Karl Polanyi and the Modern World – Part 4

Karl Polanyi does not talk about the origins of money in any detail in TGT, yet it is extremely important to his argument. If social relations were centered around markets, and markets around monetary exchanges as libertarians claim, then we would expect money to be a very early invention. In fact, we would expect money and markets to predate the state, or to emerge even in the absence of a central state.

Yet this is not what we find. Recently, a number of economists, historians and anthropologists have probed deeply into the origins of money. What they find is that money began not to facilitate individuals trading in imaginary markets, but as systems of debits and credits that formed when societies grew too large for the basic institutions of reciprocity and redistribution to function at the community level. The systems of debits and credits facilitated redistributive temple and palace economies using the new invention of writing long before they were represented by the paper and metal tokens we now think of as money.

In contrast, the standard “just-so” story of money proposed by economists from Adam Smith onward is this: Money spontaneously evolved because it facilitated trade in an imaginary stateless society. Money evolved by mutual consent to facilitate trading among primitive proto-capitalists for all the stuff they needed. Precious metals were commonly agreed upon as an “intermediate good” that everybody wanted, eventually evolving into standardized coins with standardized weights. The value of the coins derived solely from the amount of precious metal they contained. To remove metal from coins – “debasing” them – was accomplished by government “interference” in the economy causing trade to falter and empires to collapse. Paper is only a representation of precious metal held in a vault somewhere, which is the only “real” money.

Bolstering Polanyi’s argument is the fact that “money” as we know it is a fairly recent invention. Most “primitive” peoples don’t use it. We’ve seen that societies like Egypt, Mesopotamia, pre-classical Greece, and Peru managed to run fairly complex economies using no “money” whatsoever. The first coins were minted in about 600 B.C., and paper money in the West had to wait until the 1600’s (earlier in China) to be widely circulated. Yet the Bronze Age had trading regimes so complex that it has been termed “the first global economy.”

The Lydian Lion is the one coin I’d personally call “The Coin.” It directly preceded ancient Greek coinage, which through Rome begot all Western coinage, and which through the Seleukids, Parthians, and Sassanians begot all Islamic coinage. Indian coinage has largely been a product of Greek, Roman, and Islamic influences. Chinese coinage, though it probably developed independently, was succeeded by Western-style coinage in the late nineteenth century. Other countries in Asia, in Africa, and elsewhere have adopted the Western approach to coinage as well. It’s not chauvinistic, and it’s only mildly hyperbolic, to suggest that virtually all coinage in use today is the progeny of the Lydian Lion, that it’s the Adam of coins…Even though coinage doesn’t appear to have initially served commerce or trade, it’s likely that the Lydians created coins as we know them because they were the first to recognize their profit-making potential, as will be shown below. It would still be possible of course for later governments to earn seigniorage profits by issuing coins in pure gold and silver, just not as easy…

The first coins – no ‘means of market exchange’ but ‘means of gift exchange’? (Real World Economics Review)

As we’ve seen, the economies of true stateless societies were governed by redistribution, reciprocity, and gift exchange, not by money and markets. The redistributor chiefs gave everything away; they didn’t take everything away from the people and charge them money for its use (where would they get the money to pay for it?). It was more akin to “primitive communism” than anything libertarians envision.

The fetishization of money, markets and trade, along with the stateless theories of the origin of money arising spontaneously out of barter, were all part of the formation of “classical” or “Neoclassical” economics in the late eighteenth century and after. This also informed Hobbes’ (mistaken) theories of state formation as solitary individuals mutually agreeing to form a state by voluntarily coming together and giving up a portion of their freedom to a sovereign.

But these are classic cases of what the authors of Sex at Dawn call the “Flintstonization” of history: the erroneous projection contemporary conditions back onto the distant past. If our entire lives are determined by buying and selling in markets and working at jobs, we think, then surely that must have been how people lived their lives in the past as well, right? Wrong!

…Now for [Adam] Smith, the most important function of money is to serve as a medium of exchange.  Because once this is established his apocryphal story expands. As a medium of exchange money facilitates trade, encourages greater specialization and productivity, reduces transactions costs, and allows for the further flowering of capitalism.  It also serves as the beginning of the banking system.  As metals become the preferred medium of exchange, banks are created to store and manage these wealth holdings.  The coining of metal by state governments facilitates this process by standardizing weights and degrees of alloyed purity. The bankers than issue receipts describing the amount of gold stored or deposited on its premises.

