Money
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This question continued to trouble researchers over the century after Furness’ account of Yap was published. As historical and ethnographic evidence accumulated, Yap came to look less and less of an anomaly. Seek as they might, not a single researcher was able to find a society, historical or contemporary, that regularly conducted its trade by barter. By the 1980s, the leading anthropologists of money considered the verdict to be in. “Barter, in the strict sense of moneyless market exchange, has never been a quantitatively important or dominant mode of transaction in any past or present economic system about which we have hard information,” wrote the American scholar George Dalton in 1982.15 “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there has never been such a thing,” concluded the Cambridge anthropologist Caroline Humphrey.16 The news even began filtering through to the more intellectually adventurous fringes of the economics profession. The great American economic historian Charles Kindleberger, for example, wrote in the second edition of his Financial History of Western Europe, published in 1993, that “Economic historians have occasionally maintained that evolution in economic intercourse has proceeded from a natural or barter economy to a money economy and ultimately to a credit economy. This view was put forward, for example, in 1864 by Bruno Hildebrand of the German historical school of economics; it happens to be wrong.”17 By the beginning of the twenty-first century, a rare academic consensus had been reached amongst those with an interest in empirical evidence that the conventional idea that money emerged from barter was false. As the anthropologist David Graeber explained bluntly in 2011: “[T]here’s no evidence that it ever happened, and an enormous amount of evidence suggesting that it did not.”18
The story of Yap does not just present a challenge to the conventional theory’s account of money’s origins, however. It also raises serious doubts about its conception of what money actually is. The conventional theory holds that money is a “thing”—a commodity chosen from amongst the universe of commodities to serve as a medium of exchange—and that the essence of monetary exchange is the swapping of goods and services for this commodity medium of exchange. But the stone money of Yap doesn’t fit this scheme. In the first place, it is difficult to believe that anyone could have chosen “large, solid, thick stone wheels ranging in diameter from a foot to twelve feet” as a medium of exchange—since in most cases, they would be a good deal harder to move than the things being traded. But more worryingly, it was clear that the fei were not a medium of exchange in the sense of a commodity that could be exchanged for any other—since most of the time, they were not exchanged at all. Indeed, in the case of the infamous shipwrecked fei, no one had ever even seen the coin in question, let alone passed it around as a medium of exchange. No, there could be no doubt: the inhabitants of Yap were curiously indifferent to the fate of the fei themselves. The essence of their monetary system was not stone coins used as a medium of exchange, but something else.
Closer consideration of Adam Smith’s story of commodities chosen to serve as media of exchange suggests that the inhabitants of Yap were on to something. Smith claimed that at different times and in different places, numerous commodities had been chosen to serve as the money: dried cod in Newfoundland; tobacco in Virginia; sugar in the West Indies; and even nails in Scotland. Yet suspicions about the validity of some of these examples were already being raised within a generation or two of the publication of Smith’s Wealth of Nations. The American financier Thomas Smith, for example, argued in his Essay on Currency and Banking in 1832 that whilst Smith thought that these stories were evidence of commodity media of exchange, they were in fact nothing of the sort.19 In every case, these were examples of trade that was accounted for in pounds, shillings, and pence, just as it was in modern England. Sellers would accumulate credit on their books, and buyers debts, all denominated in monetary units. The fact that any net balances that remained between them might then be discharged by payment of some commodity or other to the value of the debt did not mean that that commodity was “money.” To focus on the commodity payment rather than the system of credit and clearing behind it was to get things completely the wrong way round. And to take the view that it was the commodity itself that was money, as Smith did, might therefore start out seeming logical, but would end in nonsense. Alfred Mitchell Innes, the author of two neglected masterworks on the nature of money, summed up the problem with Smith’s report of cod-money in Newfoundland bluntly but accurately:
A moment’s reflection shows that a staple commodity could not be used as money, because ex hypothesi the medium of exchange is equally receivable by all members of the community. Thus if the fishers paid for their supplies in cod, the traders would equally have to pay for their cod in cod, an obvious absurdity.20
If the fei of Yap were not a medium of exchange, then what were they? And more to the point, what, in fact, was Yap’s money if it wasn’t the fei? The answer to both questions is remarkably simple. Yap’s money was not the fei, but the underlying system of credit accounts and clearing of which they helped to keep track. The fei were just tokens by which these accounts were kept. As in Newfoundland, the inhabitants of Yap would accumulate credits and debts in the course of their trading in fish, coconut, pigs, and sea cucumber. These would be offset against one another to settle payments. Any outstanding balances carried forward at the end of a single exchange, or a day, or a week, might, if the counterparties so wished, be settled by the exchange of currency—a fei—to the appropriate value; this being a tangible and visible record of the outstanding credit that the seller enjoyed with the rest of Yap. Coins and currency, in other words, are useful tokens to record the underlying system of credit accounts and to implement the underlying process of clearing. They may even be necessary in an economy larger than that of Yap, where coins could drop to the bottom of the sea and yet no one would think to question the wealth of their owner. But currency is not itself money. Money is the system of credit accounts and their clearing that currency represents.
