Isegoria

The Origins of Money

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Our best information on the origins of money, David Graeber says, goes back to ancient Mesopotamia — but there seems no particular reason to believe matters were radically different in Pharaonic Egypt, Bronze Age China, or the Indus Valley:

The Mesopotamian economy was dominated by large public institutions (Temples and Palaces) whose bureaucratic administrators effectively created money of account by establishing a fixed equivalent between silver and the staple crop, barley. Debts were calculated in silver, but silver was rarely used in transactions. Instead, payments were made in barley or in anything else that happened to be handy and acceptable. Major debts were recorded on cuneiform tablets kept as sureties by both parties to the transaction.

Certainly, markets did exist. Prices of certain commodities that were not produced within Temple or Palace holdings, and thus not subject to administered price schedules, would tend to fluctuate according to the vagaries of supply and demand. But most actual acts of everyday buying and selling, particularly those that were not carried out between absolute strangers, appear to have been made on credit.

“Ale women”, or local innkeepers, served beer, for example, and often rented rooms; customers ran up a tab; normally, the full sum was dispatched at harvest time. Market vendors presumably acted as they do in small-scale markets in Africa, or Central Asia, today, building up lists of trustworthy clients to whom they could extend credit.

The habit of money at interest also originates in Sumer — it remained unknown, for example, in Egypt. Interest rates, fixed at 20 percent, remained stable for 2,000 years. (This was not a sign of government control of the market: at this stage, institutions like this were what made markets possible.)

This, however, led to some serious social problems. In years with bad harvests especially, peasants would start becoming hopelessly indebted to the rich, and would have to surrender their farms and, ultimately, family members, in debt bondage. Gradually, this condition seems to have come to a social crisis — not so much leading to popular uprisings, but to common people abandoning the cities and settled territory entirely and becoming semi-nomadic “bandits” and raiders.

It soon became traditional for each new ruler to wipe the slate clean, cancel all debts, and declare a general amnesty or “freedom”, so that all bonded labourers could return to their families. (It is significant here that the first word for “freedom” known in any human language, the Sumerian amarga, literally means “return to mother”.) Biblical prophets instituted a similar custom, the Jubilee, whereby after seven years all debts were similarly cancelled. This is the direct ancestor of the New Testament notion of “redemption”.

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15 responses to “The Origins of Money”

  1. Mala Lex

    Myeh. Graeber’s a Wobbly, so he would take a state-centric view. The whole “rich preyed upon the poor” story seems quite progressive.

    I think money itself is emergent; countless times through history, and countless times in ad hoc societies (shipwrecks, POW camps, mining camps).

    Perhaps a more accurate summary of Graeber would be “manipulation of (pre-existing) exchange rates began by state-run institutions in Mesopotamia,” which would be kind of tautological :)

  2. Isegoria

    I didn’t realize that Graeber was literally an International Worker of the World; I just picked up some strong hints of progressive thinking — like the notion that money evolved because it was easier for armies to plunder. Um, how does that incentive work, exactly?

  3. Mala Lex

    I guess money would be more portable and easier to steal, though that would seem to be a disincentive to adoption, from the perspective of the moneyholder.

    Now, in terms of sovereigns stealing money through debasement, I’d buy that’s a very good reason for them to promote coinage and, later, paper money. Still, one wants to distinguish money (eg gold/silver) from fiat currency (coinage, paper) — the first is emergent, the second is state-born. I’d assume as first approximation that anything state-born has invidious purpose.

  4. DRG

    Actually I’d agree that if you define money broadly enough — as any means of measuring proportional values (three of this is worth seven of that) — then, sure, it has a tendency to emerge anywhere — it no more has one specific origin than singing or wearing jewelry.

