The Origin of Money 9 – Bonds and the Invention of the ‘National Debt’

The Venetian government is the first we know of which became a debtor to its own citizens, or conversely, where citizens became creditors on the government. As with most innovations in finance, it was the need to raise funds for war that drove the need to raise revenue quickly.

Other city-states had to compete with Venice, and the system spread, first to Genoa, and then to other republics in Northern Italy like Florence, Milan and Sienna. These city-states were all expanding militarily, and they needed money to do it. Since they were republics, they had advantages that the absolute monarchies of Northern Europe did not have, including accountability to their citizens. The merchant classes essentially borrowed from themselves to fund the wars.

These methods of short and long term debt financing spread to Northern Europe but were done on the municipal, not state level, since states were largely still absolute monarchies who could, and did, repudiate their debts on a regular basis.

In Northern Europe tax collection was highly decentralized during the Middle Ages, and national governments relied on municipal and provincial tax receipts for revenue. Many localities in Western Europe turned to securities (annuities, lotteries, tontines, etc.) for short-term and long-term borrowing which were allowable under the Church’s ban on usury. Both France and Spain eventually incorporated these into the nation’s overall financial structure, however, these were still primarily local, not state liabilities. Both governments used debt instruments for borrowing, but these were intermediated by banks and unlike the Italian republics, borrowing costs were high because they were less reliable. The kings of France and Spain, unrestrained by effective parliaments, were serial defaulters.

The Seven United Provinces (today’s Belgium and the Netherlands), which, like the Italian City-states, were trading empires run by a wealthy merchant oligarchy, used these new methods of financing and banking to fund their rebellion against Spain as well as expand their burgeoning overseas trading empire. These securities eventually became negotiable, and markets emerged for buying, selling, and trading these debts. The United Provinces is likely the first place where these became national liabilities. The center of financial innovation shifted from Northern Italy to Holland.

From there “Dutch finance” spread across the Channel to England during the Glorious Revolution of 1688. To manage his mounting war debt, William of Orange took out a loan from the merchant bankers of England in exchange for certain prerogatives from the crown. England was the first major country to consolidate its debt, nationalize it, and monetize it, therefore setting the stage for the public/private hybrid system of money creation and banking that we use today.

Italy Invents the State Bank

It all started with the Crusades. Seaports like Venice and Genoa were launching points for the armies marching south to conquer the Holy Land. The vast amounts of money flowing into these cities during this time allowed them to remove themselves from the feudal order and become self-governing communes. The shipping expertise gained by ferrying soldiers back and forth to the Middle East allowed the Venetians and Genoese to develop the skills to become Europe’s primary merchants and traders, importing exotic goods from the Islamic world into western Europe, and becoming fabulously wealthy in the process.

It was through the Islamic trade centered around the Silk Road and the Indian ocean—the first modern “global economy”–that the Italians learned all sort of innovations that we saw last time, from paper to base-10 place notation, to algebra, to checks, to bills of exchange. These ideas would be used to usher in the “commercial revolution” of the late Middle Ages. They would also make Northern Italy the crucible for European banking and finance.

To fund their expansion, these thassalocracies needed money. Trading empires, as Paul Colinveax would remind us, require superior military technique. At this time, military empires relied mainly not on conscripts (most people in these republics were merchants and artisans), but on professional soldiers, i.e. mercenaries. As Carroll Quigley put it, “the existence of mercenary armies made money equivalent to soldiers and thus to power.” (p. 373)

For much of the fourteenth and fifteenth centuries, the medieval city-states of Tuscany – Florence, Pisa and Siena – were at war with each other or with other Italian towns. This was war wages as much by money as by men. Rather than require their own citizens to do the dirty work of fighting, each city hired military contractors (condottieri) who raised armies to annex land and loot treasure from its rivals. [2]

The main way states raised money during this period, as we saw last time, were taxes and seignorage. Taxes were levied almost exclusively on commercial activity for most of history (since most other activity took place outside of the commercial/money economy). This was unlikely to be as effective in an entrepot dependent upon shipping and trade. Feudal rents and dues were levied by kings, but were less available to city-states outside of the feudal system. Siegnorage was a major way of raising revenue as we saw previously, but for a merchant-based society, devaluing the currency was less likely to be helpful or popular.

The solution arrived at was to borrow money from the city’s wealthy merchant and banking classes.

During the thirteenth and fourteenth centuries major cities such as Florence, Genoa, Milan, and Venice were able to extend their territorial control; those of Venice and Genoa attained the importance of maritime empires.

The formation of a territorial state came at enormous costs. How did urban governments raise the money needed to cover such expenses? Since increasing or raising new taxes required time and, above all, public acceptance, the easiest way was to borrow from the wealthiest citizens.[3]

Despite the ban on usury, no medieval European government – municipal, territorial, or national – was able to function without borrowing, given that its powers to tax and exact rents were limited, while it was often engaged in costly wars. But such loans were usually for short terms, often at punitive rates of interest.

During the twelfth century, the Italian progenitors of the ongoing Commercial Revolution developed what became a system of municipally funded debts, debts that subsequently became permanent. Genoa took the lead, in 1149, when it agreed to give a consortium of the city’s lenders control over a compera, a consolidated fund of tax revenues to be used in paying the city’s creditors.

Venice followed suit in 1164, by securing a loan of 1,150 silver marci against the tax revenues from the Rialto market for twelve years. In 1187, in return for a loan of 16,000 Venetian lire, to finance the doge’s siege of Zara, creditors were given control over the salt tax and certain house rents for thirteen years; thereafter, the Salt Office was made responsible for all such loan payments…by 1207, the Venetians had adopted what had already become the hallmark of public finance in the Italian republics: a system of forced loans, known locally as prestiti, whose interest charges were financed by additional taxes on salt, the Rialto market, and the weigh-house.

Between 1262 and 1264, the Venetian Senate consolidated all of the state’s outstanding debts into one fund later called the Monte Vecchio – mountain of debt – and decreed that debt-holders should receive annual interest at 5 per cent, which the Ufficiale degli Prestiti was required to pay twice yearly from eight specified excise taxes. These prestiti debt claims (with interest payments) were assignable through the offices of the procurator of San Marco and, by 1320 at the latest, a secondary market for them had developed. [4]

A loophole in the medieval prohibition on usury allowed this to take place. Although we regard usury and interest as one in the same, in fact medieval law made a distinction between the two:

Usury is sometimes equated with the charging of interest, but by the thirteenth century it was recognised that the two ideas were different.

Usury derives from the Latin usura, meaning ‘use’, and referred to the charging of a fee for the use of money. Interest comes from the Latin intereo, meaning ‘to be lost’, and originated, in the Roman legal codes as the compensation someone was paid if they suffered a loss as a result of a contract being broken. So a lender could charge interest to compensate for a loss, but they could not make a gain by lending.

It is easier to understand this with a simple example. A farmer lends a cow to their cousin for a year. In the normal course of events, the cow would give birth to a calf and the cousin would gain the benefit of the cow’s milk. At the end of the loan, the farmer could expect the cow and the calf to be returned. The interest rate is 100%, but it is an interest since the farmer, if they had not lent the cow to their cousin, would have expected to end the year with a cow and a calf. Similarly, if the farmer lent out grain, they could expect to get the loan plus a premium on the basis that their cousin planted the grain, he would reap a harvest far greater than the sum lent. [5]

These concepts gave birth to the idea of the medieval census:

A census originated in the feudal societies as an “obligation to pay an annual return from fruitful property”. What this means is that the buyer of the census would pay a landowner, for example, for the future production from the land, such as wheat or wine, over a period of time.

As economic life in western Europe became based on money transactions rather than barter transactions, censii lost the link to specific produce, cartloads of wheat or barrels of wine. The buyer of the census would accept regular cash payment instead of the actual produce, and this was legitimate in the eyes of the canon lawyers as long as the lump-sum paid buy [sic] the buyer ‘equated’ with the value of the ‘fruitful property’ being produced by the seller.

Anyone who could became involved in censii. A labourer might sell a census based on the future revenue from their labour, states sold them based on the future revenue from taxes and monopolies, and the Church invested bequests by buying censii. Censii issued by governments, usually linked to specific tax revenues, became known as rentes. Censii could be ‘temporary’, lasting a few years, or ‘permanent’, until one of the parties died.

In today’s terms, temporary censii resemble modern mortgages, permanent censii resemble the ‘annuities’ pensioners live off today. They could be ‘redeemable’, by one or both parties, meaning that the contract could be cancelled. [6]

The Venetian government required a “forced loan” from their wealthiest citizens in line with their income (i.e. it was progressive) to fund the war effort. Since the loans were forced loans, interest was compensation for the lost money, which was allowable under the Church’s anti-usury doctrine. The government paid an “interest” of 5 percent per year in biannual installments of 2.5 percent to compensate for the lost money. To do this, the government allocated dedicated revenue streams from commercial taxes to pay the interest.

Prestiti were a development from the rentes created by states. Around the twelfth century the Italian city-states of Venice, Genoa and Florence began to forcefully sell temporary rentes to their rich citizens. By the mid-thirteenth century the different issues of rentes were consolidated into a mons (mountain) and everyone who had been made to buy a rente was given a share, proportionate to their contribution, in the mons. [7]

The loans were basically irredeemable—there was no pledge by the government to pay back the principal in a fixed amount of time. These were not bearer bonds; rather, the names of the creditors were recorded in government ledgers at the loan office (Camera degli imprestiti). They were assignable in that the revenue stream could be transferred to a third party with the consent of the owner, but they were not negotiable, however, at least at first. You could not simply sell your bonds on the open market without the knowledge of the original debtor (the government), i.e. they were not easily transferable. Nor were they legal tender which could be used in lieu of cash.

Venice created its mons, the monte vecchio, in 1262 and the shares, known as prestiti, entitled the holder to be paid 5%, a year, of the sum they lent, which was written on the prestiti and known as the ‘face value’. While there was no obligation for the states to pay the coupon, the annual payment, there was an expectation that they would if it could be afforded and the mountain itself was paid back as and when funds allowed. [8]

Eventually, as borrowing costs grew to encompass more and more of state revenue, dedicated agencies were established in order to manage the consolidated debt these states owed to their citizens and others:

During the last quarter of the thirteenth century the demand for loans on Venetian citizens grew: they had to deposit a part of their assessed wealth into state coffers, the sums were registered on public books, and tax revenues were devoted to paying interest. By 1274 Genoa adopted a similar measure, and some loans were consolidated and managed by a single state agency.

The republics of Venice and Genoa were thus the first to transform their floating debt into a consolidated debt; later, some Tuscan communities would follow suit.
The main features of such a system were extraordinary financing through irredeemable forced loans; moderate interest rates; credits that were heritable, negotiable and usable payment; an amount consolidated and managed by a specific authority; and specific tax revenues designated for paying interest. [9]

The Genoese set up a dedicated private bank to manage the public debt around 1400 called the Casa di San Giorgio. Today it is recognized by financial historians as the first modern state bank, and in time, it became more powerful than the state itself! Many European monarchs regularly used it for borrowing, and it even funded some of the first expeditions to the New World (Christopher Columbus’ childhood home was nearby):

On March 2 1408, eight men gathered in the great hall of the Casa di San Giorgio, a trading house on what was then the main street in Genoa, a few metres from where the waters of the Ligurian Sea lap the Italian shore. They were merchants, rich and powerful representatives of the city’s most influential families, and they were meeting to discuss a matter of the utmost gravity. The once-glorious republic of Genoa had fallen on hard times. After years of war with Venice and a crushing defeat at the battle of Chioggia in 1381, the state was effectively bankrupt. The task was to rescue it.

A few months earlier, towards the end of 1407, Genoa’s Council of Ancients had authorised the Casa di San Giorgio to carry out this job. It would be accomplished by creating a bank that would facilitate the repayment of Genoa’s debts in return for interest at 7 per cent and the right to collect taxes and customs owed to the city. The purpose of the meeting that spring day was to declare the Banco di San Giorgio open for business.

..The Banco di San Giorgio would, in time, become as powerful as the republic that created it – more powerful, according to Niccolò Machiavelli. It would survive for nearly 400 years. It would become the world’s first modern, public bank, not just a forerunner of the Bank of England but its prototype…in a short space of time, it became so entwined with the republic of Genoa that the bank and the state were indistinguishable.

Machiavelli described the relationship as “a state within a state”. The Banco di San Giorgio grew so influential that it replaced the Fuggers, the German banking dynasty, as the source of financing for Europe’s cash-starved, perpetually warring monarchs. A century and a half after it was created it had restored Genoese power and influence as a maritime and commercial state to such an extent that the period from 1557 to 1627 was termed the Age of Genoa by Fernand Braudel, the great French historian…Christopher Columbus, Genoa’s most illustrious son, would be a customer…[10]

The management of state finances became increasingly concentrated in the hands of a professional bureaucracy which was separate from direct control by the state. The republics made very sure that the money was paid back reliably. This made loaning to them much more reliable than loaning to monarchs, and they were able to raise more revenue for their operations:

One reason that this system worked so well was that they and a few other wealthy families also controlled the city’s government and hence its finances. This oligarchical power structure gave the bond market a firm political foundation. Unlike an unaccountable hereditary monarch, who might arbitrarily renege on his promises to pay his creditors, the people who issued the bonds in Florence were in large measure the same people who bought them. Not surprisingly, they therefore had a strong interest in seeing that their interest was paid. [11]

Because of their dependability, these government-backed IOUs soon became highly desirable places for rich merchants and nobles to store their wealth, much as they are today, secured by the government’s promises to pay. The guaranteed returns provided a reliable income stream for those able to purchase the bonds. The merchant classes and various institutions bought up the bonds and used them as collateral, endowments for charities, even gifts and dowries, and passed them down to their assignments and heirs.

