The Origin of Money
The textbook definition of money is something that can be used as a medium of exchange, a unit of account, and a store of value. The common narrative is that money evolved from a system of barter. Originally, people would produce different goods and trade them. For example, one person might make clothes and another might make cakes. With barter, a person could trade their clothes for some other persons cake and vice versa. However, barter was cumbersome so people created a commodity that could be used in exchange. These commodities took many different forms, but often evolved towards the use of metals and specifically the use of gold or silver.
This narrative was most famously expressed by Adam Smith in The Wealth of Nations. Adam Smith argued that human nature would inevitable lead everyone to a money based market system. This narrative makes intuitive sense, but is it correct?
Credit as the precursor to money
In David Graeber’s book, Debt The First 5,000 Years, he argues for a different narrative on the origin of money. Graeber uses historical, ethnographic, and archaeological studies to show that in societies without money, people don’t actually use barter.
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.
Graeber argues that for most of human history, during which we divided ourselves into small communities, exchange was accomplished through the use of credit. People would make one-sided exchanges with the assumption, that sometime in the future, they would be repaid with something of equivalent value. This was a type of social currency that was structured through system of reputation. If you didn’t make good on your obligations, you would quickly find yourself lacking any available credit. In this world, barter was reserved for trading with strangers where contact was infrequent.
These small communities were built on a sense of mutual obligation. We respect our neighbors and we expect them to respect us in return. Debt is one such obligation, and if we owe our neighbors something, and they owe us something, our interests tend to be bound together.
The rise of money
In ancient Sumer, around 3500 BCE, money was created by bureaucrats in order to keep track of debts between departments. This money took the form of coins called shekels. These coins didn’t circulate freely and even though debts were measured in shekels, they didn’t actually need to be paid in shekels. The key to this system was that to repay a debt of 10 shekels, you only needed something else worth 10 shekels.
Over time, these small credit based communities gave way to larger market based states. Between 800-200 BCE, modern coinage systems were developed simultaneously in China, India, Persia, and the Greco-Roman world. These new systems used coins to put a price on obligations and to make them transferable. Instead of communities being based around interconnected debts, they were now being organized around large powerful states.
The power of these states relied on the maintaining of a professional army and on the ability to tax. These armies had no interest in being paid with promises, and instead demanded coinage. The states in turn needed a way to obtain more coins, so they formed vast mining complexes relying on the use conquered slaves for labor. The states also required taxes to be paid in currency, which further forced people to engage in monetary transactions. Graeber postulates that the rise of the great empires in China, India, and the Mediterranean was marked by the rise of a “military-coinage-slave complex.”
When the great empires in Rome and India collapsed, hierarchical caste systems returned to fill in the void. Hard currency was no longer used in everyday life but the concept of money didn’t disappear. Medieval Europe still used gold and silver as a unit of account and even more sophisticated financial instruments, like promissory notes and paper currency, began to appear.
The heavy use of bullion and large-scale military violence wouldn’t return in force until the Atlantic slave trade unlocked massive amounts of gold and silver in the Americas. This, in turn, would end with the abandonment of the gold standard in 1971. We have now come full circle back to a credit based monetary system.
Graeber’s narrative argues two things.
The first is that contrary to Adam Smith’s belief, debt is the oldest means of trade, with cash and barter transactions being developed later. Furthermore, to this day, debt retains its primacy, with cash and barter usually being limited to situations where trust is limited.
The second is that small credit based communities are only replaced by large currency based states through the use of violence and subjugation.
Which narrative is right?
Probably neither. It is clear that Adam Smith’s narrative, about money being a natural evolution of human nature, isn’t supported by the evidence. Graeber’s argument, on the other hand, that money leads to war and subjugation, doesn’t sound that convincing either. The truth, as always, probably lies somewhere in between.
However, as far as I can tell, market based state systems are the best we have been able to come up with.
We study history to better understand change and how the society we live in came to be. As with most things, history isn’t black or white, but rather it is a laboratory of human experience with conflicting results. This laboratory has experimented with many forms of social organization, and each one has had some nasty byproducts. We, never the less, continue forward with the goal of always bettering ourselves.