    I hardly said that “money evolved because it was easier for armies to plunder.” I observed that during periods marked by large empires, standing armies, pervasive wars, chattel slavery, etc, then money tends to take the form of actual gold and silver rather than complex credit arrangements which tend to emerge in periods and places where it’s used for peaceful trade. How? Historians have actually mapped most of this out in the Aegean case pretty clearly: gold and silver are the most uniform and valuable thing plunderers are likely to carry off, especially as it can be divided into however small chunks you like among the soldiers; while armies need provisions, a bunch of heavily armed thugs who are probably just passing through anyway are the last people in the world to which a local merchant is likely to extended credit; rulers, who wish to keep their armies provisioned, will tend to start regularly paying soldiers in such gold and silver chunks, and then demand them back as taxes, thus automatically creating a demand among the entire populace to acquire said chunks, and creating a mechanism for provisioning the army so they don’t have to… Etc.

    I think the notion that “gold and silver” is real money, and that modern money is thus “fiat money” is very deceptive. The real distinction has to be made between bullion, and credit systems. Chinese paper money grew out of credit tokens, the system then being nationalized; under the Caliphate, where the government stayed out of the economy largely, similar credit systems never turned into paper money but were maintained totally independently (the check, for instance, was originally a product of Islam); part of the liberal mythology of money which begins with Adam Smith is this idea that money originates not in ongoing credit arrangements, which people will have with their neighbors, but the spot trade (“I’ll give you ten chickens for that cow. What, you don’t need chickens? Damn, I’ll have to go invent money now”) which the moment you think about it is absurd. Why would people be doing spot trade with their neighbors? They’ll have something you want eventually.

     

  5. Isegoria

    I apologize for putting words in your mouth, David.  (And I’m quite pleased that you stopped by to clarify.) You never said: Money evolved because it was easier for armies to plunder.

    The exact sentence that did strike me as odd was this one: Precious metals were also far more appropriate for an age of generalised warfare, for the obvious reason that they could be stolen.

  6. Mala Lex

    DRG, I’m not sure I understand your point by ‘the notion that “gold and silver” is real money, and that modern money is thus “fiat money” is very deceptive.’ If I read correctly, you place the importance on the physical representation — paper or bullion, rather than whether or not there is anything backing the paper.

    So in the case of Islamic or Renaissance checks, they were generally backed by actual bullion, thus not subject to debasement. In the case of fiat currency, it is linked to nothing, thus it is incredibly tempting for governments to debase via the printing press.

    This difference in the security of property seems to me an important distinction between fiat and asset-backed, whereas the physical form of the currency (asset-backed or bullion) does not seem to me a very important distinction.

    Where in Adam Smith does he claim that money arose from the spot market and not the credit market? I’ve never heard that argument anywhere.

  7. DRG

    First, as for Adam Smith, his basic narrative of the origins of money via the “inconviency” of barter — as with later retellings by Jevons, Menger, etc, or for that matter those still to be found in just about every single economic textbook in print — assume spot-trades. Because if you can delay repayment the problem of the “double coincidence of wants” so endlessly cited disappears. You might not have what your neighbor needs right now, but you will eventually, and he knows that. So the basic causative mechanism disappears if you allow for the possibility of credit. Money can only arise through exchange (rather than as an accounting tool) if you need to pay instantly. In fact, historically, that situation would only exist between relative strangers, and anthropologically, that’s exactly what you find: when you do find something that looks like barter, it’s between strangers who have no moral ties to each other anyway. This is why, as the French economist Jean-Michel Servet duly notes, words for “truck and barter” in all European languages came from words that originally meant “to bamboozle or rip off” — and that was still their primary meaning before Smith’s time.

    As for the credit money vs fiat money debate, well, I obviously take a different position than you do. Some people think that there’s a fundamental difference between a piece of paper that represents somebody’s obligation to pay an equivalent amount of goods of some kind, and is thus used as money, and a similar IOU which a government has issued and agreed it will accept for tax payments, purchases, or the payment of legal obligations with itself, and is thus used as money, and, finally, an IOU which a government or government-authorized bank has issued and agreed it will accept for tax payments, purchases, or the payment of legal obligations with itself, and that it also promises to exchange for an equivalent amount of some one specific commodity (usually, gold) on demand. Others think these are variations on a theme. I go for the latter camp myself.

  8. DRG

    Oh, yes, and thanks, Isegoria. No problem.