If all this sounds familiar to the modern reader—even obvious—it should. After all, thinking of money as a commodity and monetary exchange as the swapping of goods for a tangible medium of exchange may have been intuitive in the days when coins were minted from precious metals. It may even have made sense when the law entitled the holder of a Federal Reserve or Bank of England note to present it on Constitution Avenue or Threadneedle Street and expect its redemption for a specified quantity of gold. But those days are long gone. In today’s modern monetary regimes, there is no gold that backs our dollars, pounds, or euros—nor any legal right to redeem our banknotes for it. Modern banknotes are quite transparently nothing but tokens. What is more, most of the currency in our contemporary economies does not enjoy even the precarious physical existence of a banknote. The vast majority of our national money—around 90 per cent in the U.S., for example, and 97 per cent in the U.K.—has no physical existence at all.21 It consists merely of our account balances at our banks. The only tangible apparatus employed in most monetary payments today is a plastic card and a keypad. It would be a brave theorist indeed who maintained that a pair of microchips and a Wi-Fi connection are a commodity medium of exchange.
By a strange coincidence, John Maynard Keynes is not the only giant of twentieth-century economics to have saluted the inhabitants of Yap for their clear understanding of the nature of money. In 1991, the seventy-nine-year-old Milton Friedman—hardly Keynes’ ideological bedfellow—also came across Furness’ obscure book. He too extolled the fact that Yap had escaped from the conventional but unhealthy obsession with commodity coinage, and that by its indifference to its physical currency it acknowledged so transparently that money is not a commodity, but a system of credit and clearing. “For a century or more, the ‘civilized’ world regarded as a manifestation of its wealth metal dug from deep in the ground, refined at great labor, and transported great distances to be buri
ed again in elaborate vaults deep under the ground,” he wrote. “Is the one practice really more rational than the other?”22
To win the praise of one of the two greatest monetary economists of the twentieth century may be regarded as chance; to win the praise of both deserves attention.
MONETARY VANDALISM: THE FATE OF THE EXCHEQUER TALLIES
The economic worldview of Yap which both Keynes and Friedman applauded—of money as a special type of credit, of monetary exchange as the clearing of credit accounts, and of currency as merely tokens of an underlying credit relationship—has not been without its own forceful historical proponents. Amongst those who have had to deal with the practical business of managing money—especially in extremis—the view of money as credit, rather than a commodity, has always had a strong following. One famous example is provided by the siege of Valletta by the Turks in 1565. As the Ottoman embargo dragged on, the supply of gold and silver began to run short, and the Knights of Malta were forced to mint coins using copper. The motto that they stamped on them in order to remind the population of the source of their value would have seemed perfectly sensible to the inhabitants of Yap: Non Aes, sed Fides—“Not the metal, but trust.”23
Nevertheless, it is undoubtedly the conventional view of money as a commodity, of monetary exchange as swapping goods for a medium of exchange, and of credit as the lending out of the money commodity, that has enjoyed the lion’s share of support from theorists and philosophers over the centuries, and thereby dominated economic thought—and, for much of the time, policy as well. But if it is so obvious that the conventional theory of money is wrong, why has such a distinguished canon of economists and philosophers believed it? And why does today’s economics profession by and large persist in using the fundamental ideas of this tradition as the building blocks of modern economic thinking? Why, in short, is the conventional theory of money so resilient? There are two basic reasons, and they are worth dwelling on.
The first reason has to do with the historical evidence for money. The problem is not that so little of it survives from earlier ages, but that it is virtually all of a single type—coins. Museums around the world heave with coins, ancient and modern. Coins and their inscriptions are one of the main archaeological sources for the understanding of ancient culture, society, and history. Deciphered by ingenious scholars, their graven images and their abbreviated inscriptions give up vast libraries of knowledge about the chronologies of ancient kings, the hierarchy of classical deities, and the ideologies of ancient republics. An entire academic discipline—numismatics—is devoted to the study of coins; and far from being the scholarly equivalent of stamp collecting, as it might appear to the uninitiated, numismatics is amongst the most fruitful fields of historical research.
But of course the real reason why coins are so important in the study of ancient history, and why they have dominated in particular the study of the history of money, is that coins are what have survived.24 Coins are made of durable metals—and very often of imperishable metals, such as gold or silver, which do not rust or corrode. As a result, they tend to survive the ravages of time better than most other things. What is more, coins are valuable. As a result, there has always been a tendency for them to be squirrelled away in buried or hidden hoards—the better to be discovered decades, centuries, or even millennia later by the enterprising historian or numismatist. The problem is that in no field so much as the history of money is an approach fixated upon what physically survives likely to lead us into error. The unfortunate story of the wholesale destruction of one of the most important collections of source material for the history of money ever to have existed shows why.