Over time, as issuing bonds became more common, more and more people became dependent on bonds for their income. Much like today, many of the holders of bonds were not just individuals but institutions and endowments who relied on the bonds as a source of income. This parallels today, where holders of bonds are often institutional holders like retirement accounts and insurance companies:

Throughout the sixteenth and seventeenth centuries it seems that most of the bonds were in the hands of guilds and ecclesiastical and charitable institutions that looked to state debt to assure a sound, even if relatively low, return. The economic importance of the redistribution of money through the government debt can not be neglected…Both in Florence and Genoa, government creditors drew a significant share (about one-fifth) of their income from bonds. Accordingly, a flow of money spread through the city and revived the local economy. [12]

Initially, only citizens of the Republic could buy bonds, but over time, bonds were issued to outside sources. Nonetheless, it appears that the debt in Italian city-states was held mainly by its own citizens, and not by foreign creditors. Buying bonds was seen as a sort of civic duty for the city’s wealthy individuals:

To loan to the commune was regarded as a duty, part of belonging to the urban community. Loans were connected, to a certain extent, with the concept of charity and gifts to the res publica.

Some governments, such as Florence, at first forbade foreigners to held state bonds, while it seems that in Venice since the thirteenth century foreigners were allowed to buy government credits. Some devices, nevertheless, were adopted in order to bypass such prohibitions; the easiest solution was to grant citizenship to those who were willing to buy government bonds…At any rate, the foreign presence among bondholders seems to have been a limited phenomenon: by the early fifteenth century about one tenth of the Florentine debt was held by foreigners; in 1629, 92 percent of the principal of S. Giorgio belonged to Genoese citizens and institutions…Unlike some Italian princely states, such as Milan and the papal state, and German cities, the urban governments of Venice, Florence and Genoa succeeded in raising enormous amounts of money from their citizens and very seldom borrowed from foreigners…[13]

Today, governments sell bonds directly to the public in what is called a primary market. From there, they are traded by investors in secondary markets. At this time, there was no primary market for bonds—only a select few insiders could loan to governments. But soon a thriving secondary market emerged where such debts were bought and sold. The prices of bonds varied, depending on the reliability of the debtor (the state). Because interest was paid on the face value of the bond, if you could buy a bond on the cheap, you would be assured a nice payout. This was effectively an end-run around the Church’s ban on usury:

Quickly a market for Prestiti emerged, where holders who needed ready cash would trade them with people who had a surplus of cash and wanted to save. During times of peace and prosperity they had a high price, but during war and uncertainty, they traded at a low price.

For example, Venetian prestiti traded for their face value around 1340 when the Republic paid off a lot of the mons, but in 1465, during a disastrous war with the Ottoman Turks, they fell to 22% of face. The Florentine prestiti actually had a built in facility where a holder could go to the state and sell them for 28% of their face value, however their market price was never so low as to make this profitable.

The legitimacy of the prestati was debated by the canon lawyers. On the one hand the coupons, the regular cash payments can be seen as compensation for the forced nature of the original loan. The lender had no choice and so does suffer a loss. However, if a prestiti with a face of 100 ducats was sold for 22 ducats, the buyer would be receiving interest at a rate of 5∕22 = 23%; in what way had this buyer of the prestiti been forced to enter into the contract? An interest payment of 23% in these circumstances seemed to be “asking for more than what was given”.

Prestiti are important in that are one of the earliest representations of an actively traded financial instrument. The prestiti does not represent bushels of wheat or barrels of oil, it is a contract where by a state promises to pay a specified amount of money. Whether or not the state does pay out on the contract, is unknown and uncertain, hence the value of the contract is also unknown and uncertain. [14]

In the end, the ability to have people voluntarily lend to the government provided advantages that were simply too great to ignore. Such governments were able to raise large amounts of cash quickly; they were able to raise money from a much wider circle than just the immediate tax base; and they were able to overcome limitations in the amount of specie circulating. This made state borrowing very effective and the places that engaged in it very powerful. In addition, bonds provided reliable places for wealthy citizens to store wealth outside of banks, and the interest payments helped local economies flourish. Money was becoming an important source of military power, too. Luciano Pezzolo summarizes the advantages of bond issuance by Italian city-states:

First, the enormous concentration of capital in some Italian cities allowed governments to transform, through public credit, private wealth into military power, to build a territorial state, and to control a wider economic area…Italian governments collected money from taxpayers at 5 to 7 percent, whereas the major European monarchies of the Renaissance were compelled to borrow at a much higher price.

Second, the debts took on a political function. To be creditors in the government meant sharing the destiny of the regime, and consequently supporting it. In Florence, the Medicean regime tied itself to an oligarchy that profited from the management of government debt. Thus, debt helped create stability.

Third, the social structure was supported by state debt: the considerable bond income drawn by charitable and social institutions and redistributed it the poor maintained a paternalistic policy that was a pillar of the urban political and social system.

Fourth, both government bonds and interest provided an effective surrogate of cash money in the later Middle Ages during a period of bullion shortage. The trade of bonds and interest claims opened up sophisticated forms of speculation and implemented financial techniques that are quite familiar to modern brokers.

Finally, the means devised by governments to finance the deficit offered new forms of social security and investment (dowries, life annuities, lotteries) that are at the roots of [the] later financial system. [15]

In this, we can discern something like David Graeber’s military-coinage-slavery complex emerging around the bond markets:

1.) Governments would raise money for military operations by dedicating future expected revenue streams to loan repayments, effectively becoming debtors to their citizens. That is, they could borrow against future revenues.

2.) The proceeds from the territorial/commercial expansion would be used to pay interest on the loans.

3.) The interest money would then flow back into the domestic economy, causing economic expansion at home, as more people became dependent on the government debt as a store of value and a source of income.

4.) Economic expansion abroad and at home would allow governments to deliver better services to its citizens, ensuring broad popular support.

5.) The dependency on regular payouts by lenders would encourage them to support the political stability of the regime.

6.) City-states which avoided default were able to gain a fundraising advantage over their rivals. Hence, there was a strong incentive to make reliable payments and not to default.

Thus, the concept of the “national debt” was born. This gave rise to a brand new “money interest” whose wealth was held in government debt rather than coin.

Debt Financing Spreads to Northern Europe

Now contrast this with Northern Europe. Most nation-states were still under the feudal system. It would have made no sense for a ruler to borrow from himself, since they theoretically “owned” everything in the kingdom. Instead of borrowing from their citizens, therefore, these kingdoms continued to rely upon other sources of income.

Under the feudal system tax collection was highly decentralized and done mainly at the local level. Wealthy kingdoms, such as France, used tax farming (publican) methods very similar to those of ancient Rome:

Fiscal revenues consisted of a mixture of direct (income or wealth) taxes, indirect (consumption) taxes, and feudal dues arising from the royal demesne. The assessment and collection of these revenues was decentralized. For direct taxes, a global amount was set by the government, and then broken down into assessments for each province, where local authorities would proceed with the next level of assessment, and so on to the local level.

For indirect taxes, collection was carried out by tax farmers on behalf of the government. The procedure was much like the one in place since Medieval times for running the royal mints. The right to collect a given tax was auctioned to the highest bidder. The bidder offered a fixed annual payment to the king for the duration of the lease. Meanwhile, he took upon himself to collect the tax, hiring all the necessary employees. Any shortfall in revenues from the promised sum was made up by the entrepreneur; conversely, any revenue collected above and beyond the price of the lease was retained as profit by the entrepreneur…

Spending is decentralized as well to various treasurers. Each tax had an associated bureaucracy of collectors and treasurers, either government employees or officers (direct taxes) or employees of the tax farmer. The treasurers spent some of the monies they collected, upon presentation of payment orders emanating from the government, and turned over the remainder, if any, to the royal treasury in Paris. [16]

Although it’s anathema under modern economic dogma, government monopolies on various business activities were considered a legitimate way to raise revenue.

Government monopolies, such as salt and recently introduced tobacco, were also farmed out in the same fashion. Indeed, the ability to create monopolies was one of the king’s resources; one of the more outlandish examples being the exclusive right to sell snow and ice in the district of Paris, sold for 10,000L per year in 1701. [17]

Another method was through the sale of political offices. Governments would create offices and sell them at a profit, and the salary paid was essentially interest on the lump sum payment for the original position:

An officer was someone who held a government position not on commission or at the king’s leave, but as of right, and enjoyed various privileges attached to the position (in particular the collection of fees related to his activities). Offices were sold, and the king paid interest on the original sale price, which was called the wages of the office (gages). A wage increase was really a forced loan, requiring the officer to put up the additional capital. Officers could not be removed except for misconduct; however, the office itself could be abolished, as long as the king repaid the original sum. Thus, offices as a form of debt also carried the same repayment option as annuities. [18]

And, as in Italy, the census evolved into annuities which were sold by municipalities as a way of long-term borrowing.

Offices and annuities (which I will generically call bonds, and whose owners I will call bondholders) could be transferred or sold, but with fairly high transaction costs. Both were considered forms of real estate, and could be mortgaged. In the late 17th century the French government, like others in Europe, had begun experimenting with life annuities, tontines, and lottery loans, but on a limited basis, and had not yet issued bearer bonds. Even the short-term debt described above was registered in the sense that the payee’s name was on the instrument, and could be transferred only by endorsement.

A final form of borrowing combined tax creation and lending. The procedure consisted in creating a new tax for some limited time and immediately farming its collection in exchange for a single, lump-sum payment representing the tax’s net present value. [20]

Besides, absolute monarchs could always repudiate their debts, and there was not much recourse for creditors since monarchs had their own armies and made the laws. The kings who did take out loans for military campaigns ended up paying very high interest rates for this reason.

By the early sixteenth century, the Habsburg Emperor, French kings, and princes in the Low Countries had all affirmed their powers to regulate municipal public finances, especially rentes, and the municipal taxes that were used to pay annual rent charges. But this method of financing governments still remained municipal, because only municipalities sold rentes, so that the national institutions required for a funded, permanent public debt had yet to be created…the first national monarchy to establish a permanent, funded national debt based on rentes, by the early sixteenth century, was … the newly unified Habsburg kingdom of Spain.

Both the French and Spanish crowns sought to raise money … but they had to use towns as intermediaries. In the French case, funds were raised on behalf of the monarch by the Paris hôtel de ville-, in the Spanish case, royal juros had to be marketed through Genoa’s Casa di San Giorgio (a private syndicate that purchased the right to collect the city’s taxes) and Antwerp’s heurs, a forerunner of the modern stock market. Yet investors in royal debt had to be wary. Whereas towns, with their oligarchical forms of rule and locally held debts, had incentives not to default, the same was not true of absolute rulers. [21]

Despite this ability to borrow, by the 1500-1600’s France and Spain had become serial defaulters.

…the Spanish crown became a serial defaulter in the late sixteenth and seventeenth centuries, wholly or partially suspending payments to creditors in 1557 , 1560, 1575 , 1596, 1607, 1627 , 1647, 1652 and 1662. [22]

The Netherlands, by contrast, used these financial techniques to fund their war of independence from Spain and in the process became the financial center of northern Europe.

Part of the reason for Spain’s financial difficulties was the extreme costliness of trying and failing to bring to heel the rebellious provinces of the northern Netherlands, whose revolt against Spanish rule was a watershed in financial as well as political history. With their republican institutions, the United Provinces combined the advantages of the city state with the scale of a nation-state. They were able to finance their wars by developing Amsterdam as the market for a whole range of new securities: not only life and perpetual annuities, but also lottery loans (whereby investors bought a small probability of a large return). By 1650 there were more than 6 5,000 Dutch rentiers, men who had invested their capital in one or other of these debt instruments and thereby helped finance the long Dutch struggle to preserve their independence. [23]

The center of European trade moved from the Mediterranean to the North Atlantic starting in the mid-1400’s with the advent of pelagic shipping vessels and the discovery of new routes to Asia by circumnavigating Africa. Portugal and Spain took the lead here. Spain’s “discovery” of the American continent ensured that trade would now be centered on the Atlantic coast, and the Islamic trade in the Mediterranean withered and became less significant, especially after the fall of Constantinople to the Turks in 1453. Eventually, European maritime trade became centered in Antwerp. When the Spanish conquered the southern Netherlands, what we now call Belgium, in 1585, they took Antwerp, which was the main port for Northern Europe. Many of the more highly skilled merchants fled to Amsterdam, which would then become ground zero for the financial revolution.

The reason for the primacy of the Dutch Republic in trading and finance might simply boil down to geography. Holland and the Netherlands are below sea level, which is why they are called the Low Countries. The land had forcibly been reclaimed from the sea by dykes over the centuries. This made the Dutch dependent upon fishing, shipping and trading far more than just about anywhere else, since the water table was too high for farming and there was not much arable land. Yet at the same time the population density of these areas was quite high. So their entire economy had to be dependent almost exclusively on shipping and trade since there were no other options, unlike in France, Spain, Portugal and England.

The Dutch utilized much of the same methods of borrowing as the rest of Europe, but much more effectively:

The Netherlands successfully liberated itself from Spain between 1568 and 1648. The Dutch established the Dutch east India Company in 1602 and the Dutch West India Company in 1621. The Netherlands didn’t have to pay for an expensive court, fought their wars at home rather than abroad, profited from international trade, and saved money. The Amsterdam Exchange dealt not only in shares of the Dutch East India Company and Dutch West India Company, but in government bonds as well.

Most securities were in the form of Annuities issued by the individual provinces, the United Provinces and the towns. This is the essential way in which Dutch lending differed from Italian lending. The Italian credit system relied upon a system of private international banking. The Medicis and other commercial bankers would lend their funds to states, knowing the risks involved. The Italians also had officially chartered banks that intermediated deposits and loans.

Outside of the Italian city-states, loans to heads of state were basically personal loans that clearly ran the risk of default. Spanish, French and English kings borrowed when they had to, defaulted when they couldn’t pay, but had no system of drawing upon the savings of the public. The Dutch, on the other hand, developed state finance based upon the government’s ability to pledge its revenues against the annuities they had issued. Having no royal court, and relying upon local governments, the Dutch paid off loans on time with little risk of default. As risk declined, interest rates fell to 4%, the lowest they had ever been in history, and a rate consistent with the low level of default risk that governments enjoy today. [24]

The Dutch also set up a bourse where national debts could be traded as negotiable securities. They set up a state bank to manage trade. They also developed the modern corporation, where corporate shares were freely tradable, hence establishing the first stock market (the Amsterdam exchange).

The Dutch Republic became the main place where international debts could be bought and sold in secondary markets. While it was neither the first bank or exchange, what made it unique was the fact that this was consolidated in one specific location, with government backing, as well as the scale of operations. Securities from all over became speculative commodities. This was the beginning of trading debts and money that engendered speculative bubbles like Tulip mania. In fact, you could even gamble with assets that you didn’t actually own, setting up the stage for the modern Casino Capitalism.