  9. Mala Lex

    Ah, so you’re extrapolating from the inconveniency of barter. Smith would not, I believe, have contested that currency is useful for credit, though I don’t think he explicitly discussed it, perhaps because it was not in doubt. Credit as origin of money, however, is a bit far — physical credit instruments (as opposed to informal reciprocal altruism), as you know, came much later than commodity currency.

    I’m still not getting the “very deceptive” criticism. This may be down to our fields. As an anthropologist you may be interested in how people use money. In that sense, I agree that government-issued scrip backed by taxation is equivalent in use, particularly given legal tender laws, to bullion-backed scrip.

    As an economist, however, I am most interested in currency as a store of value, in which case the counterfeitability of government-issued currency is a central concern.

    As for the ‘bamboozle or rip off,’ I think you might be simplifying a rich literature involving just price. If you’re interested in the topic, I’d recommend Rothbard’s History of Economic Thought, volume 1. It’s tough going at times, but reading through the section on Aquinas gives a great overview.

    Matt Ridley’s Origins of Virtue starts much earlier, looking at exchange in simple societies. If you haven’t read him I’d highly recommend — a much easier read than Rothbard, as well.

  10. DRG

    “Physical credit instruments (as opposed to informal reciprocal altruism), as you know, came much later than commodity currency.”

    To the contrary, what anthropology reveals in stateless societies is what I’d call social currencies, that is, currency used primarily to arrange marriages, resolve disputes, pay penalties, give fees to curers or for ritual services, etc, but not to buy chickens and shovels. There are times and places (parts of Papua New Guinea, aboriginal California) where such currencies came to be used to buy and sell everyday items as well — particularly with strangers, but sometimes, with anybody — but nothing like the classic Smith-Jevons-Mengers picture of savages bartering things with their fellow villagers, let alone such barter turning into some kind of currency being used mainly to acquire material goods and services, has ever been observed. Anthropologists went looking for it, assuming Smith was right, but what they found was pretty much invariably the opposite: “gift economies” as Mauss called them, which could be interpreted, in some sense, as primitive credit systems, since they were all about lingering obligations.

    As for the first state societies where we have records, actually, what we find is that everyday transactions are in fact taking place by credit and not by physical currencies. Mesopotamia is the best documented. A lot of the economy was based on centralized redistribution from palaces and temples, and silver came to be used as an accounting mechanism, to measure the value of goods being distributed within those bureaucratic systems, but there were also markets from quite early and perhaps from the very beginning. But the thing is, for everyday transactions, physical currency does not appear to have been used. Taverns for example operated on credit: you ran up a tab until, say, harvest time, it was calculated in silver, since that’s what the temples and palaces used to keep accounts, and you paid, usually, in grain, there being a fixed rate of equivalence between silver and grain that stayed stable for centuries. This wasn’t in defiance of market forces — it was that equivalence that made markets possible, since ordinary people didn’t have silver — and anyway the scales in use couldn’t even measure quantities of silver small enough for use in buying minor everyday objects, making it very clear ordinary market transactions were by credit as well. All you need to do is go to a West African market, for instance, to see how it probably worked: every vendor has their personal clientele of customers to whom they extend credit on a regular basis, they pay off their tabs periodically when they happen to come into something; this happens even in places where currency is available.

    The thing is the “myth of barter” — as just about everyone but economists now call it — has been demonstrated false over and over again, by everyone who’s ever been a position to check some aspect of it empirically, whether historians, anthropologists, or anyone else. (The question is why economists still keep repeating it even though it’s obviously wrong.) Believe me, I’m an anthropologist, I would know. It is quite clear that credit actually did come before the use of material tokens in everyday transactions. That’s why we already have money (as a means of account) in 3500 BC, when the first Sumerian texts appear, but no actual coinage until maybe 2800 years later.