Over time, bankers realize that these gold receipts are circulating as money.  They also realize that only a fraction of their holdings are called for on any given day.  Thus they can make loans at interest and issue gold receipts far in excess of their actual holdings.  This emergence of credit further greases the wheels of capitalist exchange, savings, and investment.  However, in the overall economy, money only affects prices and not the process of actual physical production.

Even peak oil author Richard Heinberg repeats this myth:

While early forms of money consisted of anything from sheep to shells, coins made of gold and silver gradually emerged as the most practical, universally accepted means of exchange, measure of value, and store of value.

Money’s ease of storage enabled industrious individuals to accumulate substantial amounts of wealth. But this concentrated wealth also presented a target for thieves. Thievery was especially a problem for traders: while the portability of money enabled them to travel for long distances to purchase rare fabrics and spices, highwaymen often lurked along the way, ready to snatch a purse at knife-point. These problems led to the invention of banking—a practice in which metal-smiths who routinely dealt with large amounts of gold and silver (and who were accustomed to keeping it in secure, well-guarded vaults) agreed to store other people’s coins, offering storage receipts in return. Storage receipts could then be traded as money, thus making trade easier and safer.

Eventually, goldsmith-bankers realized that they could issue paper receipts for more gold than they had in their vaults, without anyone being the wiser. They did this by making loans of the receipts, for which they charged a fee amounting to a percentage of the loan.

Economic History in 10 Minutes (Resilience.org)

This the the “evolutionary origin of money” proposed by Austrian Economist Carl Menger. Menger’s theory is based on the model of thousands of anonymous individuals transacting for their daily needs in “free and open” markets that we have thoroughly debunked over the last few posts:

Karl Menger, an Austrian economist, set out one school of thought as long ago as 1892. In his version of events, the monetisation of an economy starts when agricultural communities move away from subsistence farming and start to specialise. This brings efficiency gains but means that trade with others becomes necessary. The problem is that operating markets on the basis of barter is a pain: you have to scout around looking for the rare person who wants what you have and has what you want.

Money evolves to reduce barter costs, with some things working better than others. The commodity used as money should not lose value when it is bought and sold. So clothing is a bad money, since no one places the same value on second-hand clothes as new ones. Instead, something that is portable, durable (fruit and vegetables are out) and divisible into smaller pieces is needed. Menger called this property “saleableness”. Spices and shells are highly saleable, explaining their use as money.

Government plays no role here. The origin of money is a market-led response to barter costs, in which the best money is that which minimises the costs of trade. Menger’s is a good description of how informal monies, such as those used by prisoners, originate.

On the origin of specie (The Economist)

This is at the core of the libertarian argument. Money and trading does not need the state at all, they say. It is all about individuals making mutually-beneficial trades in free markets with a mutually-agreed upon medium of exchange which evolves spontaneously over time, they say. If the state just “went away” instead of taking from the “makers,” economic life would go on just fine, they argue. Also, in this estimation, a finite stock of precious metals are the only “real” money, and “fiat currency” is an abomination that can only lead to doom.

The problem is that, historically speaking, these ideas are all incorrect. In fact, logic alone uncovers problems with this approach:

In terms of logic, [Adam] Smith’s story is simply not convincing…the barter story that emerged from Smith contradicts both the logic and the historical record… For example, if you grew up in a small town in the western US in the 1970s, you might remember that you could go to the grocery store, pick up groceries, and simply sign a slip a paper acknowledging your receipt of the groceries.  The same could be done in Smith’s hypothetical example.  If the shoe seller or potato seller were trustworthy, the shoe seller could simply create a record of the shoes purchased on credit by the potato seller/shoe buyer and their value in some agreed upon unit of account.  This is not barter and it is not a purchase using a medium of exchange.  Instead it is “the exchange of a commodity for a credit.”  And it is far easier that the use of a medium of exchange.

