The Origin of Money – Key Takeaways

“We begin with the story of the greatest conqueror in history, a conqueror possessed of extreme tolerance and adaptability, thereby turning people into ardent disciples. This conqueror is money. People who do not believe in the same god or obey the same king are more than willing to use the same money. Osama Bin Laden, for all his hatred of American culture, American religion and American politics, was very fond of American dollars. How did money succeed where gods and kings failed?”
~ Yuval Noah Harari, “Sapiens: A Brief History of Humankind,” (2015)

So I’m done for now writing about the history of money, which is doubtless good news to any readers I still have left (if there are any). I went way too far down the rabbit hole on this one 😊.

But the way it started was actually very simple. When I started, I had two major questions. One was, where did the notion of a “national debt” come from??? I mean, you never hear about the national debt of ancient Greece and Rome do you? In fact, it’s hard to imagine any ancient empire, from Persia to China voicing concerns about the national debt. Yet now it seems to drive just about every decision any government makes. We’re constantly told that “we can’t afford” this or that because it would increase the national debt. But how can a nation-state go into debt merely by issuing its own money? And how can every country in the world be simultaneously in debt? Since every nation-state is the ultimate source of its own currency, how can they be in debt? To whom?

The other major question I had was how did we get this weird hybrid system where we have government money, but private banks and financiers seem to control it? After all, money is a public good. We all need it. It should theoretically be under democratic control. But actual control over it is exercised by a secretive cabal of bankers and financiers who are not accountable to any democratic institutions. As Michael Hudson says, “every economy is planned, it’s only a matter of who does the planning.” He argues that in our society it is the private financial interests who do the planning rather than government bureaucrats, and they do so primarily to benefit themselves, even to the detriment of society. As Frederick Soddy said:

“… every monetary system must at long last conform, if it is to fulfil its proper role as the distributive mechanism of society. To allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government.”(The Role Of Money[1932]).

Hopefully we learned some answers to those two questions. A thoroughgoing history of money, rather than just being of historical interest, does give us some crucial insights into current dilemmas and what we need to do going forward.

So, by way of conclusion, here are some of the major takeaways I got while writing this series of posts. If your eyes glazed over during the series or you just quit reading over the summer (and I don’t really blame you), I encourage you to come back and at least read this instead:

What is money and finance at its heart? It’s a way to get large numbers of people to cooperate on the same goal. As Yuval Noah Harari writes in Sapiens, because our “natural” group size is fairly small (only about 150 or so), we need to invent shared fictions to get people in order to cooperate at larger and larger scales.

For a long time, religion was the major one. Then came the nation-state. Now finance seems to be the major way of controlling people and getting them to cooperate. With enough money you can get people to do just about anything, including have sex with you or kill one another. Money is permission. But usually it’s used for more benign purposes, such as getting thousands of people from all over the world to cooperate in a shared goal such as building electric cars or making and selling fizzy drinks.

Homo sapiens have no natural instincts for cooperating with large numbers of strangers. Humans evolved for millions of years living in small bands. Consequently, there are no instincts for mass social cooperation. To make up for that, humans have to rely on all kinds of imagined realities that regulate cooperation on such a huge scale. The human empires are based on shared common beliefs, social and legal norms that sustain them. The stability of the complex societies is not based on natural instinct or on personal acquaintance, but on shared imagined realities. Coursera: A Brief History of Humankind by Dr. Yuval Noah Harari

Both the corporation and the nation-state are shared legal fictions invented to bind large numbers of people together with imaginary ties to some sort of common purpose. Since its invention in the 1600’s, the corporate form has gained more and more power relative to the nation-state which created it.

Money is transferable debt (or credit). This is the “credit theory of money.” In “primitive” societies, many items are used to signify debts and obligations between various individuals, groups, and families. But once these obligations can be transferred among unrelated people, it becomes a type of money, even if the “exchange” is just by oral agreement (as on the island of Yap). “Money” may not even have corporeal form, but if it does, then it is usually standardized in some way (stone disks, shells, beads, coins, paper, etc.).

Money, then, is credit and nothing but credit. A’s money is B’s debt to him, and when B pays his debt, A’s money disappears. This is the whole theory of money (Innes 1913, p.16)

…money is anything that denotes and extinguishes one’s debt/liability to another; it was not a product of market exchanges but rather a byproduct of social relations based on debt…the nature of money is a credit-debt relationship that can only be understood in institutional and social contexts…Therefore, money originated as a byproduct of social relations based on debt and realized its standard form through the need of the central authority, as opposed to private individuals, to establish a standard unit of account to measure debt obligations or production surplus.
Vincent Huang, On the Nature of Money, p. 6

In fact, there are numerous examples from history where the state has stopped issuing money or the banks have closed (such as Ireland in the 1960’s), and private credit circulated as money in the form of checks. Rather than barter, the establishment of new credit-clearing systems is the common response when currency systems seize up and go under at levels greater than a local village. Also, we see that throughout history the shrinking of the state has led to a curtailment of trade, not an expansion, suggesting that the markets, money and governments are symbiotic and not in opposition as we are led to believe.