The novelty at the beginning of the seventeenth century was the introduction of a stock market in Amsterdam. Government stocks and the prestigious shares in the Dutch East India Company had become the objects of speculation in a totally modern fashion. It is not quite accurate to call this the first stock market, as people often do. State loan stocks had been negotiable at a very early date in Venice, in Florence before 1328, and in Genoa, where there was an active markets in the luoghi and paghe of the Casa di San Giorgio, not to mention the Kuxen shares in the German mines which were quoted as early as the fifteenth century at the Leipzig fairs, the Spanish juros, the French rentes sur l’Hotel de Ville (municipal stocks) (I522) or the stock market in the Hanseatic towns from the fifteenth century. The statutes of Verona in 1318 confirm the existence of the settlement or forward market (mercato a termine). In 1428, the jurist, Bartolomeo de Bosco protested against the sale of forward loca in Genoa. All this evidence points to the Mediterranean as the cradle of the stock market.

But what was new in Amsterdam was the volume, the fluidity of the market and the publicity it received, and the speculative freedom of transactions. Frenetic gambling went on here – gaming for gaming’s sake: we should not forget that in about 1634, the tulip mania sweeping through Holland meant that a bulb ‘of no intrinsic value’ might be exchanged for ‘a new carriage, two grey horses and a complete harness’! Betting on shares however, in expert hands, could bring in a comfortable income… Exchanges and growing rich while the merchants said they Were becoming poorer. In every centre, Marseilles or London, paris or Lisbon, Nantes or Amsterdam, brokers, who were little hampered by the regulations, took many liberties with them.

But is is also true that speculation on the Amsterdam Stock Exchange had reached a degree of sophistication and abstraction which made it for many years a very special trading-centre of Europe, a place where people were not content simply to buy and sell shares, speculating on their possible rise or fall, but where one could by means of various ingenious combinations speculate without having any money or shares at all. This was where the brokers came into their own… All the same, such practices had not yet attained the scale they were to reach during the following century, from the time of the Seven Years War, with the increased speculation in shares in the British East India Company, the Bank of England and the South Sea, above all in English government loans…Share prices were not oficially published until 1747 however, whereas the Amsterdam Exchange had been billing commodity prices since 1585.

Several other changes took place as well. To resolve the multiple currencies circulating, state banks became established by governments, and monetary exchange ever more centered around bank credits rather than government-issued monies. You would deposit your coins in the bank and be given a credit for it, which would hold its value, protected from the arbitrary currency fluctuations decreed by sovereigns. Credit creation led to fractional reserve banking. Joint-stock companies were applied to banking, and even made loans to governments.

The seventeenth century saw the foundation of three distinctly novel institutions that, in their different ways, were intended to serve a public as well as a private financial function.

The Amsterdam Exchange Bank (Wisselbank) was set up in 1609 to resolve the practical problems created for merchants by the circulation of multiple currencies in the United Provinces, where there were no fewer than fourteen different mints and copious quantities of foreign coins. By allowing merchants to set up accounts denominated in a standardized currency, the Exchange Bank pioneered the system of cheques and direct debits or transfers that we take for granted today. This allowed more and more commercial transactions to take place without the need for the sums involved to materialize in actual coins. One merchant could make a payment to another simply by arranging for his account at the bank to be debited and the counterparty’s account to be credited.

The limitation on this system was simply that the Exchange Bank maintained something close to a 100 per cent ratio between its deposits and its reserves of precious metal and coin…A run on the bank was therefore a virtual impossibility, since it had enough cash on hand to satisfy nearly all of its depositors if, for some reason, they all wanted to liquidate their deposits at once. This made the bank secure, no doubt, but it prevented it performing what would now be seen as the defining characteristic of a bank, credit creation.

It was in Stockholm nearly half a century later, with the foundation of the Swedish Riksbank in 1656, that this barrier was broken through. Although it performed the same functions as the Dutch Wisselbank, the Riksbank was also designed to be a Lanebank, meaning that it engaged in lending as well as facilitating commercial payments. By lending amounts in excess of its metallic reserve, it may be said to have pioneered the practice of what would later be known as fractional reserve banking, exploiting the fact that money left on deposit could profitably be lent out to borrowers…

The third great innovation of the seventeenth century occurred in London with the creation of the Bank of England in 1694. Designed primarily to assist the government with war finance (by converting a portion of the government’s debt into shares in the bank), the Bank was endowed with distinctive privileges. From 1709 it was the only bank allowed to operate on a joint-stock basis; and from 1742 it established a partial monopoly on the issue of banknotes, a distinctive form of promissory note that did not bear interest, designed to facilitate payments without the need for both parties in a transaction to have current accounts. [25]

This last innovation – the use of private corporations such as banks to consolidate and manage the government’s debt, is at the heart of the modern financial system. The money we use is the government’s liability, backed by its ability to collect taxes. Yet now private banks would continue to be allowed to create credit by extending loans denominated in the same unit of account that the government required to pay the taxes, the ultimate form of financial settlement.

We’ll take a look at how that happened next time.


[1] Not used.
[2] Niall Ferguson; The Ascent of Money, p. 69
[3] William N. Goetzmann and K. Geert Rouwenhorst, eds.: The Origins of Value: The Financial Innovations that Created Modern Capital Markets, p. 147
[4] John H. Munro: The medieval origins of the ’Financial Revolution’: usury, rentes, and negotiablity. p. 514
[6] ibid.
[7] ibid.
[8] ibid.
[9] ibid.
[11] Niall Ferguson; The Ascent of Money, p. 72
[12] William N. Goetzmann and K. Geert Rouwenhorst, eds.: The Origins of Value: The Financial Innovations that Created Modern Capital Markets, p. 147
[13] ibid., p. 158
[15] William N. Goetzmann and K. Geert Rouwenhorst, eds.: The Origins of Value: The Financial Innovations that Created Modern Capital Markets, p. 163
[16] Francois R. Velde; Government Equity and Money: John Law’s System in 1720 France, p. 5-6
[17] Francois R. Velde; Government Equity and Money: John Law’s System in 1720 France, p. 5-6
[18] Francois R. Velde; Government Equity and Money: John Law’s System in 1720 France, p. 8
[19] Niall Ferguson; The Ascent of Money, pp. 73-74
[20] Francois R. Velde; Government Equity and Money: John Law’s System in 1720 France, p. 8
[21] John H. Munro: The medieval origins of the ’Financial Revolution’: usury, rentes, and negotiablity. p. 73-74
[22] Niall Ferguson; The Ascent of Money, p. 74
[23] Niall Ferguson; The Ascent of Money, pp. 74-75
[24a] Fernand Braudel: Civilization and Capitalism Volume 2: The Wheels of Commerce, pp 100-102
[25] Niall Ferguson; The Ascent of Money, p.Pp. 48-49

The Origin of Money 8 – Bills of Exchange and Banking

We saw last time that seignorage was used by medieval sovereigns to raise revenue. But this led to all sorts of problems because the values of the coinage were constantly being adjusted against the monetary standard. Even where there was a consistent monetary standard, there was no “official” currency equivalent to that standard, so a multitude of different coins circulated, with a multitude of shifting values. We also saw that when bullion and exchange values got too far out of whack, this led to chronic shortages of coins. This made trade difficult.

To overcome both the shortage of circulating money, and the constant variations in the value of the coins issued by states, what the merchant classes did was create a private, parallel currency system based around trade credit. This was done using bills of exchange, which were discounted by a clique of pan-European bankers centered mainly in Italy.

The net effect of this was the creation of a parallel money system based around debits and credits recorded by bankers in their ledgers using double-entry bookkeeping, without any coins changing hands. These credits would circulate as paper documents and be periodically settled at trade fairs. The bills could be converted into the local currencies at varying exchange rates. The volume of trade in late medieval Europe was far to great for the circulating coins to be adequate. Bills of exchange allowed trade to take place without using government-issued coins, which were clunky and cumbersome, not to mention uncertain.

The modern bill of exchange originated in Islamic trade and most certainly entered Europe through the Italian maritime city states during the thirteenth century.

In basic terms, exchange by bill required two networks – one of traders and one of bankers. A trader would draw a bill on a local banker, which he would then use as a means of payment for the specific goods imported from outside the local economy. The exporter of the goods would then present the bill for payment to his local representative of the banking network.

In their simplest form, the bills directly represented the value of the goods in transit. Their adoption facilitated long-distance trade, but there is nothing in these economic advantages themselves that would suggest that the bills would develop into credit money. Indeed, this is precisely what did not happen in Islam.

Exchange by bill per arte was the means by which the ‘nations’ of bankers enriched themselves by exploiting the unique opportunities afforded by the particular structure of the late mediaeval geopolitical and monetary systems. In doing so they expanded the early capitalist trading system. The bill of exchange system allowed an increase in trade without any increase in the volume or velocity of coins in the different countries; but this was an unintended systemic consequence of the exchange bankers’ entirely self-interested exploitation of the particular circumstances…Exchange by bill was also one of the practices that eventually led to issue of credit money by states…[1]

Bilateral exchange agreements had existed since Classical times, but until the advent of written contracts, they could not be disconnected from their original context and used as a means of third-party settlement.

Bills of exchange were documented in a “pure” unit of account, and thus were disconnected from precious metals and coins. That meant they could be issued without the limitations of gold and silver.

But until they could be used in the settlement of third-party debts outside of the limited network of exchange bankers, they could not function as a true currency. During the sixteenth century, some bills began to “leak” out of the banking system and be used in the settlement of other debts. Eventually a rule change allowed for the transferability of liabilities of the bill of exchange, making drawing a bill a more widely used means of payment after 1600.

But before any of this could happen, however, two relatively mundane and overlooked innovations had to be established. These were paper, and double-entry bookkeeping.

Paper and Double-Entry Bookkeeping

Before paper, people in medieval Europe wrote on parchment, which was made from the skins of animals. Parchment was expensive—a single bible required the skins of 250 sheep. However, most people didn’t couldn’t read (because they were farmers and didn’t need to), so there wasn’t much call for books. The main book was the Bible, meticulously handcopied by monks in monasteries, so the limited supply of writing media was no big deal.

Paper, like so many medieval innovations, was invented in China and came to Europe through the Arab world. It could be produced much more cheaply, and as a commercial class arose, the need for paper became more acute, leading to mass production:

The oldest known piece of paper was made in Shangsi Province in China around 49 BC. That’s about the same time sheepskin was replacing papyrus in the Roman world. So what is paper, really?

You make paper by spreading out a slurry of organic fibers and draining off the water. Paper is a kind of felt made of overlapping fibers. At first the Chinese made paper from hemp. They used it for wrapping and decoration — not for writing. They’d already been wrapping themselves in felt clothing.

In AD 105, one Ts’ai Lun used paper to replace bamboo blocks as a writing surface. He made it from fibers of bark, bamboo, and hemp. By AD 500, the Chinese had experimented with rattan and mulberry and had finally settled on bamboo paper…

Pergamon, in western Turkey, had become a parchment-based intellectual center, and parchment would become Europe’s writing material. But, in the 8th century, intellectual ascendancy passed to Baghdad, and it came to rest on the new writing medium of paper.

Historian Jonathan Bloom drives home the importance of that fact. Before we had cheap and abundant paper, arithmetic involved erasing and shifting numbers — operations that could be done on slate, but not paper. In AD 952, Arab mathematician al-Uqlidisi used Indian algorithms to create neat once-through methods that could be done on paper. Paper drove the creation of our methods for doing multiplication and long division.

The use of paper slowly crept westward. Cairo was making paper by the 10th century, Tunisia and Islamic Spain by the 11th. Paper didn’t cross the Pyrenees into Europe. Rather, it entered by way of Islamic Sicily. It was being made in Italy by 1268.

Both Hebrew and Islamic scripture had first been put on parchment. Both religions were reluctant to put scripture on anything so modest as paper, despite its strength and durability. The flow of paper into Europe was also slowed by Christians, who called it an infidel technology. Central Europe didn’t take up paper until the 14th century, and England only at the end of the 15th.

No. 894: INVENTING PRINTING (Engines of Our Ingenuity)

No. 1456: PAPER IN SAMARKAND (Engines of Our Ingenuity)

The mass production of paper may have spurred the development of mechanization of production in Europe:

When Christian Europeans finally did embrace paper, they created arguably the continent’s first heavy industry. Initially they made paper from pulped cotton. This requires some kind of chemical to break down the raw material. The ammonia from urine works well, so for centuries the paper mills of Europe stank as soiled garments were pulverized in a bath of human piss. The pulping also needs a tremendous amount of mechanical energy. One of the early sites of paper manufacture, Fabriano in Italy, used fast-flowing mountain streams to power massive drop hammers. Once finally macerated, the cellulose from the cotton breaks free and floats in a kind of thick soup. The soup is then thinly poured and allowed to dry where the cellulose reforms as a strong, flexible mat.

50 Things that made the modern economy – Paper (BBC)

One of the very first things the Europeans did on this new, cheap material was carry out mathematical operations with the new Hindu/Arabic number system which was being imported the Arab world. This was popularized by one Leonardo Bonacci of Pisa, better known as Fibonacci:

Leonardo’s father, Guglielmo Bonacci, was a merchant looking after the Pisan interests in the Algerian port of Bejaia. While we might not imagine that medieval finance was very sophisticated, we would be wrong. The historian Alfred Crosby describes a series of transactions undertaken by an Italian merchant, Datini, which, although they took place two hundred years later, would have been similar to the types of transactions Guglielmo Bonacci would have been involved in…Datini would have engaged in forward contracts, loan agreements and transactions in at least five currencies (Arogonese, Pisan, Florentine, Venetian, North African). To make a profit, he needed to be an expert at ‘commercial arithmetic’, or financial mathematics.

Leonardo was born in Pisa around 1170 and educated, not only in Bejaia but, as far afield as, Egypt, Syria, Constantinople and Provence. He would write a number of books on mathematics, but his first and most influential was the Liber Abaci (‘Book of Calculation’), which appeared in 1202. The Liber was heavily influenced by the Arabic book ‘The Comprehensive Book on Calculation by Completion and Balancing’ written around 825 CE by al-Khwarizmi, who was himself motivated to write the book because

men constantly require in cases of inheritance, legacies, partition, law-suites and trade [a number]

and his book provided the easiest way of arriving at that number, using al-gabr (‘restoration’) and al-muqabala (‘balancing’). Fibonacci collated these Arabic techniques into a single textbook for merchants…facing the increasingly complex financial instruments and transactions emerging at the time.