Was Money Created to Overcome Barter? (Naked Capitalism)

In fact, this actually happened in the real world:

To prove his core point – that money is not currency – [Author Felix] Martin reminds readers of a previous crisis 43 years ago in Ireland. Following an industrial dispute, the nation’s banking system shut down for nearly seven months, with customers unable to withdraw or deposit money. Yet instead of the country grinding to a halt as anticipated, people began accepting cheques or IOUs based on their own assessments of risk. So in a rich and developed economy, albeit one with strong communal links, institutionalised banking was replaced by a personalised credit system – proving, he says, “the official paraphernalia” of banks, credit cards and notes, can disappear “and yet money still remains”.

Money: a Biography by Felix Martin – Review (The Guardian)

So money was not “invented” to overcome barter. Rather, it goes back to the early redistributive economies that we’ve been discussing.

So if there has never been a land of barter, then where did we get money and credit from? A British diplomat named Alfred Mitchell-Innes was one of the first to write about the true origins of money. He published an essay entitled “What is Money” back in 1913:

[Mitchell] Innes (p. 397) argues that systems of credit pre-date coins by over a thousand years.  “The earliest known coins of the western world are those of ancient Greece, the oldest of which, belonging to the settlements on the coast of Asia Minor, date from the sixth or seventh centuries B.C.”  In contrast, the law of debt goes back to at least the Code of Hammurabi in Babylonia 2000 years B.C.  Innes saw that the foundation of society and thereby of credit was that promises or obligations were and are viewed as sacred.  In all societies (p. 391) the breaking of the pledged word, or the refusal to carry out an obligation is held equally disgraceful.”

He goes on to explain how wooden tally sticks and clay shubati tablets were used to track credits/purchases and debits/sales long before the existence of coins.  And that one could repay a debt by returning a credit of the same amount to the lender.  In fact, village fairs were convened so that those holding the debts of others could match credits and debits together and thereby clear their accounts.  Over time others showed up to buy and sell other goods and services or to cater to those in this most basic business of banking.

Was Money Created to Overcome Barter? (Naked Capitalism)

…the earliest uses of money in recorded civilization were not coins, or anything like them. They were tallies of credits and debits (gives and takes), assets and liabilities (rights and responsibilities, ownership and obligations), quantified in numbers. Accounting. (In technical terms: sign-value notation.) Tally sticks go back twenty-five or thirty thousand years. More sophisticated systems emerged six to seven thousand years ago (Sumerian clay tablets and their strings-of-beads predecessors). The first coins weren’t minted until circa 700 BCE — thousands or tens of thousands of years after the invention of “money.”

These tally systems give us our first clue to the nature of this elusive “social construct” called money: it’s an accounting construct. The earliest human recording systems we know of — proto-writing — were all used for accounting. So the need for social accounting may even explain the invention of writing.

This “accounting” invention is a human manifestation of, and mechanism for, reciprocity instincts whose origins long predate humanity. It’s an invented technique to do the counting that is at least somewhat, at least implicitly, necessary to reciprocal, tit-for-tat social relationships.

None of this is to suggest that explicit accounting is necessary for social relationships. That would be silly. Small tribal cultures are mostly dominated by “gift economies” based on unquantified exchanges. And even in modern societies, much or most of the “value” we exchange — among family, friends, and even business associates — is not accounted for explicitly or numerically. But money, by any useful definition, is so accounted for. Money simply doesn’t exist without accounting.

Coins and other pieces of physical currency are, in an important sense, an extra step removed from money itself. They’re conveniently exchangeable physical tokens of accounting relationships, allowing people to shift the tallies of rights and responsibilities without editing tally sheets. But the tally sheets, even if they are only implicit, are where the money resides.

Did money evolve? You might not be surprised (Evonomics)

This comment sums it up succinctly:

Money (a standard unit of account, used to denote debts or assess value) predates coins by millennia, and coins only ever comprised a small fraction of the money in daily use. Most ancient money was in the form of marks on clay tablets or notes on pieces of papyrus, just as it is today (computers replacing clay or papyrus).

A Roman who bought an estate in Italy qualifying him for the equestrian order (one million sesterces) did not haul a cartload of silver around. He arranged for his banker to transfer a sum from his account to that of the vendor, again just as we would today. Ditto mercantile debts. Coins were for spot transactions, untrusted persons and ceremonial gifts (donatives). The real cost of making money was and is in establishing and maintaining the trust needed to support it.

The real costs of making money 2. Where did the silver used to buy Josef come from?