Money emerges when one class is able to impose obligations on the rest of society. This is the contention of John F. Henry. This could be a redistributor chief, a warlord, a royal household or a divine priesthood. Henry contends that hydraulic engineers were the first such class to emerge in ancient Egypt. Carroll Quigley argues that ancient priests used their knowledge of reading the movements of the heavens to predict floods, and this allowed them to set themselves up as a ruling class. Others posit that the need to wage warfare led to warlords setting themselves up a ruling class. Religion probably played a key role; the root of the word hierarchy is “hiero-“ meaning sacred.

In every case, this class probably engaged in astronomy; managed collective labor in some way, whether in military or engineering endeavors; and collected goods for redistribution among the populace.

Money has no value in and of itself. It is not the thing that matters, but the ability of one section of the population to impose its standard on the majority, and the institutions through which that majority accepts the will of the minority. Money, then as a unit of account, represents the class relations that developed in Egypt (and elsewhere), and class relations are social relations.

To service the activities of this class, resources needed to be deployed to fund their efforts. To keep track of these resources, a unit of account was established by these authorities (priests and scribes).

As James C. Scott points out, writing was originally invented as a tool for social control of the masses by the ruling class, not as a form of cultural expression (which was oral). Written records first emerge to manage inputs and outputs. There is a fascinating argument that clay bullae envelopes were a form of double entry bookkeeping, with debits represented by tokens placed inside and credits represented by the markings on the outside.

Apart from its role in the invention of writing, accounting is significant for human civilization because it affects the way we see the world and shapes our beliefs. To take this early example, the invention of token accounting in Mesopotamia was important not only because it facilitated economic exchanges and generated writing, but, according to Mattessich, “because it encouraged people to see the world around them in terms of quantifiable outcomes. …
Jane Gleeson-White, Accounting: Our First Communications Technology

Along with writing, establishing common standards of measurement appears to have been a chief function of the ruling classes since their emergence. Ancient priests tracked cyclical movements of celestial bodies and divided the year into discrete units to determine the precise timing of the planting and harvest, as well as ritual gatherings and feasts. They encoded these heavenly movements and measurements into their monuments in order to depict a kind of cosmic order on earth–“as above so below.” The built calendrical monuments such as Gobeckli Tepe, Stonehenge and Nabta Playa. They began to measure distance in addition to time (to mark off plots of land) and weights and quantities (to measure offerings to the gods). This process happened independently in both the Old World and the New. Thus, the creation of a unit of measurement to establish equivalencies between disparate goods produced by households was a logical extension of the duties of the ruling class once people began to occupationally specialize.

…the rise of class society and inequality took place alongside the emergence of money, whereby money played a key role in establishing, maintaining and exacerbating inequality and class division in societies. To put it simply, as soon as one witnesses the emergence of money, one observes the rise of class society and economic inequalities. Money, class society, and inequality came into being simultaneously, so it seems, mutually reinforcing the development of one another. Semenova and Wray, The Rise of Money and Class Society: The Contributions of John F. Henry (PDF) p.2

Which leads to the following conclusion:

The “unit of account” role appears to have been the first function of money to emerge (and not the “means of exchange” or “store of value” functions). Thousands of years before the first coins were minted, tributes and donations to temples were denominated in a standard unit of account, such as the shekel in Babylonia and the deben in Egypt. Babylonian scribes established money-prices for internal administrative purposes to track the crops, wool, barley, and other raw materials distributed to their dependent workforce, as well as to calculate the rents, debts and interest owed to the temples and palaces. These prices were then fixed to a certain weight of silver, allowing it to be used as a standard measure of value and means of payment. Initially, grain (the principal product of the Mesopotamian economy) was used, but its value fluctuates too widely from year-to-year, so silver replaced it.

Thus, the authorities can determine, for example, that 1 horse = 2 cows = 5 pigs = 10 bushels of grain = 1 ounce of silver. This was used to calculate inputs and outputs for the redistribution economies of the Bronze Age. It was also used in assessing fines and punishments by legal and religious authorities. Such compensation payments for transgressions kept societies stable in the face of increasing numbers of strangers living shoulder-to-shoulder. There are clues in our language: the word for “debt” also means “sin” or “transgression” in many languages, and the verb “to pay” also means “to appease” or “to pacify.”

