that it must have replaced a barter system in response to increasingly complicated trade. As he wrote in Politics, the “more complex form of exchange [money] grew, as might have been inferred, out of the simpler [barter]. … For the various necessaries of life are not easily carried about, and hence men agreed to employ in their dealings with each other something which was intrinsically useful and easily applicable to the purposes of life, for example, iron, silver, and the like. Of this the value was at first measured simply by size and weight, but in process of time they put a stamp upon it, to save the trouble of weighing and to mark the value.”4
Aristotle’s argument that money replaced barter in this way appears to have been based more on speculation than detailed evidence or anthropological footwork on his part, but his opinions influenced much further thinking on the subject. In a book whose title translates to A Guide to the Merits of Commerce and to Recognition of Both Fine and Defective Merchandise and the Swindles of Those Who Deal Dishonestly, the Damascus merchant and writer Abu Ja‘far al-Dimashqi noted the difficulties inherent in barter:
[T]he time of need of a person does not often coincide with the time of need of another person, as in the case of a carpenter who may be in need of an ironsmith but could not find one (at that particular time). It may also happen that there is no equivalence between the respective quantities of what each need[s] from the other, and there is no way of knowing the value of each item of each kind of goods, and of knowing the rate of exchange between one item and another item of a part of the merchandise among all the parts of the rest of the merchandise, nor the relative value of each of the different crafts.5
As a result, “The ancients searched for something by which to price all things” and settled on coins of gold and silver, which were preferred “due to their being readily suited for casting, forging, combining, separating and shaping into any form required.”
The story was picked up by the schoolmen who repeated Aristotle’s teaching to a medieval audience in the first universities, and later by economists such as Adam Smith. In The Wealth of Nations, he agreed with Aristotle that money—and indeed the entire market economy—must have emerged naturally from barter. A “prudent man” would build up a stockpile of some commodity that “few people would be likely to refuse in exchange for the produce of their industry.”6 Again, the ideal material was gold or silver; originally these were used in the form of “rude bars” that constantly needed to be weighed and measured, but eventually the government would have stepped in to issue standardized coins. Mints, according to Smith, had exactly the same role in this process as “stamp-masters of woollen and linen cloth.” He fleshed out the picture with the addition of vignettes of hunters and shepherds, with “bows and arrows” being exchanged “for cattle or for venison,” which appear to be drawn from what was known at the time about peoples such as the Native Americans of North America.
Double Coincidence
In the late nineteenth century, neoclassical economists such as William Stanley Jevons attempted to reinvent economics as a mathematical discipline; part of that project was framing the emergence of money as a kind of logical necessity. “The earliest form of exchange,” he wrote in his book Money and the Mechanism of Exchange, “must have consisted in giving what was not wanted directly for that which was wanted. This simple traffic we call barter or truck.”7 Echoing Al-Dimashqi, Jevons noted that barter relies on what he called a double coincidence of wants, since each person has to want what the other has: “A hunter having returned from a successful chase has plenty of game, and may want arms and ammunition to renew the chase. But those who
have arms may happen to be well supplied with game, so that no direct exchange is possible.”
The first money, according to Jevons, took the form of commodities: “In the traffic of the Hudson’s Bay Company with the North American Indians, furs, in spite of their differences of quality and size, long formed the medium of exchange.” Indeed, companies even used a unit of account called the Made Beaver to keep track. “In the next higher stage of civilization,” Jevons went on, “the pastoral state, sheep and cattle naturally form the most valuable and negotiable kind of property. They are easily transferable, convey themselves about, and can be kept for many years, so that they readily perform some of the functions of money. … In countries where slaves form one of the most common and valuable possessions, it is quite natural that they should serve as the medium of exchange like cattle.”
But of course you can’t put furs, cattle, or slaves in your pocket; so again the best material, and the inevitable end result of this process, is coins made of precious metal:
[I]n order that money may perform some of its functions efficiently, especially those of a medium of exchange and a store of value, to be carried about, it is important that it should be made of a substance valued highly in all parts of the world, and, if possible, almost equally esteemed by all peoples. There is reason to think that gold and silver have been admired and valued by all tribes which have been lucky enough to procure them. The beautiful lustre of these metals must have drawn attention and excited admiration as much in the earliest as in the present times.
The metals are also malleable enough to be formed easily into coins; a job Jevons thought should be left to “executive government and its scientific advisers” (though in his Social Statics, Herbert Spencer argued that private firms would do a better job).