The impact of the Liber Abaci was enormous. Fibonacci became an adviser to the most powerful monarch of the time, Frederick II, Holy Roman Emperor and King of Sicily. More significant, Abaco or rekoning [sic] schools sprang up throughout Europe teaching apprentice merchants how to perform the various complex calculations needed to conduct their business. [Luca] Pacioli, who taught Leonardo da Vinci maths, was a well known graduate. Less well known is the fact that Copernicus came from a merchant family and in 1526, seventeen years before his more famous, “epoch-making” ‘On the Revolutions of the Heavenly Spheres’, he wrote ‘On the Minting of Coin’ about finance.

The practical usefulness of the reckoning schools was that, by using positional numbers and algebra, merchants could execute complex financial calculations that would typically include an illicit interest charge, hidden from the mathematically unsophisticated, university based, Church scholars. The merchant bankers were using mathematics to keep one step ahead of the regulator and the effectiveness of the non-university mathematics would not have been lost on the sharper scholastics, observing market practice.

Who was the first Quant? (Magic, Maths and Money)

It’s difficult to imagine the financial techniques noted above without the use of our arithmetic calculations being able to be carried out on cheap, accessible paper. These two inventions—paper and base-ten positional notation, were to be fused into the invention that made modern accounting possible: double-entry bookkeeping. This allowed accounts to once again be free of cumbersome gold and silver, or even hazelwood tally sticks.

You’re a medieval businessman — trading wool, pepper, cloth. Money is owed you, you have debts, and it all needs to be recorded. But there’s a problem. You track it with a diary, using Roman numerals. For arithmetic you have only some finger-counting methods. Your records would curl a modern accountant’s hair.

Alfred Crosby writes about an explosion of trade in the High Middle Ages. No longer was European trade a mere matter among farmers and villagers. By 1400, after the Plague, Europe was enormously capital-intensive — its ships moved goods internationally. None of that could happen without bringing money under control.

And so there developed, according to one historian, an atmosphere of calculation. Scholars were learning the new mathematics of algebra — that game where quantities are balanced across an equal sign — where quantities are positive on one side and negative on the other.

So Crosby goes looking for the invention of the new algebra of record keeping — the method called double-entry bookkeeping, where we list debits on one side and credits on the other. It’s the method marked by the absolute requirement that those two columns sum to zero. It’s the basis for tracking all our vast financial affairs today. He finds that, in 1300, a Florentine bookkeeper began listing debits and receipts in different ledgers. In 1340, an accountant from Genoa listed payouts and receipts on the left and right sides of a single page. For two centuries, the method slowly evolved.

No. 1229: DOUBLE-ENTRY BOOKKEEPING (Engines of Our Ingenuity)

Economic historians can pinpoint roughly when this occurred by using the record books of Francesco Datini, which survive to the present day. Datini’s books show the process of changing over from a diary to a sophisticated accounting of inputs and outputs, escribed on paper:

Datini’s meticulously kept account books span almost fifty years and clearly show the transition from single-entry to double-entry bookkeeping. His surviving ledgers from 1367 to 1372 do not use the double-entry system, while those from 1390 onward do.

Datini was innovative not just in his early adoption of the new style of bookkeeping; when in 1398 he and a partner opened a bank in Florence, they accepted a new form of payment only just coming into Europe: cheques. Like many business practices new to medieval Europe, the cheque had long been used by Arab merchants, who gave us the English word ‘cheque’. As early as the ninth century a Muslim merchant could cash a cheque in China drawn on his bank in Baghdad.

Datini also dealt in bills of exchange, which were notes for the exchange at a future date of florins for one of the many different currencies circulating in Europe at this time, when every city minted its own coins. These bills first appeared in Europe in the twelfth century and became a powerful new financing tool. In Datini’s day, charging interest on a loan at a fixed rate was outlawed by the Church, which deemed it usurious (demanding interest rates on loans was no permitted anywhere in Europe until 1545, when Henry VIII legalised it in England.) Bills of exchange became popular because, while they attracted a profit, the eluded the Church’s ban on usury.

Paradoxically, their popularity rested on their unreliability. Bills of exchange were effectively gambles on exchange-rate variations, and the chance of making a profit from them was so uncertain, so precarious, that the Church did not recognize their profits as interest and therefore allowed their use.

Datini was one of the new breed of Italian international merchant bankers who in the fourteenth century created vast trading empires and networks of credit from London to Constantinople. In the next century these Italian international merchant bankers, most notably the Medici of Florence, would use their immense wealth to commission works of architecture, art and scholarship–and effectively finance the Renaissance. [2]

It was in Venice that Arabic numerals and double-entry bookkeeping first became commonplace, hence this method came to be known throughout Europe as the “Venetian method” of finance:

…By the 1430s the merchants of Venice had perfected a system of double-entry account keeping in two columns which became known as bookkeeping el modo de vinegia or alla viniziana: the Venetian method. It is this Venetian method that, through its extraordinary resilience and mutability, has come down to us today, transformed over several centuries from a rudimentary business tool into an efficient calculating machine. [3]

This system was popularized and spread by Renaissance Man Luca Pacioli, a close friend and confidant of Leonardo da Vinci.

The man responsible for its codification and preservation–the author of the world’s first printed bookkeeping treatise–is Luca Bartolomeo de Pacioli, Renaissance mathematician, monk, magician, constant companion of Leonardo da Vinci. As the origin of all subsequent bookkeeping treatises throughout Europe, Luca Pacioli’s bookkeeping tract is not only the source of modern accounting but also ensured the medieval Venetian method survived into our own times. And so accountants have named Luca Pacioli the ‘father of accounting’…[4]

While this was the beginning of the sophisticated use of double-entry bookkeeping in Europe using ledgers and Arabic numerals, the concept goes back a long way:

Double entry is used because of the basic fact that every movement of value has two aspects, and both should be recorded in a proper set of accounts. For the giver of value the transaction is a credit, for by giving value he has earned a credit, he is owed the equivalent. For the receiver the transaction is a debit, because he is a debtor for the value.

The basic rules of double-entry bookkeeping are as follows:
1) debit value in, credit value out;
2) debit receipts, credit payments;
3) debit assets, credit liabilities;
4) debit losses, credit profits.

Every transaction has to be recorded twice, or a multiple of twice, in any set of accounts, each as a debit and as a credit. There are no exemptions to this rule. The need to record things twice seems to have occurred to those responsible for accounts at least 4,000 years ago. When a sheep was due to the temple from a peasant, the temple would record the sheep as owed by the peasant, and list it as a part of the income of the temple. When the sheep actually appeared, the peasant’s record would be credited, the debt wiped out, and the temple would add the sheep to the list of the sheep it owned.

The accounts of that era went no further along the road of developing the full sophistication of a modern accounting system, but, as has been mentioned earlier, the basic element of a double record seems to have been there. [5]

These techniques were deployed by Italian bankers all across the continent, and it’s no coincidence that most financial centers in Europe such as London have a “Lombard Street” in their financial district even today.

Finance and Science

According to Tim Johnson, the sophisticated mathematical techniques engendered by finance at this time pushed forward the development of mathematics in Northern Europe, and eventually led to the scientific revolution.

Fibonacci’s mathematics revolutionised European commercial practice. Prior to the Liber Abaci, merchants would perform a calculation, using an abacus, and then record the result. The introduction of Hindu/Arabic numbers in the Liber enabled merchants to “show their working” as an algorithm, and these algorithms could be discussed and improved upon. Essentially after Fibonacci mathematics ceased to be simply a technique of calculation but became a rhetorical device, a language of debate.

Lady Credit (Magic, Maths and Money)

Financial techniques had to be sophisticated, due to not only the church’s ban on usury but also the multitude of shifting currencies all over Western Europe. As Johnson notes, many of the mathematicians who made great strides in mathematics and physics at this time came out of the financial system. Leonardo of Pisa’s treatise on math was explicitly described as helping merchants and traders carry out business transactions. Many advancements were attempts at calculating probabilities.

The most influential single Abaco graduate has to be the Dutchman, Simon Stevin. Stevin, who was born in 1548 in Bruges, had originally worked as a merchant’s clerk in Antwerp then as a tax official back back in Bruges, where he wrote his first book Tafelen van Interest (‘Tables of interest’) which he published in 1582, before moving to the University of Leiden in 1583. About this time, he was appointed as adviser to Prince Mauritz of Nassau, who was leading the Dutch revolt against the Spanish, and eventually became the Dutch Republic’s Finance Minister.

As well as being active in government, Stevin carried out scientific experiments, and it is believed his bookeeping [sic] inspired his physics. His most famous experiment showed that heavy and light objects fell to the earth, in the absence of air resistance, at the same speed, an experiment that disproved a belief of Aristotle and is usually attributed to Galileo dropping things from the Tower at Pisa some years later.

One of Stevin’s most important posts was as the director of the Dutch Mathematical School, established in 1600 by Mauritz to train military engineers. In this capacity, in 1605, he published a textbook for the School, the ‘Mathematical Tradition’, which was a comprehensive overview of mathematics and included a whole section on ‘Accounting for Princes in the Italian manner’.

In a very short period, the Dutch Mathematical School became the centre for merchants’ training in north western Europe. This success, in turn, forced the authorities at the University of Leiden, which provided the School with its facilities, to take practical sciences, in particular maths, a bit more seriously. The Dutch Mathematical School would inspire the soldier Descartes to study maths and would train Huygens and a whole generation of European scientists.

In addition, it was Stevin’s promotion of the use of decimals, to aid accounting, that inspired Newton to think of functions as power-series, giving birth to the discipline of Analysis. Newton essentially finished his work in physics with the publication of Principia in 1687, his last significant work, Optiks, published in English in 1704, was based substantially on research undertaken in the early 1670s. After almost a decade of troubles, Newton moved into finance in April 1696 when he was appointed Warden of the Royal Mint. This was a largely ceremonial post, but Newton took to it so much that he became the Mint’s operational manager, its Master, in 1699.

Johnson attributes this to “reverse Quants”: instead of highly-trained mathematicians going to work in finance, at this time it financial mathematicians who went to work in academia. This allowed academia to push forward calculations that applied to the real world much further in Europe than elsewhere. Both Copernicus and Isaac Newton worked in the money system.

…the migration from academic careers in science to finance appear to be embedded, it is not a modern phenomena. However, possibly more significant is the less well-appreciated role of the ‘reverse-quants’ in the development of science. The influence is captured by events in France in 1304-1305 when economic instability and a market failure led the French King, Philip the Fair, to issue decrees fixing the price of bread. His decrees failed spectacularly, and this was seen by contemporary observers as evidence that ‘nature’ ruled, and not the authority of the King, and that market prices where an objective, ‘scientific’ measure. This enabled the likes of [Thomas] Bradwardine to re-assess the role of mathematics in science. Later, people trained in commercial arithmetic – financial mathematics – such as Copernicus and Stevin, were able to challenge the authority of Aristotelian science, and argue that the Earth revolved around the Sun and that heavy and light objects fall at the same speed.

We saw this before, when the use of money spurred the ideas of Greek science and philosophy–the idea of an unlimited, underlying substance underpinning all phenomena. He concludes:

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..

Who was the first Quant? (Magic, Maths and Money)

Some Debt Becomes Money

Alfred Mitchell-Innes described the “primitive law of commerce” as the exchange of a commodity for a credit. It was this that was at the heart of the private money creation scheme developed by Italian bankers. Debts and credits would always match up, meaning that theoretically the amount of money circulating would always equal the value of goods in transit.

It has been observed time and time again in the last 400 years that banks can create credit very freely, because they know that the drawing down of a loan automatically creates the deposit which balances the lending. When a bank has agreed to lend, the moment that the loan is drawn down by the payment of a cheque drawn upon it, a deposit to match it is also created at the receiving bank. Therefore the moment a borrowing takes effect, the saving to match it must arise as well. Even if the borrowing is to finance a capital project, the saving to match that capital investment must come into being automatically the moment the loan is drawn down to make a payment. As all money is effectively transferable debt, then money can be created by creating debt. Once it is realised that all money is some form of debt, it becomes obvious that money can only be created by creating debts…[6]

In the aggregate the accounts of banks are always in balance. So in theory a bank can grant unlimited loans in the knowledge that the amount lent will always appear somewhere as a deposit to balance the lending. The snag for the bank granting the loan would seem to be that the deposit might be made in another bank. Actually this is no problem at all. If one bank has a loan not backed by a deposit, another bank will have a deposit which is unlent. The two have to meet up; the bank with the excess lending will borrow, directly or indirectly, the excess deposit from the other bank….’A banker is one who centralises the debts of mankind and cancels them against one another. Banks are the clearing houses of commerce.’ To put it in the simple words of the treasurer of a large modern bank, ‘If we are short, we know the money has to be somewhere. Our only problem is to find it, and pay the price asked for it.'[7]

Felix Martin describes the basics of this system:

The system was simple. An Italian merchant wishing to import goods from a supplier in the Low Countries could purchase a credit note known as a bill of exchange from one of the great Florentine merchant houses. He might pay for this note either in the local sovereign money or on credit.

By buying such a bill of exchange, the Italian merchant achieved two things. First, he accessed the miracle of banking: he transformed an IOU backed by only his own puny word for one issued by a larger, more creditworthy house, which would be accepted across Europe. He transformed his private credit into money.

His second achievement was to exchange a credit for a certain amount of Florentine money into one for a certain amount of the money of the Low Countries where he was making his purchase. [8]

The bill of exchange itself was denominated in a private monetary unit created specially for the purpose by the network of exchange bankers: the ecu de marc. There were no sovereign coins denominated in this ecu de marc. It was a private monetary standard of the exchange-bankers alone, created so that they could haggle with one another over the value of the various sovereign moneys of the continent. Somewhat bizarrely to modem eyes, the foreign exchange transaction included in the bill of exchange therefore involved two exchange rates-one between Florentine money and the ecu de marc, the other between the ecu de marc and the money of the Low Countries…

The end result was to overcome a previously insurmountable series of obstacles. The exchange-banker would accept the importer’s credit in payment, knowing him and his business well from the local market. Meanwhile, the supplier in the Low Countries would accept the exchange-banker’s credit as payment, knowing that it would be good in its tum to settle either a bill for imports or for some local transaction-and satisfied that he was being paid in the local money.