…money as a unit of account precedes its roles as a medium of exchange and store of value… It thus follows that the physical manifestation of money (the “money things”) is not necessary since money as a debt relation needs not be physically tangible. This has been demonstrated as early as in Mesopotamia (3100BC) where crops and silver were used as standard units of account but not as a general medium of exchange. Exchanges simply took the form of credit and debit entries in clay tablets, similar to our electronic payment system today. Vincent Huang, On the Nature of Money p.6

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)…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 unit of account was typically based on what was most appropriate for giving to the gods. This is a point David Graeber makes. We are all “in debt” from the moment we are born–to the gods, to our ancestors, to our parents, and to our society. This “primordial debt” is discharged by sacrificing to the gods or gifts to temples (mediated by the religious authorities). Hence, that “universal debt” becomes the cornerstone of taxation, and hence the first monetary systems. For example, the Bible demands a ten-percent gift of one’s income to the temple (a tithe).

Every tithe of the land, whether of the seed of the land or of the fruit of the trees, is the Lord’s; it is holy to the Lord. If a man wishes to redeem some of his tithe, he shall add a fifth to it. And every tithe of herds and flocks, every tenth animal of all that pass under the herdsman’s staff, shall be holy to the Lord. One shall not differentiate between good or bad, neither shall he make a substitute for it; and if he does substitute for it, then both it and the substitute shall be holy; it shall not be redeemed.” (LEV. 27:30–34)

So, for example, in ancient Mesopotamia, the fact that silver is “captured sunlight,” gives it a divine quality which makes it highly desirable for gifts to the temple. Thus, the unit of account becomes equivalent to a certain weight of silver.

Silver was sort of a “goldilocks commodity” – there was enough of it for coinage, but no so much that it would be too easy for anyone to procure. It only comes from a single place–a mine down deep in the earth, most of which were owned by the authorizes. Things like apples and hides could not be useful, for example, because they were widely distributed. You had to use something whose issuance could be controlled by the state. By stamping the ruler’s mark on the coins, it gained value in exchange over and above its precious metal value. That is, they were tokens:

Coinage arose at approximately the end of the seventh century BCE in Lydia (in what is now western Turkey), where there was an abundant supply of electrum, a natural alloy of gold and silver. But coinage was first used in everyday life in the Greek city-states on the coast of Lydia. One plausible theory is that it arose out of the best possible way for the Lydian monarchy to use its abundant electrum to pay Greek mercenaries. Each piece of electrum had a different and undeterminable proportion of gold and silver (and so a different metallic value), but numerous pieces each with exactly the same value could be created by stamping them with a mark meaning ‘this is worth x’. And so from the very beginning of coinage its conventional value was different from (generally greater than) its metallic value. Radical Anthropology, Richard Seaford interview (PDF)

In ancient Greece, cattle were ranked and sacrificed to the gods. Thus, the value of things such as ships and armor were measured against cattle, even though no one ever used cattle to buy or sell anything. In ancient Ireland, slave girls (kumals) were the most valuable commodity, so items were evaluated against them. Eventually, the kumal became just an abstract unit of account for trading purposes, divorced from its original context.

Religiously significant metals became important as temple offerings and temples began accumulate large reserves. Followers of the religion would look to acquire the metal, to enable them to make an offering to the gods, and so the metal became the commodity in the most demand. The Ancient Egyptians, who had easy access to gold, used Cypriot copper for their religious offerings while the Cypriots used Egyptian gold. In Mesopotamia, the metal of choice was silver…Later, we read in Homer that the Greeks priced goods in terms of oxen, the animal that was reserved for sacrifices to the gods, ..When ‘Currency Cranks’ or ‘Bullionists’ argue that the economy would be improved by reverting to a Gold Standard because gold has an ‘inherent value’ they need to explain where is the value in gold, apart from its inherent symbolic, representative, value. Lady Credit (Magic, Maths and Money)

The Unit of Account and the Means of Exchange need not be the same. In fact, for most of history they weren’t! In the Middle Ages, prices were denominated and taxes assessed in a common unit of account (e.g. livres tournois), but hundreds of different coins churned out by dozens of mints were used to pay them (such as the Piece of Eight or Louis d’Or).

In many places, there was often no coin equivalent to the unit of account. Coins were exclusively minted by authorities. The coins didn’t have a fixed value, rather their exchange value fluctuated and was dictated by government fiat. However, their bullion value fluctuated according to supply and demand in the marketplace. Imbalances between bullion and exchange values led to surfeits and shortages of precious metals, with corresponding price swings (e.g. the “Price Revolution”). This led to efforts by authorities to restrict the movements of precious metals (bullionism).

Similarly, bills of exchange were denominated in an abstract unit of account (écu de marc), which did not correspond to any particular currency. The arbitrage between this abstract unit and the currencies of the time is how bankers made their money when usury was still illegal.