A more recent take on the origins or money is the book Money: A Biography by Felix Martin:

[Felix] Martin sees [money] as based upon a system of credit and clearing from the start. … he says we should view money as a social technology, a set of ideas and practices for organising society. It was created after the collision of Mesopotamian inventions of literacy, numeracy and accounting with Greek notions of equality, and evolved amid struggles for supremacy between sovereigns and their subjects. Ultimately, it was a liberating force for individuals against the state – but also something prone to near-ceaseless speculation and financial crises.

Money: a Biography by Felix Martin – Review (The Guardian)

In fact, the state played a crucial role in the creation of money:

…Take the widespread use of precious metals as money. A Mengerian would say that this happens because metals are durable, divisible and portable: that makes them an ideal medium of exchange. But it is incredibly hard to value raw metals…so the cost of using them in trade is high. It is much easier to assess the value of a bag of salt or a cow than a lump of metal. Raw metals fail Menger’s own saleableness test.

This problem explains why metal money has circulated not in lumps but as coins, with a regulated amount of metal in each coin. But history shows that minting developed not as a private-sector attempt to minimise the costs of trading, but as a government operation. It was state intervention, not the private market, that made metal specie work as money.

That suggests another theory is needed, in which the state plays a bigger role in the origin of money…The fiscal wing of government has a huge incentive to move its economy away from barter. Once money exists, income and expenditure can be measured. That means they can be taxed. And the public purse gets a second boost from seigniorage, the difference between the value of the coins and the cost of producing them. On this account, governments impose taxes payable only in money, creating a demand for money that means it will be widely accepted as payment for goods. The state forces the economy away from barter for its own fiscal purposes.

On the origin of specie (The Economist)

In other words, the use of money created markets, not the other way around! And they were both intentional creations of central states. Charles Goodhart of the London School of Economics published a paper arguing this in 1998:

Mr Goodhart used monetary history to test these competing theories. He examined the overthrow of Rome and a period in the tenth century when the Japanese government stopped minting coins. If the origin of money were purely private, these shocks should have had no monetary effects. But after Rome’s collapse, traders resorted to barter; in Japan they started to use rice instead of coins. There is a clear link between fiscal power and money. The evidence suggests that only “informal” monies can spring up purely privately…

On the origin of specie (The Economist)

Just how much of a state invention is detailed by the book Making Money by Christine Desan; like Felix Martin’s book, a history of money, in this case from late medieval and early modern Europe. This book covers the history of money at the same time as market exchanges were emerging to become central in the social relations of Western Europe:

The central assumption of [the conventional] story is that coins were simply a package in which precious metal traveled. Hence “they had to be assayed and weighed to determine their value in the best of times.” But even that is too optimistic, if the question is whether coins serve as safe assets. Coins did have a metal value, since they could theoretically be converted into bullion, which had its own price, albeit at some cost. But they also had a coin value, which was simply the value dictated by the sovereign, since coins could be used to pay taxes.

The metal value and the coin value were related, but they were related in the sense that the value of a currency today is related to the economic fundamentals of the country that issues it. That is, the relationship between metal value and coin value was managed by the government using a variety of policy instruments. One of those was setting the number of coins that would be minted from a given quantity of metal (and the number of those coins that would be skimmed off the top for the sovereign).

A central principle of late medieval English law..was that the sovereign had the absolute right to dictate the value of money…If Queen Elizabeth said that worn, clipped coins had the same value as brand-new coins from the mint, even if the former had only half the silver content of the latter, then they had the same value. She could say that because the value of pieces of metal depends on what you can use them for, and so long as you (or someone else) can use them to pay debts and taxes, they have value…money was never simply precious metal in another form, but an instrument of commerce artificially created by kings.

Even in the heyday of coins, they were hardly the only form of money. For one thing, most everyday transactions were conducted using debt—what we would call trade credit, although it was used by consumers as well as businesses—because the smallest coin was simply too big to pay a day’s wages, let alone buy a beer, at least in England. For another, as early as the 14th century, carved sticks of wood known as tallies were circulating as money.
Tallies began as records of taxes collected, then became receipts the crown gave to tax collectors for advances of coin (the idea being that, at tax time, the collector could show the tally and say, “I already paid”), and finally evolved into tokens that the government used to pay its suppliers (who could then cash them with tax collectors, who would use them at tax time). In most of the 15th century, a majority of tax receipts came in the form of tallies rather than cash (p. 177). Again, if the government is willing to take take something in payment of taxes, it becomes money.