    As for “just price,” I am well familiar with the Scholastic literature. This has nothing to do with that. Servet was referring to the fact that barter is normally something that one carries out with people with whom one has no ongoing moral relations (the very opposite of the sort of neighbors and fellow clansmen Smith imagined), people whom one would just as soon rob or even kill if one thought one could get away with it. Money transactions, in contrast, were often considered — and I’m speaking on the popular level here, about ordinary economic practice, not the sort of theory discussed in Universities at the time — a much more moral business, since it too was largely conducted by credit. (Coins were almost non-existent in even English villages in the late Middle Ages through the 17th century.) In credit arrangements, obviously, the honor and reputation of the contracting parties are always a necessary consideration. Anyway you might want to check Colin Muldrew on this — he’s the premier historian of the subject. Or wait for my debt book to come out in September.

  11. DRG

    …and to complete the comment — you refer to physical credit instruments — presumably like checks or so on. Actually, no, those come way before coinage. Mesopotamian bullae are the classic example: they’re basically promissory notes that became negotiable in certain contexts. Similarly in China there appear to have been a system of knotted strings like the Inca quipu and later, tally sticks, in Shang times, long before coinage — though there were also what I’ve called social currencies. Presumably in the ancient Middle East people weighed out silver ingots — not uniform and stamped ones, but of some sort — for very large transactions. But calling that “currency” seems a bit much.

    All evidence then is that money of account came first, and seems to arise with states. In the absence of states, one often encounters physical currencies (cowries, wampum, Solomon island feather money, etc), but it’s used primarily for making social arrangements and not acquiring commodities.

    Presumably the two did somehow merge together in a lot of times and places — a story that’s largely lost, and can only be tentatively and retrospectively reconstructed — but that’s one thing I try to do in my book.

  12. Mala Lex

    You certainly know more details of early money than I. “Social currencies” is what I was getting at with “informal reciprocal altruism,” though you naturally describe them with far greater detail and specificity, and thank you for the recommendation.

    Granting that formal institutions were involved early on with currency, I suppose the question comes down to the definition of a state. It seems to me that a bullion warehouse issuing receipts becomes a very different animal if it is voluntary or compulsory.

    The distinction is similar to that between free-banking and state-run banking. So a voluntary system of warehousing, where the temple, say, is offering to safeguard your bullion in return for either interest or some rate of debasement might, to the extent there is freedom of withdrawal, maintain currency value. That is, even with debasement, insofar as it is restrained by a concern to retain and attract clients, a temple can be seen as, roughly, combining warehousing and insurance services.

    On the other hand, if the warehousing is compulsory (eg territorial monopoly via the state or a territorially monopolistic temple or state religion), then one might expect the warehouser to be no longer providing an insurance service; rather they would be tempted to violate the integrity of the bullion content of coins. In such a situation, one might expect either private warehousers to arise (often goldsmiths), or a reduction in merchant activity due to insecurity of bullion values (eg commercial activity declines or expatriates).

    I would assume that early currencies, if generally used to mark ceremonial debts, were still subject to a (fluctuating) rate of exchange with some commodity, typically food or some common tool. So my tribe killed your predatory lion, your brave married our squaw, so we’ve got some balance in the account, and when the hungry times come potatoes go for some percentage of that balance. That exchange rate, I’d presume, would depend how hungry we are, how many potatoes you’ve got, in addition to the value of the original source (eg is the squaw a productive member of your tribe, or do you wish she’d stayed home). Naturally, I’d assume the exchange rate wouldn’t be too closely monitored; rather, like friends adding up the tab at a bar, would be ball-park exchange rates.

  13. DRG

    Thanks for the thoughtful reply.

    I would definitely agree that the question of force is essential here. There is a big difference between a group of people voluntarily creating a common stockpile, and an accounting system to keep track of inputs and outputs, allowing people to convert the value of one kind of input into another, and, say, the same system made compulsory by some central power, let alone a tax system that basically creates money by declaring that only certain things are payable in taxes. This is one reason why it’s very hard to say when a “state” first appears in Mesopotamia. Early on, there were temples and palaces each running their own bureaucratic economy, alongside clans that were basically self-governing, probably things like independent guilds. There was no monopoly of coercive force or single court of high appeal, etc. So how much of it was voluntary, and how much not, and when did one start shading into the other? At what point did land “owned” by the temple become different than land “owned” by a clan? At what point did the palace claim to have certain property-like claims to everything? It’s never clear.