For more than six hundred years, from the twelfth to the late eighteenth century, the operation of the public finances of England rested on a simple but ingenious piece of accounting technology: the Exchequer tally. A tally was a wooden stick—usually harvested from the willows that grew along the Thames near the Palace of Westminster. On the stick were inscribed, always with notches in the wood and sometimes also in writing, details of payments made to or from the Exchequer. Some were receipts for tax payments made by landowners to the Crown. Others referred to transactions in the opposite direction, recording the sums due on loans by the sovereign to prominent subjects. “9£ 4s 4d from Fulk Basset for the farm of Wycombe” reads one that has survived, for example—relating a debt owed by Fulk Basset, a thirteenth-century Bishop of London, to Henry III. Even bribes seem to have been recorded on Exchequer tallies: one stick in a private collection bears the suspicious-sounding euphemism “13s 4d from William de Tullewyk for the king’s good will.”25
Once the details of the payment had been recorded on the tally stick, it was split down the middle from end to end so that each party to the transaction could keep a record. The creditor’s half was called the “stock,” and the debtor’s the “foil”: hence the English use of the term “stocks” for Treasury bonds, which survives to this day. The unique grain of the willow wood meant that a convincing forgery was virtually impossible; while the record of the account in a portable format—rather than just inscribed in the Treasury account books at Westminster, for example—meant that Exchequer credits could be passed from their original holder to a third party in payment of some unrelated debt. Tallies were what are called “bearer securities” in modern financial jargon: financial obligations such as bonds, share certificates, or banknotes, the beneficiary of which is whoever holds the physical record.
Historians agree that the vast majority of fiscal operations in medieval England must have been carried out using tally sticks; and they suppose that a great deal of monetary exchange was transacted using them as well.26 A credit with the Exchequer, as recorded on a tally stick, would after all have been welcomed in payment by anyone who had taxes of his own coming due. It is, however, impossible to know for certain. For although millions of tallies must have been manufactured over the centuries, and though we know for sure that many thousands survived in the Exchequer archives up until the early nineteenth century, only a handful of specimens exist today. The ultimate culprit for this unfortunate situation is the famous zeal of England’s nineteenth-century advocates of administrative reform.
Despite the fact that the tally-stick system had proved itself remarkably efficient over the preceding five hundred years, by the late eighteenth century it was felt that it was time to dispense with it. Keeping accounts with notched sticks—let alone using wooden splints as money alongside the elegant paper notes of the Bank of England—was by then considered little short of barbaric, and certainly out of keeping with the enormous progress being made in commerce and technology. An Act of Parliament of 1782 officially abolished tally sticks as the main means of account-keeping at the Exchequer—though because certain sinecures still operated on the old system, the Act had to wait almost another half-century, until 1826, to come into effect. But in 1834, the ancient institution of the Receipt of the Exchequer was finally done away with, and the last Exchequer tally replaced by a paper note.
A collection of English Exchequer tallies: rare survivors of one of the great episodes of historical vandalism of the nineteenth century.
(illustration credit 1.2)
With the tally-stick system finally abolished, the question arose of what to do with the vast archive of tallies left in the Exchequer. Amongst the partisans of reform the general feeling was that they were nothing but embarrassing relics of the way in which the fiscal accounts of the British Empire had been kept, “much as Robinson Crusoe kept his calendar on the desert island,” and it was decided without hesitation to incinerate them.27 Twenty years later, Charles Dickens recounted the unfortunate consequences:
It came to pass that they were burnt in a stove in the House of Lords. The stove, overgorged with these preposterous sticks, set fire to the panelling; the panelling set fire to the House of Lords; the House of Lords set fire to the House of Commons; the two houses were reduced to ashes; architects were called in to build others;
we are now in the second million of the cost thereof …28
The Houses of Parliament could be rebuilt, of course—and were, to leave the splendid Palace of Westminster that stands on the banks of the Thames today. What could not be resurrected from the inferno, however, was the priceless record of England’s fiscal and monetary history constituted by the tallies.29 Historians have had to rely on a handful of tallies that survived by chance in private collections, and we are fortunate that there are a few contemporary accounts of how they were used.30 But as for the immense wealth of knowledge that the Westminster archive embodied about the state of England’s money and finances throughout the Middle Ages, it is irretrievably lost.
If this is a problem for the history of money in medieval England, the situation is infinitely worse for the history of money more generally. All too often, the only physical trace of money that remains is coins: yet as the example of the English tally-stick system shows, coinage may have been only the very tip of the monetary iceberg. Vast hinterlands of monetary and financial history lie beyond our grasp—simply because no physical evidence of their existence and operation survives. To appreciate the seriousness of the problem we have only to consider what hope the historians of the future would have of reconstructing our own monetary history if a natural disaster were to destroy the digital records of our contemporary financial system. We can only trust that reason would prevail, and that they would not build their understanding of modern economic life on the assumption that the pound and euro coins and nickels and dimes that survived were the sum total of our money.