Similarly, it is true that “problems with coins” led to the development of other forms of money—beginning with trade credit and tallies—but for the most part they were not the transactional problems faced by households and firms, but fiscal and military problems faced by governments.

The Bank of England, which issued the first recognizably modern paper currency, was created because William III needed money to fight wars on the Continent, but there simply wasn’t enough coin in the country to both pay the required taxes and keep the economy functioning. Bank notes were able to function as money because the government was willing to accept them in payment of taxes—which was not true of the notes issued by purely private goldsmith-bankers. In other words, what made Bank notes money, rather than simply paper records of debt, was a political decision necessitated by a fiscal crisis.

Mysteries of Money (The Baseline Scenario)

In fact, metal coins were fiat currency! Both Martin and Desan point to John Locke as the chief culprit in the redefinition of money as a finite stock of precious metals which dominates libertarian thinking today:

…the Bank of England’s formation…coincided with the reconceptualization of money as simply precious metal in another form—a fable told most prominently by John Locke.

In earlier centuries, everyone accepted that kings could reduce the metal content of coins and, indeed, there were good economic reasons to do so. Devaluing coins (raising the nominal price of silver) increased the money supply, a constant concern in the medieval and early modern periods, while revaluing coins (keeping the nominal price of silver but calling in all old coins to be reminted) imposed deflation on the economy. But Locke was the most prominent spokesperson for hard money—maintaining the metal content of coins inviolate. The theory was that money was simply metal by another name, since each could be converted into the other at a constant rate.

The practice, however, was that the vast majority of money—Bank of England notes, bills of exchange issued by London banks, and bank notes issued by country banks—could only function as fiat money. This had to be the case because the very policy of a constant mint price had the effect of driving silver out of coin form, vacuuming up the coin supply. If people actually wanted to convert their paper money into silver or gold, a financial crisis could be prevented only through a debt-financed expansion of the money supply by the Bank of England—or by simply suspending convertibility, as England did in the 1790s.

To paraphrase Desan, at the same time that the English political system invented the modern monetary system, liberal theorists like Locke obscured it behind a simplistic fetishization of gold. The fable that money was simply transmutated gold went hand in hand with the fable that the economy was simply a neutral market populated by households and firms seeking material gain. This primacy of the economic over the political—the idea that government policy should simply set the conditions for the operation of private interests—is, of course, one of the central pillars of the capitalist ethos. Among other things, it justified the practice of allowing private banks to make profits by selling liquidity to individuals (that’s what happens when you deposit money at a low or zero interest rate)—a privilege that once belonged to sovereign governments.

Mysteries of Money (The Baseline Scenario)

Thus we see that money is not “thing” that we can run out of. In our societies, those who control the management and issuing of currency, like the Mesopotamian priests of old, control the society. But this is a social choice as much as anything else. The bankers use their knowledge of the system to enforce an artificial scarcity of money for everyone but themselves.

As David Graeber points out, throughout history, money has circulated between periods where it has been seen primarily as a commodity, and periods where it is seen primarily as a social relationship. These are associated with changes in the underlying society, particularly with periods of either centralized state expansion or collapse. In societies and political regimes with highly centralized and functional bureaucracies which can establish standards, enforce contracts, and adjudicate disputes, money is primarily credit. In circumstances of state breakdown, money once again reverts to commodities, and autarky, rather than market exchanges, prevail. Traveling becomes unsafe, and long-distance trade breaks down. Self-sufficiency becomes paramount. Barter usually becomes prevalent in cases after the breakdown of central states; it’s not the source of markets as we know them:

One of my inspirations for ‘Debt: The First 5,000 Years’ was Keith Hart’s essay ‘Two Sides of the Coin’. In that essay Hart points out that not only do different schools of economics have different theories on the nature of money, but there is also reason to believe that both are right. Money has, for most of its history, been a strange hybrid entity that takes on aspects of both commodity (object) and credit (social relation.) What I think I’ve managed to add to that is the historical realization that while money has always been both, it swings back and forth – there are periods where credit is primary, and everyone adopts more or less Chartalist theories of money and others where cash tends to predominate and commodity theories of money instead come to the fore. We tend to forget that in, say, the Middle Ages, from France to China, Chartalism was just common sense: money was just a social convention; in practice, it was whatever the king was willing to accept in taxes…