An interesting example of this was seen in Brazil in the 1990’s. The government created a totally new unit of account, the “Unit of Real Value” (URV) which would hold its value relative to the currency (the cruzeiro), which was subject to hyperinflation. Prices, taxes and wages would be denominated in the URV, which would remain constant, while the amount of cruzeiros needed to equal 1 URV would vary. Eventually, once prices stabilized, the country would introduce a totally new currency equivalent to the URV (the real).: How Fake Money Saved Brazil (NPR)

Items that can be accepted in payment as fines or taxes to authorities acquire value in private transactions. As MMT economists point out, the dollar is given value by the ability to pay ones taxes with it, that is, one is able to discharge one’s personal obligations to the state with dollars (and only dollars). Thus, prices are typically denominated in dollars as well, and producers accept dollars in exchange for goods and services.

While private money can be created and issued, the ability to pay one’s taxes with dollars means there is always a demand for them. Also, since money is transferable credit, the government’s credit is typically much more reliable than that of private individuals. This is often referred to as the “state theory of money,” of “chartalism”:

[While] private individuals may have different units of accounts (cattle, watermelon, etc.)…It is unlikely that any individual could have sufficient power to induce others to hold its liabilities as a standard unit of account…By choosing a unit of account as the only means for individuals to extinguish his/her liabilities to themselves, the central authorities “write the dictionary”. Hence, the power of the central authority (state, temple, tribe, etc.) to impose a debt liability (fines, fees, taxes, etc.) on its population gives the former the unique right to choose a particular unit of account as the only means of payment to the central authority.

Money’s value comes from faith in the issuing government’s credit. The loss of faith in the currency had much more to do with the stability of the issuing government rather than the amount of precious metal contained in the coin. Numismatists can find no solid correlation between prices and the precious metal content of coins over millennia. Nor can they find a consistent standard of how much specie a coin “should” have.

In the case of paper money, the paper itself is not valuable; it is the enforceable claim written on it that’s valuable. Originally this promised to pay the bearer in coin. Then it evolved into banknotes–sort of a “paper coin”–a signifier of government debt which did not pay interest.

The above leads to the following conclusion:

Money led to markets, not vice-versa. Once the concepts of money and prices are firmly established by central authorities, only then can decentralized exchanges can take place in markets. That these standards were initially set by authorities makes far more sense (and is historically better supported), than the idea that money emerged spontaneously by private individuals to reduce search costs without recourse to any centralized authority through innumerable acts of barter.

Once the state has created the unit of account and named what can be delivered to fulfill obligations to the state, it has generated the necessary pre-conditions for development of markets. The evidence suggests that early authorities set prices for each of the most important products and services. Once prices in money were established, it was a short technical leap to creation of markets. This stands orthodoxy on its head by reversing the order: first money and prices, then markets and money-things (rather than barter-based markets and relative prices, and then numeraire money and nominal prices). The Credit Money and State Money Approaches by L. Randall Wray, p.9

Religion played a key role in the establishment of money and markets from the very beginning. This makes sense, since religion was the primary unifying and coordinating “story” for ancient societies. The source of the word religion literally means “to bind together.” We saw above the Biblical instructions on tithing.

Temples appear to have been the first banks and the first treasuries. Sumerian temples stored precious metals, made loans, rented land, coordinated labor, established prices for key goods, and determined fees and fines. The obolos, the lowest denomination Greek coin, derived its name from the iron spits (obelos) through which sacrificial roast meat was evenly distributed to the members of the tribe. The drachma derives its name from obeliskon drachmai, a ‘handful’ of spits. This communal ritual is thought to have influenced Greek ideas of decentralized exchange and universal value, in contrast to the centrally-administered economies of the Near East. The iron spits acquired value in interpersonal exchange. Later, Greek temples distributed stndardized lumps of metal, stamped with the city’s emblem, to all adult male members of the polis which allowed for the unique social order to be maintained.

In contrast to most ancient near-eastern societies, the Greek polis had retained sacrificial ritual that embodied the principle of communal egalitarian distribution. The fact that the Greek word for this distribution (moira) came to mean ‘fate’ indicates the importance of the distributional imperative. Citizenship was marked by participation in communal sacrifice, which also provided a model for the egalitarian distribution of metallic wealth in standardised pieces.Some of the vocabulary of early coinage comes from animal sacrifice. For instance, the word ‘obol’, used of a coin, comes from the word for a spit. In the communal egalitarian distribution meat was distributed on iron spits, which were of standard size as well as being portable and durable, i.e. they could be used as money (in a limited way). With the use of more precious metal in exchange, ‘obol’ was transferred to a piece that was of roughly equal value and so of much smaller size (and so even more convenient). Radical Anthropology, Richard Seaford interview (PDF)

