DOWN THE RABBIT-HOLE: DO ME A FAVOUR
If many sources are to be believed, the story of money's origins is pretty clear-cut. It evolved out of necessity, with pre-money societies relying on barter and inevitably needing a commodity that would serve as a widely accepted medium of exchange. Everyday experience may seem to confirm this version of events. We do indeed have widely-accepted commodities that we use to oil the wheels of trade (although, increasingly, we are using digital payments rather than cash) and when people have had to do without money they have resorted to barter. It seems safe to reason that we similarly bartered before money was discovered.
PROBLEMS WITH THE ORTHODOX VIEW
Look a little closer, though, and things are not so clear-cut. Many economics textbooks retell the story-traceable back to Aristotle- of how barter led to commodity money. But for some reason they tend to use fictional places in order to explain how the coincidence of wants makes money such a necessity. Their thought experiments may be based on communities we are familiar with (such as a village or a town) but they rarely draw on actual historical examples of a society based predominantly on the barter system.
Some scholars claim that there are no historical examples of money evolving from barter for the simple reason that it did not. It's just that economists couldn't imagine any other way in which money could have evolved. For example, the historian and economist Michael Hudson has traced money's origins back to 3500BC, to a time when Mesopotamian temple administrators began relying on units of account to organise society. According to Hudson, Ariostotle's mistake was the failure to see that specialisation was something that developed within tribally organised communities. Rather than being obliged to specialise and market one's output in exchange for necessities such as food and clothing, specialisation instead developed within large households of chieftains, and those households supported non-agricultural labour with rations. Who oversaw the allocation of such rations? The administrators mentioned earlier. In Hudson's words, they "allocated rations and raw material in keeping with what was deemed necessary for production and for ceremonial and other institutional functions rather than resorting to private-sector markets, which had not yet come into being".
(Mesopotamian society. Image from wikimedia commons)
AN ALTERNATIVE ORIGIN STORY
The common view of money's evolution sees its origins in barter. This then leads to commodity money, and inevitably it is gold or silver coins that become the most widely-used medium of exchange, by virtue of properties such metals naturally possess such as divisibility, durability, and being in fixed supply. Over time, those gold standard monetary systems evolved into debt-based credit systems, partly out of convenience and partly because fraudsters are out to scam people into accepting fake money designed to rig markets, thereby favouring the scammers and their cronies at everyone else's expense.
But when historical and anthropological studies are brought to bare on money's origins, this version of events just doesn't quite fit the evidence. In fact, the evidence suggests that, when it comes to money's origins, we may have got things backwards.
If money did not evolve from barter, how did it evolve? Well, barter entails a simultaneous exchange between two parties. I have eggs but I want ham; you have ham but want eggs. If our paths happen to cross we can both give up what we have in exchange for what we prefer.
But, suppose I have eggs and I pass a fellow tribesperson who has nothing I want to barter with. Nevertheless, I may still hand over some of my eggs. Why would I do that? Because I have some vague sense that in being generous like this I am building up credit. If ever I am on hard times, those tribal members I lent a hand to will reciprocate the favour. In other words, I am operating in a gift economy, one in which people freely give away what they have and undertake services for others, with the caveat that person on the receiving end will later return the favour.
FROM OBLIGATIONS TO DEBT
What if they don't? And when and how is a favour fully reciprocated? As to the first problem, there doubtlessly would be free-riders who would accept gifts and favours but never reciprocate. But such people would build up a bad credit history and anyone operating under a strategy game theorists call 'tit for tat' would punish continual non-reciprocation. In fact, it is not just people who punish free-riders. Vampire bats are known to share blood if another bat has had an unsuccessful hunt, but if that bat continually fails to reciprocate, the colony punishes it by no longer being charitable. This suggests that money's origins in vague systems of credit go back beyond the dawn of the human species.
As for the problem of determining when and how a favour is returned, this probably developed along with resolving the problem of determining when a person who has done wrong has absolved themselves of guilt. How interesting it is to note that many of the words we use in association with guilt come from money. We send people to prison where they 'pay' their 'debt' to society. If we feel guilt we hope to 'redeem' ourselves. We wish to pacify and appease those who were done wrong by us- and the word 'pay' is derived from words like 'appease' and 'pacify'.
The problem of determining when one has redeemed themselves and properly appeased an injured party led to our ancestors establishing more specific systems of fines, fees and penalties. Over time this lead to quantified obligations i.e debt. At the same time, such quantifications lead to ratios between various commodities becoming established in order to measure whether both a grievance and a gift had been adequately compensated. You can see how we go from here to the Mesopotamian temple administrators.
The anthropologist David Graeber summarised this version of events in the following way:
"Our standard account of monetary history is precisely backwards. We did not begin with barter, discover money, and then eventually develop credit systems. It happened precisely the other way around. What we now call virtual money came first. Coins came much later, and their use spread only unevenly, never completely replacing credit systems. Barter, in turn, appears to be largely a kind of accidental by-product of the use of coinage or paper money: historically, it has mainly been what people who are used to cash transactions do when for one reason or another they have no access to currency".
In an earlier essay ('Money Be Gold') I said that believers in the standard account of money's origins belong to the 'church of metallism', so named because its followers insist that real money has to be based on a fixed commodity, preferably gold. Followers of the alternative origin story told in this essay belong to the 'church of the Chartalists' (it comes from the Latin 'charta' meaning 'token'). Their beliefs regarding money evolving from vague systems of credit leads to chartalists also disagreeing with metallists over such things as the role of governments in markets and what 'real money' is.
(Image from wikimedia commons)
From the Metallist perspective, markets came into being first and governments came later, playing an endorsement role through authenticating the quality and quantity of metal coins. But to the chartalists, markets and governments are inseparable, because "the state evolved to become the clearinghouse for debts and credits through its monopoly power over taxes" (in the words of Paul Vigna and Michael J Casey in their book on cryptocurrency).
THE ONLY INTRINSICALLY VALUABLE THING
As for what 'real money' is, the chartalist does not see it in terms of any kind of commodity. Rather, money is that network of credits and debts, meaning it is a social contract like marriage. More specifically, it is a means of measuring when a debt has been repaid, how much credit one has, how work should be allocated, how best to turn resources into products. In short, money is a measuring aid that helps us calculate relative costs, and good money is simply whatever system is most successful in reducing waste and getting resources to wherever they need to be in order to raise productivity in the most socially beneficial way.
Thus, the most valuable resource of all is not gold but rather trust. In a previous essay ('money be gold') I suggested a chestful of gold would be worthless to somebody alone on an island, whereas a chestful of survival gear would have near infinite value. But only if you could trust that the food rations were edible and that the survival gear met certain standards. Trust is the closest we can get to an intrinsically valuable thing.
(Trust is always valuable. Image from wikimedia commons)
Given the intrinsically valuable nature of trust and the fact that both historians and anthropologists have found evidence for the existence of societies predominantly organised around gift economies, I would say that the chartalists' view of money evolving from networks of credit and debt is the most plausible origin story. But it would be wrong to dismiss the metallists' version as entirely wrong. It cannot be denied that coinage did come to represent money. The challenge, then, is to figure out how to unify these two alternative accounts of money's development.
"The Zeitgeist Movement Defined"
"Modernising Money" by Andrew Jackson and Ben Dyson
"Cryptocurrency: The Future Of Money?" By Paul Vigna and Michael J Casey
"Rethinking Money" by Bernard Lietaer and Jacqui Dunne
"Debt: The First 5000 Years" by David Graeber