As I said Eurasian history, taken in its broadest contours, shifts back and forth between periods dominated by virtual credit money and those dominated by actual coin and bullion. The credit systems of the ancient Near East give way to the great slave-holding empires of the Classical world in Europe, India, and China, which used coinage to pay their troops. In the Middle Ages the empires go and so does the coinage – the gold and silver is mostly locked up in temples and monasteries – and the world reverts to credit. Then after 1492 or so you have the return world empires again; and gold and silver currency together with slavery, for that matter.

What’s been happening since Nixon went off the gold standard in 1971 has just been another turn of the wheel – though of course it never happens the same way twice. However, in one sense, I think we’ve been going about things backwards. In the past, periods dominated by virtual credit money have also been periods where there have been social protections for debtors. Once you recognize that money is just a social construct, a credit, an IOU, then first of all what is to stop people from generating it endlessly? And how do you prevent the poor from falling into debt traps and becoming effectively enslaved to the rich? That’s why you had Mesopotamian clean slates, Biblical Jubilees, Medieval laws against usury in both Christianity and Islam and so on and so forth.

Since antiquity the worst-case scenario that everyone felt would lead to total social breakdown was a major debt crisis; ordinary people would become so indebted to the top one or two percent of the population that they would start selling family members into slavery, or eventually, even themselves.

Well, what happened this time around? Instead of creating some sort of overarching institution to protect debtors, they create these grandiose, world-scale institutions like the IMF or S&P to protect creditors. They essentially declare (in defiance of all traditional economic logic) that no debtor should ever be allowed to default. Needless to say the result is catastrophic. We are experiencing something that to me, at least, looks exactly like what the ancients were most afraid of: a population of debtors skating at the edge of disaster.

And, I might add, if Aristotle were around today, I very much doubt he would think that the distinction between renting yourself or members of your family out to work and selling yourself or members of your family to work was more than a legal nicety. He’d probably conclude that most Americans were, for all intents and purposes, slaves.

Since we looked at the South Seas before for clues to the origin of states, let’s see if they can offer us a clue to the origin of money.

On the Pacific island of Yap, Rai Stones are used in trade and as a from of currency. These are large, circular stone discs carved out of limestone formed from aragonite and calcite crystals. The limestone is not available on Yap itself, only on neighboring islands, so these stones were considered rare and valuable by people. They vary greatly in size: the smallest are measured in centimeters, the largest are several tons. Their value is partly determined by not only their size, but by the difficulty in securing them: “If many people—or no one at all—died when the specific stone was transported, or a famous sailor brought it in, the value of the rai stone increases by reason of its anecdotal heft.”

Rai stones were, and still are, used in rare important social transactions, such as marriage, inheritance, political deals, sign of an alliance, ransom of the battle dead or, rarely, in exchange for food. Many of them are placed in front of meetinghouses or along pathways.

The physical location of the stone may not matter—though the ownership of a particular stone changes, the stone itself is rarely moved due to its weight and risk of damage. The names of previous owners are passed down to the new one. In one instance, a large rai being transported by canoe and outrigger was accidentally dropped and sank to the sea floor. Although it was never seen again, everyone agreed that the rai must still be there, so it continued to be transacted as genuine currency. What is important is that ownership of the rai is clear to everyone, not that the rai is physically transferred or even physically accessible to either party in the transfer.

While the monetary system of Yap appears to use these giant stones as tokens, in fact it relies on an oral history of ownership…As long as the transaction is recorded in the oral history, it will now be owned by the person you passed it on to—no physical movement of the stone is required.


So, we see that the “unit of account” function seems to have been primary, and preceded the “medium of exchange” aspect of money by several millennia at least. Similarly, Yap indicates that the “store of value” function also predates the “medium of exchange” aspect, and that physical transfers of a commodity were less important than social relations. Ownership of stone money was merely transferred from one party to another by collective agreement, without recourse to the actual physical object in question (in this case by oral agreement rather than by writing).