Markets also appear to have emerged around religious buildings. Many ancient exchanges were near temples. The great fairs of Europe in places like Champagne and Lyon took place near churches and cathedrals under the watchful eye of the all-seeing God. Since so much of trade relies on trust and belief (credit comes from credere = “to believe”), it is logical that religion would play a central role:

We tend nowadays to think of religion as the non-material activity of mankind. Did not Jesus expel the moneychangers from the Temple? Does not Islam forbid the charging of interest on loans? Did not a similar Christian prohibition of usury hold back mediaeval Europe’s economic development for centuries? Yet when Jesus took his action against the money-changers he must have been reversing the tradition of several millennia. The temples were the source of commercial law and practice. They had developed writing for the keeping of their accounts. They imposed the moral code which made promises inviolable. In Mesopotamia temples employed the poor, the widows and the orphans in factories which produced textiles to be traded abroad for the commodities the region lacked, including silver, copper, tin and lead. They were, it seems, the major business centres. (Innes p. 136)

Some theorists posit that as exchanges became more common and societies became more affluent, they invented “big gods” that could see everything and demanded that we behave a certain way (honest, truthful, etc.). These “Big gods” could transcend the limits of the old tribal gods that were based on shared ancestry and culture. All you had to do was profess belief! Wealth may have driven the rise of today’s religions (Science)

Trade Credit (not gold or silver) was the primordial form of commercial money. Rather than barter or coins, credit lines were probably what was used for exchanges in the days before currency became commonplace. In “primitive” cultures, reciprocity performs this role, where one’s gifts to others circulate back to the giver in time without a formal accounting of who owes what to whom. This helps maintain social relationships in small, close-knit societies.

As societies scale up, reciprocity is replaced with more formal agreements, often denominated in the standard unit of account. Even in modern times, credit is what is used to purchase inputs upfront, rather than just repeated spot transactions (as any businessperson or farmer can tell you).

The word credit is derived, very appropriately, from the Latin word for ‘to trust’. …the division of labour, from the very first moment it was applied, required the creation of a credit system of some kind. It was absolutely necessary to be able to trust one’s fellow workers’ promises to reward one appropriately at some future moment for one’s own products or services. It would have helped to have an enforcing authority, and that makes it all the more likely that trade was conducted in a regulated way, not by free individual option…it is obvious that a completely free market economy has rarely, if indeed ever, existed. We all rely on the existence of an enforcement system. We rely on the rule of law.

Trade credit (bills of exchange) formed much of the “money” of the Middle Ages and facilitated the commercial expansion in the absence of adequate gold and silver supplies. Huge amounts were transferred using double-entry bookkeeping (the “Venetian Method”) without any cash changing hands. Bankers would settle accounts at the conto which concluded the fairs. In fact, this may have been the original purpose of the fairs, with retail trade being subsidiary. Eventually, as commerce became more and more important after 1600, these activities became centered in permanent banks and bourses established by the major port cities to facilitate the trading activities of merchants.

Trade credit is the essential foundation of the whole economic system, and the essential financial problem of economic development is to monetise trade credit, to turn it into an instrument for transferring value, for measuring value and for storing value. Wray. 121

Tally sticks, which keep track of debts and credits, may be the earliest form of money to emerge, even before coins or clay tablets. They were made of organic materials such as wood and bone. Because metal coins are what survive, tally sticks are sadly omitted in standard accounts of money: What tally sticks tell us about how money works (BBC)

Debt servitude appears to be the earliest form of mass slavery. While slaves were often captured prisoners of war in primitive cultures, their numbers were necessarily limited because having too many hostile foreigners living among your society and doing its essential chores would be dangerous (if not outright suicidal). That’s why in the ancient Near East, they were mainly women and children employed in domestic labor (cooking, cleaning, weaving, child care, etc.). Rather than slave labor, their massive walls and monuments were built by voluntary, mainly corvée labor, which served as a sort of social glue and proxy form of taxation in the absence of money.

But once debt becomes commonplace, large numbers of one’s own people could be compelled to labor for others in order to service their debts. This, as David Graeber points out, would be seen as just and fair, and thus the debtors would be less inclined to rebel. In fact, this may have been how the very first classes formed in ancient societies–debtors and creditors–rather than through military conquest or political decisions. Debt and chattel slavery existed side-by-side in most ancient societies. Even in colonial America, there were more indentured servants than African slaves.

Early rulers realized they needed to occasionally release the people from their debt obligations to public institutions (temples and palaces), otherwise they would lose the support of the people. They also needed enough free men to staff the armed forces, as debt-serfs could not afford to train or equip themselves. Debt serfs could also run away. Some argue that the debt serfs of ancient Mesopotamia, the Habiru, are the ancestors of the Jews (Hebrews).

