On the Origins of Money

The standard model for the origins of money holds that there must have been a time when no such thing as money existed. In those days, supposedly, people were as motivated to improve their material well being as we are now and therefore they engaged in exchange to acquire goods that would make them better off.

Notice already that various assumptions underlie the counterfactual circumstances being imagined. One, for example, portends that money is about to be created almost as by immaculate conception.

But fine. Trading good for good must have worked fairly well much of the time, since each participant in every trade must have believed that the good he obtained was superior to the good he gave up.

Savvy traders must have noticed that sometimes the good you really want can only be obtained through a series of trades. For example, if what you want is corn, and the person you can trade for it doesn’t want your barley you might need to trade your barley for something the corn trader does want.

These, according to the standard model, are the conditions under which a medium of exchange can spring into existence. The theory holds that over a span of time some commodity — salt or gold, perhaps — becomes the conventional intermediary good around which otherwise complex trades can be arranged. Money, at last, will have evolved from the primordial soup of commerce, Next, money will become institutionalized by kings, sometimes corrupted by bad actors, and always misunderstood by magical thinkers.

It is a beautiful story in the same way that Robinson Crusoe is a beautiful novel. However, the story has the defect of being disconnected both from the historical record and from direct, formal observation of human social relationships. The reasons for this are fascinating.

One is that when the word economy was first adopted for Western scholastic use (circa 1520), many ancient texts had yet to be discovered. One could only infer or pretend what the conditions of deepest antiquity — humanity’s primitive stage, supposedly — must have been like.

Another is that nothing like modern scientific anthropology existed.

Because factual ignorance compounded by intellectual ignorance was the condition in which the earliest formal economists tried to operate, they developed a habit of counterfactual reasoning. A habit that persists to this day.

Fortunately, we are smarter. We also have both a fuller historical record to work with and a somewhat reliable practice of anthropology to help us understand the origins of money. We are in a better position to hypothesize first principles than our predecessors.

Take, for example, the late contemporary anthropologist, David Graeber. He proposed that the social psychology of reciprocity is sufficient to explain the origins of money. Reciprocity is an evolved human social behavior or cultural norm that occurs universally, although with great variation, across the species. The basic idea of reciprocity is debt or obligation: If person A does something for or to person B, then person B must respond in kind. Person A’s action creates a “debt” that person B must repay.

Since virtually any human action (even something as modest as a kind word or a minor insult) can inspire a reciprocal obligation, it is easy to see how vast and elaborate reciprocity networks can develop in even small communities. It is also easy to see how reciprocal imbalances can crop up and even persist, sometimes for years. Accordingly, means for resolving reciprocal imbalances must develop, and it is in this that the formal creation of money becomes possible.

Imagine that in a community of, say, 100 people every person has his own balance sheet of reciprocity obligations and every person is aware of every other person’s balance. The accounting wouldn’t have to be precise or even objectively accurate. Importantly, it wouldn’t take much for feuds and witch hunts to develop. Eventually, social pressure would force some settlement of debts to be attempted. At this point the value of social debts would have to be established in terms of material goods that can be given to effect debt relief. It is in such settlements that the origins of money may be found, according to Graeber.

The historical record apparently supports this analysis. Significantly, we have some 500,000 clay tablets dating from the Bronze Age and bearing cuneiform script. A large quantity of these are merely transaction records — especially bar tabs — that document debt settlements by trade, usually of seasonal grain or other farm produce.

Some of the tablets document tax payments. It seems that whatever productive franchise a Bronze Age citizen operated — whether of land or of industry — it was on loan from the king; hence taxation was a type of rent was a type of debt payment.

Finally, there is some evidence that coinage was invented as a means of support for those in society who naturally accumulated debts over time but were not capable of resolving them. Two such populations were armies and slaves. Because armies, for example, were mobile, troops had no opportunity to operate a productive franchise and therefore no means to settle debts for any goods they consumed. A special means of compensation — the king’s coin — was created for them that permitted consumption debts to be settled immediately in the moment of consumption.

Slaves similarly had no ownership of productive means other than themselves or by owning other slaves. In slavery, then, we see the origins of contract labor and even the division of labor into specialties.

Thus a new counterfactual: Reciprocity gave rise to the commoditization of social debt which in turn gave rise to the invention of monetary instruments.

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