Similarly, precious metals originally seem to have been used primarily to conduct symbolic gift giving (such as in the Kula ring), since they were far too limited and too valuable to be used for day-to-day economic transactions. Both stone money and early coins seem to have been connected to gift-exchange, similar to engagement rings (which were initially dowries – break the engagement and the gold ring is the compensation for going back on your word). Coins grew out of attempts to establish a reliable standard of purity, authenticity and weight by rulers who thereby benefited through segniorage (profits made from issuing money). As we saw, in most early states mining was a “nationalized” industry, meaning coins could only be minted by the authorities. Coins were easier to measure for collecting taxes than paying in commodities. They then began to circulate as money, not before.

In ancient times, precious metals seem to have been used primarily to facilitate long-distance trading, not internal market exchanges. Polanyi argues that long-distance trade, which existed for thousands of years, is what drove markets (not local bartering), and that these markets were kept fundamentally separate from the inner workings of the societies in which they operated. Furthermore, such markets were noncompetitive. Precious metals were not typically used within societies for transactions – reciprocity and credit were. Even when they were, the “value” of what they could purchase was dictated by governments – even gold and silver were fiat currencies whose value came from the need to pay taxes to the central state from the very beginning. As Randall Wray describes:

What we call “money” (coins, tally sticks, paper notes, electronic entries on bank balance sheets) is simply the record of debt, “accounted for” in the money of account. The line between what we want to count as “money” debts or merely as “money denominated” debts is and always has been arbitrary. Most will include a checkable bank deposit in their definition of “money”; most will not include a non-checkable certificate of deposit in that definition.

Typically, people want to apply the term money to those money-denominated liabilities that can be used immediately as a medium of exchange—that is, to buy something, passing hand-to-hand. I am sympathetic. If we look at the modern economy, and focus only on transactions of households, it works pretty well. But going back through time and including transactions of private and public institutions, it gets quite messy.

The argument is not that barter never occurred in ancient times; it certainly did. However, money as we know it did not emerge out of barter, and neither did competitive internal markets as we know them. Capitalism is not just an exchange of goods growing out of barter, but something fundamentally different.

Second, it’s not that there was never any trading or markets in antiquity. There surely were, and they date back to human prehistory. But markets were not the primary focus of social relations, rather they were exclusively mechanisms to procure goods from afar, or to exchange certain goods within societies. “Unplug” markets from society, and they go on much as before, if a bit poorer. Competitive, internal, self-regulating markets did not derive from these types of markets. Inside cultures, the idea of using impersonal market transactions based around money to regulate every aspect of social life would have struck ancient people as offensive and absurd, not to mention inhuman.

So how do we get from that to the market society of today? That’s what we’ll be  taking a look at next time.

7 thoughts on “Karl Polanyi and the Modern World – Part 4

  1. I think the most important point in these excellent posts of yours is that money-economies get created only among societies with a high level of mistrust, such as refugee societies, societies subject to turmoil like war, displacement, being taken over by a hostile empire, etc. Kind of like the way ‘pidgin’ languages come into being, out of necessity by people who are displaced, traveling far from home out of necessity, etc.

    Normal, settled, societies use gifting instead of money, and more advanced settled societies seem to actually come up with “state socialisms” that work. Cool.

    So, in prison you’d expect to see currency (often cigarettes or honey buns) and every little thing tallied up and recorded, which is how it is, and among farmers who’ve been around “forever” you’d expect to see the idea of money being paid for the dozen extra eggs your neighbor gives you, laughed at. Which is how it works in “the rurals”.

    You’re doing great work here.

    1. Yes, that’s a good way of putting it. When you get the first large empires, with large numbers of unrelated strangers interacting, you get more monetary transactions. But most people lived and died in the place where they were born until the advent of industrialism. Thus, industrialism leads to the One Big Market, with footloose capital and labor, and land just rented out to the highest bidder.

      I wonder if the dislocation of people after the Black Death played a role here. That sort of “hollowed out” European society and left room for money and markets to play a much greater role than in other cultures. If everyone in your home village is dead, there’s not much room for reciprocity, redistribution and householding anymore. Of course, it’s didn’t change overnight, but the stage was set.