Of course, the banker ran the risk that the exchange rates of the two sovereign moneys against the imaginary ecu de marc might change in between his issuing the bill of exchange and its being cashed in the Low Countries, but he made sure that his fees and commissions made this a risk worth taking. [9]

This wasn’t a sideshow: vast amounts of trade were conducted all over the continent using this method. This puts a wrinkle in the whole “money is gold” approach. With the bills of exchange we see that, fundamentally, money is credit and it always had been. From the stone money of Yap, to the tally sticks of Europe, we see that:

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: Debts and credits are perpetually trying to get into touch with one another, so that they may be written off against each other, and it is the business of the banker to bring them together. [10]

This is the essence of banking. As Felix Martin notes, “Strip away all the mystery of banking, and what are left with is an institution that matched debts and credits. It makes money by one of two ways: by discounting bills and by issuing loans.”

Here’s Alfred Mitchell-Innes description of the process of discounting bills of exchange. You might have to reread this a number of times in order to “get it”; I know I did! But once you do, you’ll see that it’s clear that this is the underlying process behind money and banking, and not storing or exchanging gold and silver:

The process of discounting bills is as follows: A sells goods to B, C and D, who thereby become A’s debtors and give him their acknowledgments of indebtedness, which are technically called bills of exchange, or more shortly bills. That is to say A acquires a credit on B, C and D.

A buys goods from E, F and G and gives his bill to each in payment. That is to say E, F and G have acquired credits on A. If B, C and D could sell goods to E, F and G and take in payment the bills given by A, they could then present these bills to A and by so doing release themselves from their debt. So long as trade takes place in a small circle, say in one village or in a small group of near-by villages, B, C and D might be able to get hold of the bills in the possession of E, F and G.

But as soon as commerce widened out, and the various debtors and creditors lived far apart and were unacquainted with one another, it is obvious that without some system of centralizing debts and credits commerce would not go on. Then arose the merchant or banker, the latter being merely a more specialized variety of the former.

The banker buys from A the bills held by him on B, C and D, and A now becomes the creditor of the banker, the latter in his turn becoming the creditor of B, C and D. A’s credit on the banker is called his deposit and he is called a depositor. E, F and G also sell to the banker the bills which they hold on A, and when they become due the banker debits A with the amount thus cancelling his former credit. A’s debts and credits have been “cleared,” and his name drops out, leaving B, C and D as debtors to the bank and E, F and G as the corresponding creditors.

Meanwhile B, C and D have been doing business and in payment of sales which they have made, they receive bills on H, I and K. When their original bills held by the banker become due, they sell to him the bills which H, I and K have given them, and which balance their debt. Thus their debts and credits are “cleared” in their turn, and their names drop out, leaving H, I and K as debtors and E, F and G as creditors of the bank and so on.

The modern bill is the lineal descendant of the medieval tally, and the more ancient Babylonian clay tablet…[11]

Loans are simply a variation on the same process, except they anticipate future sales:

Now let us see how the same result is reached by means of a loan instead of by taking the purchaser’s bill and selling it to the banker. In this case the banking operation, instead of following the sale and purchase, anticipates it. B, C and D before buying the goods they require make an agreement with the-banker by which he undertakes to become the debtor of A in their place, while they at the same time agree to become the debtors of the banker: Having made this agreement B, C and D make their purchases from A and instead of giving him their bills which he sells to the banker, they give him a bill direct on the banker. These bills of exchange on a banker are called cheques or drafts.

If this is familiar, it should be. As far back as the ancient Near East, promissory notes promised not to pay a specific person, but the bearer of the financial instrument (usually a stone tablet). This meant that liabilities could be transferred, and the stone tablet became a kind of proto-money, without the need of any sort of circulating medium like coins. As long as there was a unit of account, an agreement, and away for debts and credits to pair up, commerce could take place. The antecedent to the Bill of Exchange already existed in Babylon in 2500 B.C.:

The lending system of ancient Babylon was evidently quite sophisticated. Debts were transferable, hence ‘pay the bearer’ rather than a named creditor. Clay receipts or drafts were issued to those who deposited grain or other commodities at royal palaces or temples. Borrowers were expected to pay interest (a concept which was probably derived from the natural increase of a herd of livestock), at rates that were often as high as 20 percent. Mathematical exercises from the reign of Hammurabi (1792-1750 BC) suggest that something like compound interest could be charged on long-term loans…

It would not be quite correct to say that credit was invented in ancient Mesopotamia. Most Babylonian loans were simple advances from royal or religious storehouses. Credit was not being created in the modern sense…Nevertheless, this was an important beginning. Without the foundation of borrowing and lending, the economic history of our world would scarcely have got off the ground. And without the ever-growing network of relationships between creditors and debtors, today’s global economy would grind to a halt…[13]

As Geoffrey Gardiner notes, “If an obligation is assignable, it can be used both as a medium of exchange and as a store of value. If the obligation is not only assignable but is expressed in terms of the standard measure of value, it can properly be regarded as money…by nature all money is assignable debt. A pound note is theoretically a debt of the Bank of England. A bank deposit is a debt of the bank. A holding of gold is a portable form of debt.” [12] In fact, he argues that monetization of trade credit was the primary form of money since the very beginnings of civilization, a role that has been tragically ignored by conventional economists due to their focus on precious metals:

The process of converting a debt into a means of exchange can be called ‘monetising debts.’ If one looks at the history of economics one can surely see that the monetising of debts, usually trade debts, has been the most important process, the most important invention, in the history of commerce, ever since differentiation of labour first took place sometime in prehistory. One must agree with Mitchell Innes that gold and silver were not the essentials of a money system. That role was fulfilled by the documentary credit which originated in trade credit [14]

The petty loan sharks and money changers like the Medici scaled up to become rich and influential banking houses by using the power of the Venetian method and bills of exchange to underwrite international commerce.

In 1385 Giovanni [De Medici] became manager of the Roman branch of the bank run by his relation Vieri di Cambio de’ Medici, a moneylender in Florence. In Rome, Giovanni built up his reputation as a currency trader. The papacy was in many ways the ideal client, given the number of different currencies flowing in and out of the Vatican’s coffers. As we have seen, this was an age of multiple systems of coinage, some gold, some silver, some base metal, so that any long-distance trade or tax payment was complicated by the need to convert from one currency to another…

Of particular importance in the Medici’s early business were the bills of exchange (cambium per literas) that had developed in the course of the Middle Ages as a way of financing trade. If one merchant owed another a sum that could not be paid in cash until the conclusion of a transaction some months hence, the creditor could draw a bill on the debtor and either use the bill as a means of payment in its own right or obtain cash for it at a discount from a banker willing to act as broker.

Whereas the charging of interest was condemned as usury by the Church, there was nothing to prevent a shrewd trader making profits on such transactions. That was the essence of the Medici business. There were no cheques; instructions were given orally and written in the bank’s books. There was no interest; depositors were given discrezione (in proportion to the annual profits of the firm) to compensate them for risking their money. [15]

Though others had tried before them, the Medici were the first bankers to make the transition from financial success to hereditary status and power. They achieved this by learning a crucial lesson: in finance small is seldom beautiful. By making their bank bigger and more diversified than any previous financial institution, they found a way of spreading their risks. And by engaging in currency trading as well as lending, they reduced their vulnerability to defaults. [16]

In time, bills of exchange became disconnected from the initial issuer and the connection to specific goods. allowing it to circulate as proto-money. What really made bills of exchange into money was a change in the law allowing for its transferability. The Joint Liability Rule meant that the bill would always find someone willing to cover its liability, preventing the bills from becoming worthless. Bills began to spread beyond just the bilateral transactions mediated by merchant bankers thanks to the Joint Liability Rule:

“The term Bill of Exchange (BofE) refers to a financial instrument whereby a merchant (the issuer) ordered his agent abroad (the payer) to make a payment in a different currency on his behalf to another merchant (the beneficiary), often in a third location, at a set date in the future. The beneficiary could further transfer his claim to another party, an endorser, in exchange for currency, debt or merchandise.

…a seventeenth century legal innovation, the Joint Liability Rule (JLR), enabled the medieval BofE to develop into the dominant means of payment and credit in the early modern period. The JLR specified that in case of default, all endorsers, in addition to the issuer and payer, could be held legally liable for reimbursement. Through the endorsement on the back of the bill, each successive endorser not only surrendered his financial claim to the bill but also acknowledged his full liability for reimbursement in the event of default.

…the powerful mechanism of Joint Liability permitted merchants to conduct a larger volume of trade through BofE than would have been possible otherwise. My findings uncovered an European-wide and anonymous market for bills of exchange that provided liquidity and credit to a local merchant house. Bills originated and were settled in a geographic area that extended all over Europe, north of Africa, Ottoman Empire up to Syria, and the Caribbean Islands. Despite evidence of ongoing problems of adverse selection and moral hazard, I showed that bills worked to broaden trade in the sense that agents used them across business networks…

Bills of exchange displaced state currencies for the payment among the merchant classes. In essence, it was a competing currency system run through private banks, and one that posed a threat to state finance as more and more capital concentrated in the hands of the merchants.

My Fair Lady

In Babylonia, debt and credits were matched up by the temples. In Rome, they were matched up in the banks along the Via Sacra. In the Middle Ages, they were matched up at the great trade fairs.

Economic historians look at the great trade fairs of the middle ages which took place in the towns like Champagne, Lyon and Piacenza as the beginnings of capitalism. Goods were brought from all over the world and sold to a new class of wealthy townsfolk, i.e. the burghers or “bourgeoisie” who relied on money transactions rather than social relations to conduct their business affairs. And they were always looking to increase their money. In these “free towns,” the feudal system disintegrated, and social relations were coordinated by money and prices. Most medieval free cities had a market, a mint, and a fairground. They also had a class of money-changers who would eventually become merchant bankers.

The debts and credits were settled at the conto, which was held on the final day of the fairs:

As they continually wrote and accepted bills of exchange to finance trade between the great European cities, the exchange bankers would accumulate credit and debit balances.

The circle of exchange-bankers was a close-knit one, and willingness to allow outstanding balances to build up was therefore high. Nevertheless, to ensure a clear picture of who owed what to whom, it was necessary to have periodic offsets. These could be done bilaterally on an ad hoc basis; but the regular fairs provided a natural opportunity for a more generalised clearing-and this is precisely what they gradually became.

Every quarter, the clique of great merchant houses would meet at the central fair of Lyons in order to square their books. On the first two days of the fair there was a frenzy of buying and selling, of writing new bills or cancelling old ones, at the end of which all delegates’ books were closed for the quarter and the resulting balances between the houses were verified. The third day-the of Exchange” – was the heart of proceedings. The exclusive cadre of exchange-bankers would convene alone to agree on the conto: the schedule of exchange rates between the ecu de marc and the various sovereign moneys of Europe.

This schedule was the pivot of the entire financial system, since it was at these exchange rates that any outstanding balances had to be settled on the final day of the fair the “Day of Payments”-either by agreement to carry over balances to the next settlement date, or by payment in cash. [17]

In fact, it is sometimes argued that the primary purpose of the fairs was not buying and selling at all! Rather, periodic trade fairs originated as meeting places where debt and credits were assessed and settled. Over time, an ever-increasing trade in goods grew up around them, which eventually came to obscure the historical origins of the fairs.  In other words, the buying and selling was a peripheral development to the main activity of settling accounts. It was not gold or silver that was changing hands, so much as trade credits!

In these “economic zones” market exchanges prevailed, walled off by authorities through strict laws and regulations from the prevailing social forms of the countryside, which were more based in custom and tradition. Far from being “free trade,” such places were heavily regulated by authorities to ensure fair dealing.

Such concepts go back very far indeed, all the way back to the ritual temples and plazas of the Stone Age where suchexchanges took place. We’ve seen that feasting events were typically where the settling of debts and credits took place in pre-agricultural societies, for example the Sepik Coast Exchange in Papua New Guinea. In one memorable passage, Alfred Mitchell-Innes describes the role of fairs from ancient times in the development of money and commerce:

The clearing houses of old were the great periodical fairs, whither went merchants great and small, bringing with them their tallies, to settle their mutual debts and credits…The origin of the fairs…is lost in the mists of antiquity. Most of the charters of which we have record, granting to feudal lords the right to hold a fair, stipulate for the maintenance of the ancient customs of the fairs, thus showing that they dated from before the charter which merely legalized the position of the lord or granted him a monopoly. So important were these fairs that the person and property of merchants traveling to them was everywhere held sacred. During war, safe conducts were granted to them by the princes through whose territory they had to pass and severe punishment was inflicted for violence offered to them on the road.

It was a very general practice in drawing up contracts, to make debts payable at one or other of the fairs, and the general clearance at which the debts were paid was called the pagamentum. Nor was the custom of holding fairs confined to medieval Europe. They were held in ancient Greece under the name of panegyris and in Rome they were called nundinae, a name which in the middle ages was also frequently used. They are known to have been held in Mesopotamia and in India. In Mexico they are recorded by the historians of the conquest, and not many years ago at the fairs of Egypt, customs might have been seen which were known to Herodotus.

At some fairs no other business was done except the settlement of debts and credits, but in most a brisk retail trade was carried on. Little by little as governments developed their postal systems and powerful banking corporations grew up, the value of fairs as clearing houses dwindled, and they ceased to be frequented for that purpose, long remaining as nothing but festive gatherings until at last there linger but few, and those a mere shadow of their golden greatness.

The relation between religion and finance is significant…The fairs of Europe were held in front of the churches, and were called by the names of the Saints, on or around whose festival they were held. In Amsterdam the Bourse, was established in front of or, in bad weather, in one of the churches. They were a strange jumble, these old fairs, of finance and trading and religion and orgy…There is little doubt to my mind that the religious festival and the settlement of debts were the origin of all fairs and that the commerce which was there carried on was a later development. If this is true, the connection between religion and the payment of debts is an additional indication if any were needed, of the extreme antiquity of credit. [18]

The great French historian Fernand Braudel describes the role these fairs played in the Middle Ages in the transition from feudalism to capitalism:

the real business of the fairs, economically speaking, was the activity of the great merchant houses. They it was who perfected this instrument and made the fairs the meeting-place for large-scale trade. Did the fairs invent, or re-invent credit?…it is certainly the case that the fairs developed the use of credit… The fairs were effectively a settling of accounts, in which debts met and cancelled each other out, melting like snow in the sun: such were the miracles of scontro, compensation. A hundred thousand or so ‘ecus d’ or en or’  – that is real coins – might at the clearing-house of Lyons settle business worth millions; all the more so as a good part of the remaining debts would be settled either by a promise of payment on another exchange (a bill of exchange) or by carrying over payment until the next fair: this was the deposito which was usually paid for at 10% a year ‘(2,5% for three months). So the fair itself created credit.