And ye shall hallow the fiftieth year, and proclaim liberty throughout the land unto all the inhabitants thereof; it shall be a jubilee unto you; and ye shall return every man unto his possession, and ye shall return every man unto his family.
— Leviticus 25:10

Later, when professional soldiers replaced citizen armies, debt forgiveness was abolished and debts were held sacrosanct. This gave rise to a large class of hereditary debt serfs.

Only later on do prisoners of war become the major source of slaves in the Classical world. Some of the first markets to emerge were slave markets where prisoners of war were bought and sold. The Roman war machine brought in tens of thousands of slaves, diving their costs down and displacing free labor in agriculture. This allowed wealth to concentrate to a degree that undermined social cohesion. This may have been an underlying cause of Rome’s decline and fall.

All the major innovations in money and finance seem to have been created either to manage long-distance trade or to fund wars. The need to raise funds for war has seemingly driven all financial innovations since Medieval times. The “national debt” began when Venice needed to fund a war with Byzantium, and so they borrowed from their wealthy merchant classes. This borrowing eventually became done on a permanent basis. All the creditors’ obligations were eventually consolidated in one lump sum, revenue streams were dedicated to them, and payments were managed by a state-run bank. Thus the “national debt” was born. Borrowing was done by various municipalities in Northern Europe, but none of these were national debts. The Dutch seem to be the first country to leverage those techniques effectively on a national scale to fight for their independence from Spain.

Going even farther back, it appears that coinage was first invented to pay troops. Coins were distributed to soldiers as payment. Then a tax was then imposed on the conquered populations. The way to pay the tax was to acquire signifiers of the state’s debt in the form of coins by selling goods and services to the occupiers, thus redeeming signifiers of the state’s debt. There is another clue in the language here: the word soldier comes from the soldius, a gold coin used to pay troops in the late Roman Empire.

There is firm evidence to support money being a state creation. Money appears in Europe at the time the Greek city states became reliant on mercenary armies. Cities paid soldiers in gold to conquer some community, the soldiers then spent the gold in the colonised lands and the state recovered the gold by taxing the colonised merchants and innkeepers using the tokens that the soldiers had paid for food and lodgings. Greek and Roman citizens never paid tax, only the conquered paid for the privilege and were bound to the conqueror by having to exchange their resources for the Imperial currency. The model would survive and drive colonialism in the modern age, in the 1920s the British taxed Kenya at a rate of about 75% of wages, forcing the colonised to grow cash-crops to be consumed by the colonisers. Lady Credit (Magic, Maths and Money)

Financial innovations spread through the need to wage wars. If a system gave one nation a competitive advantage, it had to be adopted by other nations in order to compete. It was a sort of a Darwinian arms race: if a financial innovation allows a country to be more effective in trade or warfare, it will dominate countries that are unable to deploy their resources as effectively. The others will either adapt the innovation on their own or be subsumed into the empire (and thus gain the innovation that way).This is probably why financial techniques spread so rapidly in Western Europe as compared with China and the Middle East, who relied upon conscription and command-and-control systems rather than mercenaries & borrowing to fight wars.

In “patrimonial states”, where the state was an extension of the ruling family’s household, loans were essentially personal loans to the monarch that could be refuted at any time. Only when parliamentary systems come into play does state borrowing become a reliable means for governments to raise money. Thus merchant republics led the way, first in Italy, and then in Holland.

John Law’s financial innovations were an attempt to consolidate and manage the massive debts Louis 14th had run up with his wars and extravagances. Similarly, the debts generated by King William’s Glorious Revolution and subsequent wars led to the creation of the Bank of England, a joint-stock company designed to loan to the government and manage the state’s debt. This is the ancestor of today’s central banks.

Borrowing marks a time when citizens become not only debtors of the state, but creditors as well, profoundly altering the social relations between the state and its citizens. There effects were distributional–from the public sector at-large to the wealthy citizens and institutions who held the bonds. Over time, this group became more and more influential. Borrowing allows nations to bring resources forward in time. It also allows borrowing from a wider range of people and institutions than just banks.

Warfare has also been the reason for abandoning precious metal standards. The need to issue adequate money to fight wars has led to the suspension of convertibility of money and the rise of fiat currencies. Every time any sort of fixed standard has been tried, warfare undermines it.

Trading Empires are the major source for financial innovations. It’s no coincidence that major financial innovations occur in thassalocracies reliant upon long-distance trade. First the Italian city-states such as Venice and Genoa, then the Spanish and Portuguese empires, then the United Provinces (Dutch Republics), and finally the English Whig merchants who invented the modern monetary system.