Money’s emergence from barter was therefore a natural, spontaneous process. In his article “On the Origins of Money,” the Austrian economist Carl Menger attempted to demonstrate this through a kind of thought experiment; arguing that “we can only come fully to understand the origin of money by learning to view the establishment of the social procedure, with which we are dealing, as the spontaneous outcome, the unpremeditated resultant, of particular, individual efforts of the members of a society.” As people traded among themselves, it turned out that some goods were more reliably marketable than others. People therefore stockpiled this substance (e.g., gold) and began to use it as a form of money. Money was therefore created not by the state but by the markets. As Menger wrote,
Money has not been generated by law. In its origin it is a social, and not a state institution. Sanction by the authority of the state is a notion alien to it. On the other hand, however, by state recognition and state regulation, this social institution of money has been perfected and adjusted to the manifold and varying needs of an evolving commerce … the establishment and maintenance of coined pieces so as to win public confidence and, as far as possible, to forestall risk concerning their genuineness, weight, and fineness, and above all the ensuring their circulation in general, have been everywhere recognised as important functions of state administration.8
In his book An Outline of Money, Geoffrey Crowther (then editor of the Economist magazine) described money as the “radical invention … of some lazy genius who found himself oppressed by the task of calculating how many bushels of corn should exchange for one tiger-skin, if three bushels of corn were equal to five bananas, twenty bananas to one goat and twenty goats to one tiger-skin. And it undoubtedly was an invention; it needed the conscious reasoning power of Man to make the step from simple barter to money-accounting.”9 Paul Samuelson, in the ninth edition of his textbook Economics, which is the best-selling economics textbook of all time, brought the story up-to-date: “If we were to construct history along hypothetical, logical lines, we should naturally follow the age of barter by the age of commodity money. … The age of commodity money gives way to the age of paper money. … Finally, along with the age of paper money, there is the age of bank money, or bank checking deposits.”10
As economist John Smithin noted in a collection of essays called What Is Money?, the idea that money spontaneously took over from barter as the solution to a practical problem, with the role of government limited to putting its stamp of approval on the whole thing, “has persisted to the present day” and is still featured in “almost every textbook.”11 Consider, for example, the explanation of the origins of money from the thirteenth edition of a modern best-selling Canadian textbook, Economics, by Christopher Ragan and Richard Lipsey:
If there were no money, goods would have to be exchanged by barter. … The major difficulty with barter is that each transaction requires a double coincidence of wants. … The use of money as a medium of exchange solves this problem. … All sorts of commodities have been used as money at one time or another, but gold and silver proved to have great advantages. … Before the invention of coins, it was necessary to carry the metals in bulk. … The invention of coinage eliminated the need to weigh the metal at each transaction, but it created an important role for an authority, usually a king or queen, who made the coins and affixed his or her seal, guaranteeing the amount of precious metal that the coin contained. This was clearly a great convenience.12
We therefore see an eerie continuity between Aristotle, the first economists, and modern textbooks (as discussed later, this is not the only sense that economic theory remains Aristotelian). As the Banco Central do Brasil puts it: “At the beginning, there was no money. People engaged in barter.”13 Two things are worthy of note. The first is that, while Aristotle is still, of course, widely revered as one of the founders of Western philosophy, most scientific fields have been updated since his day (we don’t still think the stars are made of ether and go round the earth). It therefore seems a very odd coincidence (a double coincidence?) that the mainstream theory about the emergence of money as recited to economics students has not changed much from the few sentences that he wrote about it more than 2,000 years ago.
The second point is that the story that has been thus embalmed over the ages is completely wrong. A noticeable feature of all these accounts is the lack of dates, references, or supporting details. As the British economist Alfred Mitchell-Innes observed in his article “What Is Money?”: “So universal is the belief in these theories among economists that they have grown to be considered almost as axioms which hardly require proof, and nothing is more noticeable in economic works than the scant historical evidence on which they rest, and the absence of critical examination of their worth.” He goes on: “Modern research in the domain of commercial history and numismatics, and especially recent discoveries in Babylonia, have brought to light a mass of evidence which was not available to the earlier economists, and in the light of which it may be positively stated that none of these theories rest on a solid basis of historical proof—that in fact they are false.”14
With respect to “modern research” we should point out that Mitchell-Innes, whose work experience included a stint as financial adviser to the king of Siam, wrote his article in 1913. He argued that money is a proxy for government debt, which gains its value because it is needed to pay taxes (a school of thought known as chartalism). His work received a positive review from John Maynard Keynes, but then dropped out of sight, though it has recently made a comeback among “neochartalists” such as L. Randall Wray, who called Mitchell-Innes’s contributions “the best pair of articles on the nature of money written in the twentieth century.”15
Money did not emerge from barter. We know this because economies based purely on barter don’t appear to ever have existed (box 1.1). According to anthropologist Caroline Humphrey, “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money.”16 Far from having sprung into the world as the pristine, elegant solution to a problem of logic, the history of money turns out to be a little richer, messier, and more complex.
Money 1.0
As Mitchell-Innes p
ointed out a hundred years ago, our knowledge of the ancient civilizations that were presumably the birthplace of money has improved somewhat since the time of Aristotle, Smith, or Jevons. The best-documented ancient money system is that of the Sumerians in Mesopotamia, a society of relentless record-keepers whose clay-tablet cuneiforms—when they were decoded by Victorian scholars in the mid-nineteenth century—turned out to be mostly about commercial transactions.
Box 1.1
Some Things That Have Been Used as a Means of Making Payment
• Bars made of precious metals (e.g., ancient Mesopotamia, central banks)
• Salt (vital commodity for preserving and flavoring food used as currency in North Africa, China, and the Mediterranean; salary is from Latin sal for salt)
• Cattle (e.g., ancient India and Africa; the word “pecuniary” is from the Latin pecus [cattle], while “capital” is from the Latin capita [head], and the Indian currency rupee is from rupa [head of cattle])
• Slaves (e.g., ancient Rome, Greece, parts of modern India)
• Cacao beans, cotton capes (ancient Mexico)
• Cowrie shells (e.g., ancient China, Maldives)
• Beads (used in African slave trade)
• Feathers (Santa Cruz archipelago, Solomon Islands)
• Dog teeth (Papua New Guinea)