    War and conquest clearly had a lot to do with it. In much of the ancient world (Egypt is the big exception — there was a very clearly centralized state from early on in Egypt), there weren’t even really taxes. There was tribute on conquered populations, but actual free citizens of Uruk, or Lagash, or Athens, or even early Rome, didn’t pay taxes to the government, because in a sense they were the government. Rather they were more likely to have received benefits distributed from the stockpiles — especially those built up from war (whether Laurion silver in Athens, worked by slaves, or the Roman bread distributions from Egyptian tribute grain, etc.)

    As for the social currency — well, you’d think it would work like that, and there were some places where the social currency was freely convertible into consumables (as I mentioned, the Yurok in California or Kapauka in New Guinea are classic examples of stateless societies where everything could be acquired by money), but the majority kept such spheres assiduously apart. Most of the Eastern Woodlands societies that used wampum and similar shell beads or quills for instance used a totally different logic for the distribution of food. It was even organized by different people — wampum mainly by men, food and tools and shoes etc almost exclusively by women. So if you wanted moccasins, you went to your longhouse women’s council, and they decided whether to make or give you some; currency had nothing to do with it. This was true during famines as well, incidentally, when the laws of hospitality were if anything intensified. Now, when wampum came to be used not just in international political negotiations, treaties, bloodwealth, and the like (by international here I mean between Indian nations), but in international trade, with colonists (it never seems to have been used as currency within Indian nations), then, yes, its value came to fluctuate against the main trade goods, which in this case were beaver pelts. But such social currencies were not necessarily used in long-distance trade, and, if they were, that trade was not always that important.

    What’s interesting about the case of Mesopotamia is that you can see all the elements coming together in the form of money that developed there, which was based on some kind of general agreement — that is, not imposed by any central political authority, because there wasn’t any — to create a fixed rate of exchange between silver and grain. That is (1) what had at first at least been voluntary stockpiling of the Iroquois variety, except rather than women’s longhouse councils it was temples and then later palaces, (2) the same money of account being used to organize the — increasingly not-quite-so-voluntary — stockpiles as was used as a common standard of value and medium of exchange in long-distance trade, (3) this somehow gradually coming to incorporate the existing social currencies (probably I’d guess at first sheep and cattle, but also silver), presumably through the increasingly centralized authorities taking over and systematizing legal codes.

    That’s probably the most convincing reconstruction of how informal credit systems got converted into exact money of account, by the way — legal penalty systems, which could often be exquisitely detailed and elaborate, even in stateless societies, as the famous “barbarian law codes” in Europe also illustrate. It makes sense. To go back to the myth of barter scenario: if I want a new pair of shoes, my neighbor is a shoemaker, and he doesn’t want anything I have at the moment, I can just ask him a favor, and he’ll say, sure, and next time he needs something I have that seems roughly ballpark equivalent (you’re quite right about this) he’ll be surely dropping by. So “gift economies” generally have ranks of types goods that are more or less the same as each other, and that’s all you need. However, if my pigs get loose and eat all his strawberries, or especially, if he gets into a drunken brawl with my brother and my brother comes out of it with one less eye, I’m going to want an exact equivalent, and not a penny less. But this is rather a long story.

  14. Mala Lex

    …and here I assumed Wobbly = lefty = naive faith in coerced solutions coupled with blind rejection of emergent (ie anarchic) solutions.

    Looking forward to the book.

  15. DRG

    No, Wobblies are anarchists — we both share a commitment to getting rid of coercive structures and letting people decide for themselves how they want to run their lives. Insofar as we differ, I imagine it’s more prognosis: how we think that’s like to turn out. If most people in a free society decided they wanted to go with some form of free market capitalism, well, then that’s what they’ll decide. Not like I could stop them, or would want to be able to.

    Myself, I rather don’t see how it could work out that way, since I don’t see how, given the existence of different free communities organized on different economic principles, the people who end up as wage laborers in the capitalist enclaves are likely to stay there, if they have other places to go. But who knows? The point is we both share a commitment to bring us to a situation where we can find out.

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