Why were trading empires such a fertile source for innovations such as insurance and limited-liability corporations? Because trading voyages require enormous sums of investment upfront and the outcome is highly uncertain.

Consider the enormous length of time it took these wind-powered trading voyages. It took 12-18 months to make it to the Indies, and then you had to procure the cargo. That meant it could be 3-4 years before a profit is was realized. That meant that trading voyages required a very high level of capitalization; investors did not get an immediate return on their funding. They also required large amounts of infrastructure: ships were expensive, trading forts were expensive, soldiers were expensive, and so large amounts of resources had to be brought together. This was beyond the capacity of any single entity, so resources needed to be pooled. In addition, unlike one-off trading voyages, trade with the Indies required a permanent infrastructure rather than resources to fund a single voyage. You needed a trade with long-term continuity to realize a profit; single-purpose funding would not do.

It is these requirements that led to financial innovations, from medieval Italian commenda (a temporary limited partnership) to the limited-liability joint-stock corporation, where ownership is negotiable and is wholly separated from direct management.

Money played a huge role in the evolution of Western philosophy and mathematics. European mathematics achieved a high degree of sophistication due to the need to deal with multiple currencies at the same time as the Church’s prohibition on usury. The earliest mathematical treatises were all concerned with practical matters in trade and jurisprudence, not abstract science. Rather than sophisticated mathematics being developed to explain physical phenomena, it was first developed to manage trade risks and calculate transaction costs. Later on, these math techniques began to be applied to the natural world. Often, early scientists began their mathematical training in commerce. Newton and Copernicus both wrote treatises on Money. After 1600 the commercial and scientific revolutions both gained steam.

European science did not start in the Renaissance, it existed in the High Middle Ages. The ‘renaissance’ of the ‘long twelfth century’ resulted in what the historian Joel Kaye describes as, “the transformation of the conceptual model of the natural world…[which] was strongly influenced by the rapid monetisation of European society taking place [between 1260-1380].” and played a pivotal role in the development of European science. Thirteenth century scholars, “[were] more intent on examining how the system of exchange actually functioned than how it ought to function…” It seems that Fibonacci did not just influence medieval merchants, those scholars keeping an eye on merchant’s dubious dealings, also, became obsessed with mathematics… Who was the first quant? (Magic, Maths and Money)

Going even further back in time, many of the distinctive features of ancient Greek society (and hence Western civilization) such as science, philosophy and democracy, may have their origins in the use of money and trade in the Greek world:

The first ever pervasive monetisation in history (of the Greek polis) made possible for the first time various features of Greek culture that have in asense persisted throughout monetised society up to the present. I confine myself here to two examples. One is the idea that the abstract is more real than the concrete, which was a basis of much ancient philosophy. Another is the absolute isolation of the individual: this is especially manifest in Greek tragedy, where, for instance, Oedipus is entirely alienated from the gods and from his closest kin. Both these features are familiar to us, but do not occur in pre-monetary society. Radical Anthropology, Richard Seaford interview (PDF)

Loans create deposits, not vice-versa. This is called the “endogenous theory of money.” It claims that the amount of money is constrained only by the number of willing borrowers in the economy, and not the amount of reserves held by the central bank.

In short, the endogenous money approach reverses two causalities proposed by orthodoxy: 1) reserve creates deposits; and 2) deposits create loan. On the contrary, the endogenous money holds that loans create deposits that then create the need for the central bank to accommodate with reserve. In other words, banks first make loans, and then seek reserves to meet central bank regulations…

…Suppose Henry decides to hire Joshua to build a condo. In theory, Henry could issue his own money/IOU to Joshua in exchange for Joshua’s labor time. The problem is, Joshua would probably not accept Henry’s own liability (Henry dollar) because Henry cannot sufficiently indebt the rest of the population to create a demand for his own IOU. Instead, Joshua agrees to exchange his labor only for the liability of the state (U.S. dollars). Therefore, Henry needs somehow to convert his own IOU to the state IOU in order to get Joshua’s labor. Now Henry walks into a bank and asks for a loan, the loan officer does not check the bank’s reserves at the central bank and comes back to tell Henry, “sorry, we are out of money!” If the bank thinks Henry’s project is good, it creates a Henry loan simply by crediting the Henry’s deposit account. To meet the reserve requirement, the bank then borrows reserves from other banks that have excess reserves or directly from the central bank. What distinguishes the bank’s IOUs and Henry’s IOUs is that the former is directly convertible to the central bank/state IOUs while the latter is not. Vincent Huang, On the Nature of Money

The government is not revenue constrained. The above leads to the conclusion that in order to collect taxes, the government must first issue the money-thing it wishes to collect. This leads to the conclusion that rather than taxes funding spending, spending funds taxes! If the government (public sector) collects more in taxes than it spends, it reduces the money supply and causes the private sector to go into deficit in the equivalent amount (the “sectoral balances” approach).