  2. Thank you for this four part series. You put a lot of work into it and I appreciate your effort.

    After going through my own “free markets will save us” phase in my early 20’s for about a year, I finally concluded that there was something wrong with the “Economic Man” model as I learned more about life. During my college days I occasionally wandered away from my beloved Earth Science major into other classes like anthropology. I don’t recall the whole free markets myth being mentioned at all during studies of non-industrial societies.

    My experiences and intuition were telling me this whole economic man as human nature and free market story had holes in it so I sought out answers and found some. However, this series with Polanyi and your analysis has filled in several holes in had in my reasoning. Thank you for that. I look forward to your next installment.

    1. Thanks. To be honest, when I first became aware of Polanyi, I didn’t really “get it,” but once you grasp the key concepts, it’s impossible to look at the world the same way again.

      In order to make the theoretical One Big Market, with its fictitious commodities of land, labor and capital, work in economic models, you need to construct a model of human nature to make it work. Hence the birth of “Homo Economicus,” recognized as a fraud almost since day one, yet still necessary to make economic “science” work. Unlike normal science, if your subjects do not behave the way you expect them to, you can change *them*, rather than your assumptions. That doesn’t work in, say, chemistry or physics.

      Even the much-vaunted “behavioral” economics is simply about studying how humans interact in markets, rather than questioning their fundamental presence. It’s dedicated to the proposition that humans primarily relate to each other through markets, and that sometimes they behave “irrationally” in those markets. The more obvious conclusion would be markets themselves are profoundly unnatural on multiple levels. But you won’t hear that from economists, behavioral or otherwise.

      Hence this definition of “rational” and “irrational,” which is arbitrary and makes no sense. It defines large swaths of human nature as something needing to be “corrected;” a scary proposition indeed. Its ultimate aim is to make humans into better market players, rather than center human institutions around the way we actually relate to one another (imagine that!)

      “[Political economy] does not treat the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end.” –John Stuart Mill

  3. I have followed your blog since your discussion of Paul Colinvaux’s work. Truly appreciate the effort that you have put in to put Polanyi’s concepts into something much more digestible.

    Ran into this article today — which immediately reminds me of your current work:


    It’s a “review” of William Goetzmann’s book “Money Changes Everything:
    How Finance Made Civilization Possible” by Michael Hudson. I haven’t read William Goetzmann’s work, but if Hudson’s allegations against William’s claims stand true, it has truly exposed the corruption of the elite academics. They seem to stop at nothing to continue justifying the current neoliberal and financial zeitgeist that’s swamping the world, even to the point of retelling/rewriting histories (and projecting their worldview into the ancient civilizations).

    I just want to thank you again for your work against this avalanche of misinformation.

    1. Thanks, and thanks for bringing that to my attention. I’ve read a lot of economic history books, and they all seem to make the past out as either 1.) just a long prelude to modernism and capitalism, or 2.) essentially the same as today. Also, they tend to rewrite history to suit their point of view. For example, the common narrative goes that all of history was just one long morass of Malthusian misery until we finally took the shackles off the merchant class, and *wham*, we left that world behind forever, and everything just worked out great. This was all due to capitalist institutions, the thinking goes, and not, for example, the scientific revolution or the use of fossil fuels. Obviously, I don’t agree.

      It’s sad to see even Richard Heinberg get suckered by this false narrative, since he’s clearly not a free-market ideologue who is paid to espouse a certain point of view, unlike most economists. This just shows how all-pervasive the propaganda has become.

      1. Yeah, the lack of accurate historical understanding pervades our contemporary literature. Of course, it can be (more than?) partially blamed on the education institutions which have been geared towards producing narrowly skilled workers — of which I am also a victim of, obviously (got my degree in Singapore). But my exposure to ‘alternative’ ideas from sites/people such as Naked Capitalism, Michael Hudson, Steve Keen, David Graeber, MMT, Greer, William Catton, DOTE and many others has enriched my perspectives with additional dimensions.

        As for Richard Heinberg, I agree that this false economic history and magical/wishful thinking (on renewable energy’s feasibility) has started to pollute his works. It is truly regrettable.

        On another rather random notes, I have a few suggestions for your blog:
        1) You should link your essays from your old blogs or import it into this new site. There are massive amount of work there, especially your book reviews or ‘idea’ series. New readers wouldn’t have any idea of your old blog.
        2) You should have a WordPress page where you list major books or writers which you think the readers should read – and perhaps link your reviews as well, if any.

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