If the fair is envisaged as a pyramid, the base consists of the many minor transactions in local goods, usually perishable and cheap, then one moves up towards the luxury goods, expensive and transported from far away: at the very top of the pyramid came the active money market without which business could not be done at all- or any rate not at the same pace. It does seem that the fairs were developing in such way as, on the whole, to concentrate on credit rather than commodities, on the tip of the pyramid rather than the base. [19]

This goes to our core point: money is transferable credit (or debt). Once these debits and credits could circulate, that is, pass from once person to another, then you’ve got money. Once again, money is a tool to discharge social obligations, in this case, it allowed merchants and creditors to settle their accounts with one other.

These fairs took place all over Europe, but typically one major “financial center” for these dominated, the location of which changed over time with the volume of trade. Eventually, as trade expanded, the fairs declined, replaced by permanent institutions located in the trading cities. The first place this happened was Amsterdam in the Netherlands. Amsterdam established a permanent merchant bank. It would later establish the first joint-stock companies and stock market as well (the Amsterdam Exchange).

The fairs were linked together, and communicated with each other. Whether handling goods or credit” they had been organized to make circulation easier…Goods, money and credit were caught up in this circular movement. Money was of course at the same time providing the energy for other, larger circuits and usually tended towards a central point, from which it would set off again. In the West, where a dear recovery began with the eleventh century, ‘ .. one centre finally came to dominate the European system of payments. In the thirteenth century it was the Champagne fairs…the system reconstituted itself as best it could around Geneva in the fifteenth century, then at Lyons; and as the sixteenth century drew to a close, around the Piacenza fairs, that is around Genoa. Nothing so much reveals the functions of these successive systems as the breaks marking the changeover from one to another.

After 1622 however, no single fair would ever constitute the obligatory centre of economic life, dominating the rest, For it was now that Amsterdam, which had never really been a city of fairs, began to assert itself, taking over the previous superiority of Antwerp: it was becoming organized as a permanent commercial and financial centre. The fortune of Amsterdam marks the decline if not of the commodity fairs of Europe, at any rate of the great credit fairs. The age of fairs had seen its best days. [20]

The place where payments cleared passed from itinerant bankers at fairs to the stately colonnaded buildings in classical style as commerce became ever-more important to the European economy. Once banks became essential to commerce, they eventually became essential to states to conduct their fiscal operations as well. The modern world begins when governments access the miracle of banking to fund their own operations, especially war funding. In so doing, they caused private banknotes to become “official” currencies, backed by the state’s debt.

This happened first in the Italian City-states immediately prior to the Renaissance during 1100-1400. These city states, run by merchants and bankers, turned to the burgeoning financial markets to fund their operations, especially wars—remember that soldiers are mainly professional mercenaries at this time, and not citizen-soldiers (which comes under Napoleon). So any aspiring empire needed money to pay for war and mercenaries.

The way their got it was to borrow from their wealthiest citizens. And in so doing, they created the notion of “national debt.” That’s what we’ll be looking at next time.


[1] Wray; credit and state theory of Money, pp. 198-199

[2] Jane Gleeson-White; Double Entry: How the Merchants of Venice Created Modern Finance, pp.24-26

[3] Jane Gleeson-White; Double Entry: How the Merchants of Venice Created Modern Finance, pp.24-26

[4] Jane Gleeson-White; Double Entry: How the Merchants of Venice Created Modern Finance, pp. 27-28

[5] Wray; credit and state theory of Money, p. 134

[6] Wray; credit and state theory of Money, pp. 151-152

[7] Wray; credit and state theory of Money, pp. 136-137

[8] Felix Martin; Money: The Unauthorized Biography, p. 106

[9] Felix Martin; Money: The Unauthorized Biography, pp 106-107

[10] Wray; Credit and state theory of Money, pp. 239

[11] Wray; Credit and state theory of Money, pp. 45-46

[12] Wray; Credit and state theory of Money, p. 132

[13] Niall Ferguson; The Ascent of Money, p. 30-31

[14] Wray; Credit and state theory of Money, pp. 169-170

[15] Niall Ferguson; The Ascent of Money, p. 43

[16] Niall Ferguson; The Ascent of Money, pp. 47-48

[17] Felix Martin; Money: The Unauthorized Biography, p. 107

[18] Wray; Credit and state theory of Money, pp. 40-41

[19] Fernand Braudel; The Wheels of Commerce, pp. 90-91

[20] Fernand Braudel; The Wheels of Commerce, p. 92

The Origin of Money 7 – Medieval Money

The Great Recoinage

As this article notes, the Crisis of the Third Century caused a disruption in Rome’s internal trade network. The effect this had was a shrinking of markets and reversion to more locally-based economies as the Roman political system broke down. Although it recovered somewhat under Diocletian, the path toward the Middle Ages was being paved.

For many centuries after the fall of Rome, during the so-called “Dark Ages”, the use of money and markets all but disappeared along with the Roman state. This alone should be proof that these are not ‘natural’ phenomena separate from political governance, but rather enabled and fostered by them. If libertarians are correct, we would have expected money and trade to flourish in the absence of “oppressive” taxes and government regulations.

Instead, what happened was a collapse of local and international trade and a dramatic fall in living standards. People returned to subsistence farming, economies reverted to barter, advanced technology was lost (e.g. concrete, wheel-turned pottery), and the Roman patronage system mutated into feudalism, with the villas transitioning into the self-sufficient manors of medieval Manorialism:

Immediately after the fall of Rome in the middle of the fourth century AD, its money disappeared. From a narrowly economic standpoint, the demand for media of exchange and payment sharply contracted. Imperial trade and production diminished, and mercenary soldiers’ wages no longer needed to be paid. But most importantly, the fiscal flows that constituted the social and political relations of the Roman Empire ceased to exist.

This situation held particularly on the Celtic margins of the former empire, where coinage became redundant for two centuries after having been in continuous use for over five hundred years. As the archaeological finds of large ‘hoards’ of money imply, it was no longer routinely needed and, given the very small silver content of the coins of the late Roman empire, it is likely that they were literally dumped. The two basic functions of money as a unit of account and means of payment were unable to operate. The social and political system that was ‘accounted for’ by the abstract money of account no longer existed. [1]

During the Carolingian Renaissance after A.D. 800, there was a “great recoinage” of Europe as coins were introduced back into circulation by Charlemagne. What he did was to reintroduce the standard units of account–Pounds, shillings and pence (we’ll use English terms, but the French equivalents are livre, sous and deniers). Much like the Mesopotamians earlier, the unit of account was fixed against a weight of silver; one livre was equivalent to one pound of silver. What he did not do, however, was introduce a “standard” currency that was equivalent to these units.

Instead Charlemagne licensed out the exclusive right to mint coins and issue money to his vassals; one might call this an early form of “franchising.” The metallic content of the coins varied greatly , but what they were worth was dictated by the ruling body that issued them in reference to the standard. If the ruler said their coins were worth, say, 1/2 a livre, or one sous, then that’s what they were worth, and so on. What this meant was that, although the standard was consistent throughout the realm, the worth of the coins issued by various mints was all over the board:

…the use of a standard money of account across the Christian ecumene did indeed eventually provide the foundation for a trans-European market… three kinds of coin were struck, but with countless variations in weight and fineness – by scores of authorities in many hundreds of mints…These circulated freely across European Latin Christendom; and all were evaluated against a benchmark money of account…[2]

Once again, the standard units of account, as determined by governments, is what allowed market transactions to take place by fixing the prices of things against one another for taxation purposes:

Charlemagne reinvented the Roman empire in the West, and part of this process was the re-introduction of the Roman monetary system into an ‘un-monetised’ feudal economy where exchange was rare, that is one without currency circulating.

Because coin was scarce, Charlemagne’s bureaucrats specified the exchange rate between common goods and money in order that the taxpayers could pay there [sic] tax. If you were a small holder and had been assessed for one shilling tax, if you did not engage in the market economy you would not have a shilling, so the government told you a shilling equated to a cow.

This fixed the prices of cows, an unintended consequence, since Charlemagne’s bureaucrats probably couldn’t care less about what was happening in the market place. However the impact was enormous – there was no incentive to move goods from places of abundance to places of scarcity…

Lady Credit (Magic, Maths and Money)

A standard unit of account allowed for taxes to be assessed and market transactions to occur, but because there were so many different types of currencies circulating at so many different values, it became very hard for commerce to take place, especially between different political entities. In the old Roman Empire, the same coins were used throughout the empire. In the fractured and decentralized political landscape of post-collapse Europe, however, hundreds of coins circulated with different values, since there was no single, unified, political authority to guarantee their value:

The persistence of Charlemagne’s monetary units formed the basis for this extensive remonetisation, but it also gave rise to its chaotic practical organisation. Whereas the original introduction of money to Europe had taken place under the auspices of a unified Roman political authority, its reconstitution was the definition of piecemeal…[3]

Throughout the feudal period the right of coinage belonged not alone to the king but was also an appanage of feudal overlordship, so that in France there were beside the royal monies, eighty different coinages, issued by barons and ecclesiastics, each entirely independent of the other, and differing as to weights, denominations, alloys and types.

There were, at the same time, more than twenty different monetary systems. Each system had as its unit the livre, with its subdivisions, the sol and the denier, but the value of the livre varied in different parts of the country and each different livre had its distinguishing title, such as livre parisis, livre tournois, livre estevenante, etc.[4]

What a mess! This meant in practice that people a hard time knowing what their money was “really” worth at any given point in time. It made money exchanges and market transactions very difficult.

Now, there are a few crucial concepts you need to understand in order to understand the history of money at this time.

The first thing to understand is this: coins have both an exchange value and a commodity value. Normally the exchange value is greater than the commodity value. The difference in these two is called seignorage. Because sovereigns had the exclusive right to issue coins, the difference between these two values was major source of revenue for medieval monarchs:

Seigniorage, also spelled seignorage or seigneurage (from Old French seigneuriage “right of the lord (seigneur) to mint money”), is the difference between the value of money and the cost to produce and distribute it. Seigniorage derived from specie—metal coins—is a tax, added to the total price of a coin (metal content and production costs), that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area.

Seigniorage (Wikipedia)

The coin is a token with its exchange value set by fiat. It’s value comes from it’s ability to pay taxes to the government. The commodity value, by contrast, is set by the market for that particular commodity (gold, silver, copper, bronze, nickel, etc.):

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).

Mysteries of Money (The Baseline Scenario)

In other words, coins were a fiat currency! The sovereign reserved the right to dictate what the coins were worth. For example, In Renaissance England:

A central principle of late medieval English law, enshrined in the early 17th-century Case of Mixed Money, was that the sovereign had the absolute right to dictate the value of money:

“the king by his prerogative may make money of what matter and form he pleaseth, and establish the standard of it, so may he change his money in substance and impression, and enhance or debase the value of it, or entirely decry and annul it . . .”

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.

Mysteries of Money (The Baseline Scenario)

The second thing to understand about this period is that the circulating media of exchange did not match the units of account. Think of a dollar or Euro coin (which Europe commonly uses). It has “one dollar” or “one Euro” inscribed on it. It is always worth one Euro. Devaluing the currency means devaluing the coin.

Medieval money, by contrast, did not have a face value written on it. Rather, what the coin was worth according to the standard units of account (pounds, shillings, pence) was determined and published by the state. So you could use pretty much whatever coins you wanted to pay for stuff, as long as the published values added up to the total.

People used all sorts of coins to settle accounts, and coins were constantly being evaluated against one another. Much of the faith in currency was determined by the finances of the issuing state. If their finances were not sound (or if they were in danger of being invaded or overthrown), then their currency wasn’t worth very much. Coins’ value wasn’t determined primarily by their metal content, although coins with more precious metal might retain more value just because the bullion in them was worth something.

The biggest difference is that in the medieval age, base money did not have numbers on it. Specifically, if you look at an old coin you might see a number in the monarch’s name (say Henry the VIII) or the date which it was minted, but there are no digits on either the coin’s face or obverse side indicating how many pounds or shillings that coin is worth. Without denominations, members of a certain coin type could only be identified by their unique size, metal content, and design, with each type being known in common speech by its nickname, like testoon, penny, crown, guinea, or groat. Odd, right?

By contrast, today we put numbers directly on base money. Take the Harriett Tubman note, for example, which has “$20” printed on it or the Canadian loonie which has “1 dollar” etched on one side.

…Back then, sticker prices and debts were not expressed in terms of coins (say groats or testoons) but were always advertised in the abstract unit of account, pounds (£), where a pound was divisible into 20 shillings (s) and each shilling into 12 pence (d). Say that Joe wants to settle a debt with Æthelred for £2 10s (or 2.5 pounds). In our modern monetary system, it would be simple to do this deal. Hand over two coins with “1 pound” inscribed on it and ten coins with “one shilling” on them. Without numbers on coins, however, how would Joe and Æthelred have known how many coins would do the trick?

To solve this problem, Joe and Æthelred would have simply referred to royal proclamation that sets how many coins of each type comprised a pound and a shilling. Say Joe has a handful of groats and testoons. If the king or queen has proclaimed that the official rate is thirty testoons to the pound and eighty groats in a pound, then Joe can settle the £2 10s debt with 60 testoons and 40 groats or any another combination, say 75 testoons. If the monarch were to issue a new proclamation that changes this rating, say a pound now contains forty testoons, then Joe’s debt to Æthelred must be settled with 100 testoons, not 75.

What makes medieval money different from modern money? (Moneyness)

The third major thing to understand is that medieval rulers used their power to dictate the value of currency to raise revenue when they needed to. This served as a proxy form of taxation. In fact, it was the major way the governments of the period raised revenue, since actual tax collection was costly and inefficient in this period as we saw above.