A sovereign issuer of currency can never “run out” of money, nor can it go “bankrupt.” It can, however, be short of key resources, productive capacity, willing borrowers, or faith in the governing institutions. In such cases, excess money in the economy could lead to inflation, which is the real constraint on issuing money. Taxation serves as a way of “un-printing” money to bring inflation under control.

Although the finer points of MMT can get quite involved, the most basic takeaway is very simple. For societies with currency-issuing governments:

If something can be done, it is “affordable”.

If we have access to the raw materials, the labor power, the skills, the equipment and the facilities needed to produce something, then we can afford to produce it. The cost of doing so is not financial. The cost is a real cost: the exertion of human effort and know-how, the wear and tear on facilities and equipment, and the depletion of natural resources.

On one level, it is bizarre that this basic takeaway of MMT is not already mainstream. If the idea is heterodox, it is only because we are currently living in a very topsy-turvy world, in which up is presented to us as down, black as white, with everything reversed. In reality, it should be much harder to believe the opposite: that what we are capable of is impossible. If it’s Doable, it’s Affordable (hetereconomist)

What constitutes “money” is not so simple. Many things can be used as money. Stocks can be thought of a kind of money (since they are an IOU). Equity can be used as money. Items with intrinsic value (or perceived intrinsic value) can be used as money. Gift cards are a type of money. So are airline points. No doubt John Law’s theories derived in part from his observations at the gambling tables of Europe. There he observed that all sorts of things could serve as money in a pinch: coins, stocks, bonds, jewelry, certificates of deposit, deeds to land, checks, even hastily scribbled IOU notes. Anything that is accepted in payment, whether gold, stocks, bonds, cash, or IOUs, can be used as money, he concluded.

As MMT theorists say, anyone can create money, the challenge is getting it accepted. As we saw, private monies circulated alongside state money and borrowing before the two were combined in England, where bills of exchange became enforceable by contract law outside of merchant courts. Because the state’s liabilities and credit are generally the most reliable (except in cases of state failure), its money generally becomes the ‘money thing’ at the top of the pyramid—the ultimate means of settlement for various debts.

Recall that money represents a promise/IOU and that these promises can be created by anyone. The ‘secret’ to turning these promises into money is getting other individuals or institutions to accept them. Therefore, the ‘hierarchy of money’ can be thought of as a multi-tiered pyramid where the tiers represent promises with differing degrees of acceptability. At the apex is the most acceptable or ‘ultimate’ promise…The ‘simplified hierarchy’ can be envisioned as a four-tiered pyramid, with the debts of households, firms, banks and the state each representing a single tier…All money in the hierarchy represents an existing relationship between a creditor and a debtor, but the more generally acceptable debts will be situated higher within the hierarchy…as the decisive money of the system, both the state’s promises and banks’ promises rank high among the monies of the hierarchy. Although bank money is part of the ‘decisive’ money of the system, its acceptance at state pay-offices really requires its conversion into state money (i.e., bank reserves). That is, bank money is converted to bank reserves so that (ultimately) the state actually accepts only its own liabilities in payment to itself. The debt of the state, which is required in payment of taxes and is backed by its power to make and enforce laws, is the most acceptable money in the pyramid and, therefore, occupies the first tier. Stephanie Bell, The role of the state and the hierarchy of money, p. 10-12

The test of ‘moneyness’ depends on the satisfaction of both of two conditions. First, the claim or credit is denominated in an abstract money of account. Monetary space is a sovereign space in which economic transactions (debts and prices) are denominated in a money of account. Second, the degree of moneyness is determined by the position of the claim or credit in the hierarchy of acceptability. Money is that which constitutes the means of final payment throughout the entire space defined by the money of account. Geoffrey Ingham, The Emergence of Capitalist Credit Money p. 214

In our society, money has multiple uses: means of exchange, store of value, unit of account, and settlement of debts. That these things are all embodied in a single item we call “money” is not a natural phenomenon but a feature of capitalist credit money which allows this system to function as it does. That invention took a long time and it’s probably not over yet.

One thought on “The Origin of Money – Key Takeaways

  1. Thanks for such a wonderfully insightful and dense series. This key takeaways post is fantastic, and has encouraged me to put the time in to go through all ten in their entirety.

    I think this post is a great way to introduce someone to the essays, as opposed to starting with chapter 1. I think it’s also a great introduction to HipCrime Vocab. In that vein I wrote an introduction about you, what your work means for me, and how I think others could use it.

    Cheers for all your great work, I want you to know my friends and I are still here, and we love your work.

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