When the state’s coffers were bare, due to the need to pay mercenaries and wage war, or just due to the profligacy of the royal household, then the amount of revenue needed to be increased.

The way they did this was simple. The rulers simply declared that the coins were worth less according to the monetary standard than they were before. In other words, the coinage had been “cried down,” or, conversely, the monetary standard had been “cried up.”

…In an age when the imposition of direct taxes remained a logistical and economic challenge…the levying of seigniorage by the manipulation of the monetary standard represented an invaluable source of revenue. An important feature of the monetary technology of the day made this simple to do.

The dominant technology for representing money was coinage, with silver the metal of choice for higher-value coins, and bronze or other less valuable metals and alloys for smaller denominations. But unlike today’s coins, medieval types were typically struck without any written indication of their nominal value: there was no number stamped on either face-only the face or arms of the issuing sovereign or some other identifying design. The value of the coins was then fixed by edicts published by the sovereign on whose political authority they were minted.

This system had a great advantage for the sovereign. Simply by reducing the tariffed, nominal value of a coin, the sovereign could effectively impose a one-off wealth tax on all holders of coined money.

A certain coin, the sovereign would announce, is no longer good for one shilling, but only for sixpence. The coin had been “cried down”; or equivalently, one could say that the standard had been “cried up.” An offer might then be made to recoin the cried-down issue, upon presentation at the Mint, into a new type. The sovereign could then in addition levy a charge on the re-minting operation.[5]

So, in this situation, issuing coins, and then adjusting the value became the major way for medieval sovereigns to raise revenue, rather than taxation or borrowing. This was a separate phenomenon apart from the precious metal content the coins, which continued to be variable:

Under these circumstances, it is most unlikely that any metallic coin could have served as the standard, monetary policy did not primarily involve manipulation of the metallic content of coins. Rather, it entailed devaluation and revaluation of the money by ‘crying up’ and ‘crying down’ the money of account.

… Medieval sovereigns had few ways of raising revenue apart from the proceeds of their personal domains: levying direct or indirect taxes was far beyond most feudal administrative capabilities. Seigniorage was therefore a uniquely attractive and uniquely feasible source of income-and medieval sovereigns happily indulged in it…when the need arose, a sovereign could raise enormous sums by crying down or even demonetising altogether the current issue of the coinage and calling it in for re-minting off a debased footing.

In 1299, for example, the total revenues of the French crown amounted to just under £2. million: of this, fully one half had come from the seigniorage profits of the Mint following a debasement and general recoining. Two generations later, the recoinage of 1349 generated nearly three-quarters of all revenues collected that year by the king…[6]

Seignorage–the profits made by issuing money–was a major source of revenue for medieval governments, who could not rely upon taxes or selling bonds. Increasing taxes or confiscating property was very unpopular, and could cause a revolt if done to heavy-handedly. And besides, tax collection was fraught with problems. For a good overview, see section II of this review of Seeing Like a State.

The absolute power of medieval monarchs discouraged people from lending to them. Plus, charging usury was forbidden. In fact, many loans to monarchs by major banks were simply annulled! The English king Edward III borrowed a huge sum of money from Italian banks to fund what became the Hundred Years’ War in France, only to default, taking down the banking houses (which paved the way for the rise of scrappy new upstarts like the Medici).

However, the precious metal in the coins did serve as a “floor” under which the coin’s value could not fall. That is, the commodity value served as collateral for the credit of the issuing sovereign. This meant that the coins were always worth something. This facilitated their use among the subjects.

It’s true that certain standards were set by the mint, but these were unrelated to the coin’s exchange value; rather these were mainly to prevent counterfeiting. They also did not affect prices.

It must be said, however, that there is evidence to show that the kings …were careful both of the weight and the purity of their coins, and this fact has given color to the theory that their value depended on their weight and purity.

We find, however, the same pride of accuracy with the Roman mints; and also in later days when the coinage was of base metal, the directions to the masters of the mints as to the weight, alloy and design were just as careful, although the value of the coin could not thereby be affected. Accuracy was important more to enable the public to distinguish between a true and a counterfeit coin than for any other reason. [7]

The problem is that the cost of buying precious metal fluctuates constantly, depending on the vagaries of supply and demand. For example, the vast amounts of New World silver flowing into Europe from the mines in Potosí in Bolivia (along with better mining technology) caused a drastic fall in the price of silver (excess supply), which made profits for coins high. This had macroeconomic effects throughout Europe—More coins were minted causing inflation (the so-called ‘Price revolution’). However, if the exchange value of the coin fell below the bullion value, there was a strong incentive to melt the coins down (or shave or clip them) and sell the precious metal abroad:

How Much Is A Nickel Worth?

It depends on whether you are talking about its use value or its exchange value. Normally, the exchange value of a good used as money is equal to or greater than its use value. If the value of the metal in a nickel is only worth 3 cents melted down and sold in metal markets, you are better off using it in exchange rather than using it as a commodity. But when the use value exceeds the exchange value, the commodity money will go out of circulation. The U.S. mint has issued new regulations in an attempt to prevent this from happening to pennies and nickels.

… Start with $50.00 and purchase 1,000 nickels. Next, sell the 1,000 nickels for their metal content at 7 cents per nickel and collect $70.00. Use the proceeds to buy 1,400 nickels, sell the 1,400 nickels for $90.80, and you’ve nearly doubled you money already.

It’s unlikely that you’d receive the full 7 cents per nickel, but even at, say, 6 cents per nickel (so that the value is $72.00 instead of $90.80 after two rounds) there’s a powerful incentive to smuggle nickels out of the country. And at 2.13 cents per pre-1982 penny, the incentive is even higher.

When the values are reversed, when the exchange value exceeds the use value, you’re not allowed to go in the opposite direction either. For example, you cannot take 3 cents worth of metal and mint your own counterfeit (“plug”) nickels and realize a 2 cent profit on each one. But when the economic incentive is high enough – e.g. turning paper into $20 bills – some people still try.

How Much is a Nickel Worth? (Economists View)

As Mitchell-Innes notes, if coins were just standardized lumps of precious metal issued merely for the convenience of traders, there would have been no need to force people to use them! People would simply exchange the coins for whatever the precious metal in them was worth.

There are only two things which we know for certain about the Carolingian coins. The first is that the coinage brought a profit to the issuer. When a king granted a charter to one of his vassals to mint coins, it is expressly stated that he is granted that right with the profits and emoluments arising therefrom.

The second thing is that there was considerable difficulty at different times in getting the public to accept the coins, and one of the kings devised a punishment to fit the crime of refusing one of his coins. The coin which had been refused was heated red-hot and pressed onto the forehead of the culprit, “the veins being uninjured so that the man shall not perish, but shall show his punishment to those who see him.”

There can be no profit from minting coins of their full face value in metal, but rather a loss, and it is impossible to think that such disagreeable punishments would have been necessary to force the public to accept such coins, so that it is practically certain that they must have been below their face value and therefore were tokens, just as were those of earlier days.[8]

In fact, it was often very difficult for monarchs to get their hands on enough silver to issue coins. This was another reason that market exchanges were rare in the early Middle Ages—there simply wasn’t enough money circulating! Often, the only way to get more silver was to issue coins with less silver, or to melt down and reissue existing coins with less silver. In fact, getting silver may have even been a motivating factor for the Crusades according to Niall Ferguson:

The Roman system of coinage outlived the Roman Empire itself. Prices were still being quoted in terms of silver denarii in the time of Charlemagne, king of the Franks from 768 to 814. The difficulty was that by the time Charlemagne was crowned Imperator Augustus in 800, there was a chronic shortage of silver in Western Europe.

Demand for money was greater in the much more developed commercial centres of the Islamic Empire that dominated the southern Mediterranean and the Near East, so that precious metal tended to drain away from backward Europe. So rare was the denarius in Charlemagne’s time that twenty-four of them sufficed to buy a Carolingian cow. In some parts of Europe, peppers and squirrel skins served as substitutes for currency; in others pecunia came to mean land rather than money.

This was a problem that Europeans sought to overcome in one of two ways. They could export labour and goods, exchanging slaves and timber for silver in Baghdad or for African gold in Cordoba and Cairo. Or they could plunder precious metal by making war on the Muslim world. The Crusades, like the conquests that followed, were as much about overcoming Europe’s monetary shortage as about converting heathens to Christianity.  [9]

This differential between the commodity value and the exchange value set by the sovereign was to have dramatic consequences.

Cry Me Up, Cry Me Down

By adjusting the value of the currency, the effect these edicts had was to raise prices. As Wikipedia puts it, “…By providing the government with increased purchasing power at the expense of the public’s purchasing power, [seignorage] imposes what is metaphorically known as an inflation tax on the public.” People going to the markets suddenly found that their coins were worth less, so producers demanded more of them.

In mediaeval society, currency depreciation would take place all at once, even in a single day. While historians and economists alike have long told stories about monarchs who purposely debased coins (by reducing gold content)…[i]nstead, nominal value was announced by the monarch and maintained at government pay offices. A coin’s nominal value in circulation would be determined by its value in acceptance of payments to government. When the monarch found he had already issued too much credit (such that he was unable to purchase desired goods and services), he would simply reduce the official value of the coins already issued (such that, say, two coins would have to be delivered at public pay offices rather than one).

By doing so, monarchs ‘reduced by so much the value of the credits on the government which the holders of the coins possessed. It was simply a rough and ready method of taxation, which, being spread over a large number of people, was not an unfair one, provided that it was not abused’.

In short, government ‘cried down’ the coins in place of raising tax rates, but in the process this would devalue the market value of the government’s debt – an overnight devaluation that would be manifested as soon as markets adjusted prices upward in terms of government coin. [10]

To help understand this concept, think of a casino. I turn in my hard-earned dollars and get tokens (chips) in exchange that I can use inside the “monetary space” of the casino. Let’s say each dollar gets me a nice plastic or clay chip.

I then go and gamble. In the meantime, the casino has declared that the chips (tokens) are now worth, say 3/4 of a dollar. So, let’s say at the end of a long night at the poker table you end up breaking even–you wind up with the same amount of chips you started with.

You then go to redeem your chips at the window at the end of the night only to find out that they can now only be redeemed for 3/4 the value you came in with–they are worth less. You are now 1/4 poorer, despite having not lost any chips! This should give you some idea of the effects that “crying down” the currency, or “crying up” the standard had in the real world.

Not only that, but the casino’s “debts” to you are simultaneously lowered. Recall that coins were a record of the sovereign’s debt to the holders of the coinage. Thus, by reducing the standard, sovereigns could also lower the debts and liabilities they owed to the holders of the currency, i.e. to the general public. This also had the effect of transferring resources from the subjects to the sovereign:

We can now understand the effect of the “mutations de la monnaie,” which I have mentioned as being one of the financial expedients of medieval French kings. The coins which they issued were tokens of indebtedness with which they made small payments, such as the daily wages of their soldiers and sailors. When they arbitrarily reduced the official value of their tokens, they reduced by so much the value of the credits on the government which the holders of the coins possessed. [11]

But because it was such an effective way of increasing revenue to the crown, it was abused. The temptation was always there when monarchs played fast and loose with their finances, or wanted to make war on their neighbors:

Some kings…whose constant wars kept their treasuries permanently depleted, were perpetually “crying down” the coinage, in this way and issuing new coins of different types, which in their turn were cried down, till the system became a serious abuse. Under these circumstances the coins had no stable value, and they were bought and sold at market prices which sometimes fluctuated daily, and generally with great frequency.

The coins were always issued at a nominal value in excess of their intrinsic value, and the amount of the excess constantly varied. The nominal value of the gold coins bore no fixed ratio to that of the silver coins, so that historians who have tried to calculate the ratio subsisting between gold and silver have. been led to surprising results…The fact is that the official values were purely arbitrary and had nothing to do with the intrinsic value of the coins. Indeed when the kings desired to reduce their coins to the least possible nominal value they issued edicts that they should only be taken at their bullion value.

At times there were so many edicts in force referring to changes in the value of the coins, that none but an expert could tell what the values of the various coins of different issues were, and they became a highly speculative commodity. The monetary units, the livre, sol and denier, are perfectly distinct from the coins and the variations in the value of the latter did not affect the former, though, as will be seen, the circumstances which led up to the abuse of the system of “mutations” caused the depreciation of the monetary unit. [12]

Given these factors, if much of your wealth were held in coin, would you be pissed off? My guess is that you would be. The thing is, so were the holders and users of medieval currencies.

But what this meant in practice was that no one was really sure of the value of their money at any given point in time. This meant in practice that much of the medieval economy remained effectively unmonetized.

Of course, it was those whose business required the use of money—people such as landlords and merchants– who were the most pissed off. Felix Martin calls them the “money interest.” As the medieval economy became increasingly centered around monetary exchanges, this money interest became more powerful, and more determined to rein in the rulers:

The remonetisation of Europe over the so-called “long thirteenth century,” from the late twelfth to the mid-fourteenth century therefore generated two phenomena that would eventually come into conflict.

The first was the emergence of a class of individuals and institutions whose wealth was held, and whose business transacted, in money-a politically powerful “money interest” beyond the sovereign’s court. The second was the growing addiction of sovereigns to the fiscal miracle of the seigniorage-a miracle which grew in proportion with the increasing use of money.

The more activities were monetarised, and the more people were drawn into the money economy, the larger the tax base on which seigniorage was levied. As sovereigns were to discover, this apparently magical source of fiscal financing did in fact have limits. They were not technical, however, but political. At some point, the new money interest was bound to assert itself against the sovereign’s perceived excesses. This point was reached in the mid-fourteenth century. [13]

Cat-and-Mouse Game

Now, recall once again that coins had a commodity value that set the floor under what they were worth. If the standard were cried down too far, the metal in the coins will be worth more than they are worth in exchange. The commodity value will exceed the exchange value.

What, then, would the sovereign do? The only answer was to issue coins with less precious metal in them, to make sure their commodity value remained under their exchange value. This is, a falling exchange value (or, conversely, a rising precious metal value) inevitably meant issuing coins with less precious metal content.

Naturally, this [seignorage] process was unpopular with users of the sovereigns coinage. Fortunately for them, there was one partial, natural defence. High-value coins-minted from silver, for example-had an intrinsic value regardless of the tariff assigned to them: the price at which their metal content could be sold on the open market to smiths and jewellers, or indeed to competing mints. They included, as it were, portable collateral for the sovereign’s promise to pay.

This meant that there was a lower limit to the tariffed value which the issuing sovereign could assign his coinage. If a coin was cried down too far, the collateral would be worth more than the credit the coin represented, and holders could sell it to a smith for its bullion value. On the other hand, the alert sovereign could respond by reducing the silver content of the new type when the coinage was re-minted-a so-called “debasement.”

It was a recipe for a constant game of cat-and-mouse between the coin-issuer and the coin-user, with even a coin’s precious-metal content, which effectively served as collateral for the creditworthiness of its issuer, always vulnerable to erosion by the predations of the sovereign. [14]

If the standard got too far out of whack, the coins would simply be melted down and shipped abroad. Because melting down coins was illegal, people simply tended to “clip” them, shaving a bit off at a time, and collecting the shavings. Sovereigns eventually responded by making coins with edges that were hard to clip. In any case, “bad” money tended to drive out “good” (Gresham’s Law).

The net effect was that if the standard fell too far, there would be a chronic shortage of precious metal circulating in the kingdom, since coins would be melted down and shipped abroad. This would reduce the amount of currency circulating, leading to deflation. Consequently, a fall in the price of silver might cause more coins to be minted, causing inflation. This fluctuation in the metal content of the coins caused by fluctuations in the standard and the price of bullion led to the misconception that “debasing” the currency by issuing less precious metal in them is what caused price movements.

Because heavily indebted states were perennially “crying down” the currency, this gave rise to the erroneous belief that the precious metal content was related to the value of the currency. States with debt problems issued coins with less precious metal in them. But the problem was fundamentally not with the precious metal, but with the state’s finances.

All our modern legislation fixing the price of gold is merely a survival of the late medieval theory that the disastrous variability of the monetary unit had some mysterious connection with the price of the precious metals, and that, if only that price could be controlled and made invariable, the monetary unit also would remain fixed. It is hard for us to realize the situation of those times. The people often saw the prices of the necessaries of life rise with great rapidity, so that from day to day no one knew what his income might be worth in commodities.

At the same time, they saw the precious metals rising, and coins made of a high grade of gold or silver going to a premium, while those that circulated at their former value were reduced in weight by clipping. They saw an evident connection between these phenomena, and very naturally attributed the fall in the value of money to the rise of the value of the metals and the consequent deplorable condition of the coinage. They mistook effect for cause, and we have inherited their error. Many attempts were made to regulate the price of the precious metals, but until the nineteenth century, always unsuccessfully.

The great cause of the monetary perturbations of the middle ages were not the rise of the price of the precious metals, but the fall of the value of the credit unit, owing to the ravages of war, pestilence and famine. We can hardly realize to-day the appalling condition to which these three causes reduced Europe time after time…[15]

As Innes notes, during times of pestilence, war and famine (such as the Crisis of the Late Middle Ages), governments went heavily into debt to fund wars and output production was curtailed. Coinage was debased and prices went up. But the ‘debasing’ of the coinage, i.e. issuing coins with less precious metal in them, was not the cause!

Since coins were a record of government’s debts to the public, the “trust” in coins tended to reflect the faith in the government issuing the coin. If a government were heavily indebted, it would likely cry up the standard, and/or remint the coins. Hence, the value of coins tended to reflect the fundamental financial soundness of the issuer –the currency of heavily indebted states was worth less.

…prices rose owing to the failure of consecutive governments throughout Europe, to observe the law of the equation of debts and credits. The value of the money unit fell owing to the constant excess of government indebtedness over the credits that could be squeezed by taxation out of a people impoverished by the ravages of war and the plagues and famines and murrains which afflicted them…

The depreciation of money in the middle ages was not due to the arbitrary debasement of the weight and fineness of the coins. On the contrary, the government of the middle ages struggled against this depreciation which was due to wars, pestilences and famines – in short to excessive indebtedness. Until modern days, there never was any fixed relationship between the monetary unit and the coinage.

We imagine that, by maintaining gold at a fixed price, we are keeping up the value of our monetary unit, while, in fact, we are doing just the contrary. The longer we maintain gold at its present price, while the metal continues to be as plentiful as it now is, the more we depreciate our money. [16]

Problems with Money

These problems with money led to several reactions. The “money interest” went to great lengths to dissuade the sovereign from exercising his or her seignorage power too liberally. In one case, they even got a prominent medieval scholar, Nicolas Oresme, to write an entire treatise on money.

Oresme’s argument basically boiled down to this–although the sovereign theoretically controlled the value of the currency, in a real sense, the currency “belonged” to the whole community. Thus, by abusing his power, the sovereign prevented orderly commerce from taking place, and caused harm to his subjects. In other words, he was derelict in his duties. It was an early case of the money interest attempting to assert its control over sovereign governments; a problem which continues to this day.

A second solution was to avoid coins altogether and use the older, more “primitive” technology of tally sticks instead.

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. Again, if the government is willing to take something in payment of taxes, it becomes money.

Mysteries of Money (The Baseline Scenario)

“Issuing a tally” became another critical way for medieval sovereigns to raise needed revenue, especially when silver was scarce.

Kings learned to ‘anticipate’ tax revenues by issuing tallies in payment (‘raising a tally’). Holders of the tally stocks were then entitled to collect tax revenue, turning over the stocks to those who paid taxes. These would then be returned to the King as evidence that taxes had been paid.

Both sovereign and private tallies began to circulate widely in Europe during the later middle ages, taking on the characteristics of negotiable and discountable financial instruments, and were increasingly used as the primary means of financing sovereign spending. [17]

The fact that wooden tally sticks have by-and-large not survived to the present day and coins have colors our understanding of money to this day. Clearly people were not exchanging tally sticks for the value of the wood in them.

The other way they got around the problems with sovereign money was to use trade credit instead. What merchants and bankers did was to conduct their business using sophisticated paper instruments called bills of exchange. These bills of exchange, mediated through the great trading houses of Europe, would allow international business to be conducted in this fractured monetary landscape. While they could be converted into the local government currencies, they were denominated in a totally different monetary unit established by the banks themselves called the ecú de marc.

…there was, by definition, no sovereign authority to regulate commerce between countries, and no sovereign money with which to transact. So it was here, in the international sphere, that banking’s potential to accelerate the commercial revolution was first fully realised. The central innovation was the perfection, by the mid-sixteenth century, of the system of “exchange by bills”: a procedure for financing international trade using monetary credit issued by the clique of pan-European merchant bankers, denominated in their own abstract unit of account, recorded in bills of exchange, and cleared at the quarterly fair of Lyons. [18]

The bill of exchange was invented in the Arabic world and probably introduced into Europe by the Knights Templar, making them Europe’s first exchange bankers. The Templars, a religious/military order, also acted as moneylenders and pawn brokers. The true “secret” of the Templars may be how they managed to accomplish this in an era long before mass communication, and the Templar “treasure” may have been the vast hoards of wealth they managed to accumulate through their international banking operations.

The Templars dedicated themselves to the defence of Christian pilgrims to Jerusalem. The city had been captured by the first crusade in 1099 and pilgrims began to stream in, travelling thousands of miles across Europe. Those pilgrims needed to somehow fund months of food and transport and accommodation, yet avoid carrying huge sums of cash around, because that would have made them a target for robbers.

Fortunately, the Templars had that covered. A pilgrim could leave his cash at Temple Church in London, and withdraw it in Jerusalem. Instead of carrying money, he would carry a letter of credit. The Knights Templar were the Western Union of the crusades. We don’t actually know how the Templars made this system work and protected themselves against fraud. Was there a secret code verifying the document and the traveller’s identity?

The Templars were not the first organisation in the world to provide such a service. Several centuries earlier, Tang dynasty China used “feiquan” – flying money – a two-part document allowing merchants to deposit profits in a regional office, and reclaim their cash back in the capital. But that system was operated by the government. Templars were much closer to a private bank – albeit one owned by the Pope, allied to kings and princes across Europe, and run by a partnership of monks sworn to poverty.

The Knights Templar did much more than transferring money across long distances…they provided a range of recognisably modern financial services. If you wanted to buy a nice island off the west coast of France – as King Henry III of England did in the 1200s with the island of Oleron, north-west of Bordeaux – the Templars could broker the deal. Henry III paid £200 a year for five years to the Temple in London, then when his men took possession of the island, the Templars made sure that the seller got paid. And in the 1200s, the Crown Jewels were kept at the Temple as security on a loan, the Templars operating as a very high-end pawn broker.

The warrior monks who invented banking (BBC)

The Templars were violently disbanded (on Friday the thirteenth, 1307), bringing their banking operations to a halt. In their place, “Lombard Banking” originating in Italian city-states like Venice, Florence and Genoa developed the bills of exchange into a private international currency system that existed alongside the coins and tallies issued by local governments. In the process, they became the world’s first modern banks.

The effects this had were profound. What it did was introduce a parallel international currency system which functioned alongside the coins issued by states, but remained outside of any government’s control. It’s this system we’ll take a look at next time.

[1] Wray: State and Credit Theories of Money, p. 189

[2] Wray: State and Credit Theories of Money, p. 191

[3] Felix Martin: Money, the Unauthorized Biography, p. 87

[4] Wray: State and Credit Theories of Money, p. 29

[5] Felix Martin: Money, the Unauthorized Biography, pp.87-88

[6] Felix Martin: Money, the Unauthorized Biography, pp. 88-89

[7] Wray: State and Credit Theories of Money, pp. 28-29

[8] Wray: State and Credit Theories of Money, p. 28

[9] Niall Ferguson: The Ascent of Money, pp. 24-25

[10] Wray: State and Credit Theories of Money, p. 220

[11] Wray: State and Credit Theories of Money, p. 42

[12] Wray: State and Credit Theories of Money, p. 30

[13] Felix Martin: Money, the Unauthorized Biography, p. 89

[14] Felix Martin: Money, the Unauthorized Biography, pp. 88-89

[15] Wray: State and Credit Theories of Money, p. 43

[16] Wray: State and Credit Theories of Money, p. 63

[17] Wray: State and Credit Theories of Money, p. 3

[18] Felix Martin: Money, the Unauthorized Biography, pp. 105-106

The Origin of Money – 5: Money and the Classical World

Depiction of ritual sacrifice from the Parthenon

The First Global Economy

During the Bronze Age trade expanded across the eastern Mediterranean to such an extent that that some historians refer to this as “The first age of globalization.” The ancient palace civilizations achieved maturity—Egyptians, Babylonians, Assyrians, Hittites, Mycenaeans, Persians, Canaanites, and many others developed vast and complex trade and exchange networks with neighboring cultures large and small. Cargo ships plied the seas, rivers and canals, transporting goods from as far afield as India and the British isles. Yet this was still accomplished not through monetary exchange networks or banks, but rather through gift exchange carried out primarily by ruling elites. Rulers attempted to cultivate artificial family ties with other rulers, or sometimes literal ones through intermarriage (the exception being Egypt, which never intermarried), as Eric Cline explains in 1177BC: The Year Civilization Collapsed:

[The Amarna letters]…provide us with insights into trading and international connections in the time of Amenhotep III and Akhenaten during the mid fourteenth century B.C. It is apparent that much of the contract involved “gift giving” conducted at the very highest levels–from one king to another.…Another royal letter, from Akhenaten to Burna-Buriash II, the Kassite king of Babylon, includes a detailed list of the gifts that he has sent…Similar detailed letters with comparable long lists of objects, sometimes sent as part of a dowry accompanying a daughter and sometimes just sent as gifts, come from other kings…We should also note that the “messengers” referred to in these, and other, letters were often ministers, essentially sent as ambassadors, but were frequently also merchants, apparently serving double duty for both themselves and the king.

In these letters, the kings involved often referred to each other was relatives, calling one another “brother” or “father/son,” even though they were usually not actually related, thereby creating “trade partnerships. ” Anthropologists have noted that such efforts to create imaginary family relationships happen most frequently in preindustrial societies, specifically to solve the problem of trading when there are no kinship ties or state-supervised markets. It is not always clear what relationship merits the use of the term “brother,” as opposed to “father’ and ‘son,” but it usually seems to indicate equality in status or in age, with “father/son” being reserved to show respect..[1]

This “global sphere of trading” fell apart during the twelfth and thirteenth centuries B.C., during a period referred to by historians as the “Bronze Age Collapse” Societies all around the Mediterranean region became less complex and decentralized. Many different factors contributed to the collapse; so many that historians tend not to refer to a single cause, but rather a “perfect storm” of events which precipitated the collapse. Among them are:

-Climate change
-Environmental destruction
-Resource depletion (e.g. topsoil, timber)
-Volcanic eruptions
-Disease epidemics
-Military invasions of the so-called “Sea Peoples”

The Palace Economies of the Minoans and Mycenaeans faltered and disappeared. In their place, landed estates, often controlling large herds of livestock, became the new centers of power. The Dorian invaders came down from the north and colonized Greece, ushering in a tribal society ruled by an aristocratic warrior elite. This was an early regime of privatization as Michael Hudson describes:

From 1200 BC to about 750 BC in the Mediterranean you have a Dark Age. Apparently you had not only very bad weather around 1200 BC – maybe a small Ice Age and drought – but the weather and crop failures led to mass migrations and invasions. The palaces of Mycenaean Greece were burned and syllabic writing disappeared for nearly 500 years.

Then, when you have alphabetic writing emerging, the person whose title originally meant “local branch manager” of the palace workshop suddenly appears as the basileus, the ruler. But mostly you have landholding aristocracies holding the population in debt serfdom (like the Athenian hektimoroi, “sixth parters” liberated by Solon in 594 BC). It was much like the post-Soviet kleptocrats when Red Managers gave themselves control of their companies. When central power falls apart, local headmen take over. The dissolution of royal power led to privatization – including the privatization of credit, taking it and its rules out of royal hands. So Clean Slates stopped.[2]

Dark Age Greece

This is the culture that is depicted in the foundational tales of Western Literature—the Iliad and the Odyssey. The Greek warrior aristocracy was based around certain key principles:

1.) Absolute loyalty to one’s chief/ruler/king.
3.) Reciprocal gift exchange among aristocrats, especially upon parting.
1.) The sharing out of booty to warriors after the successful sack of a city or the defeat of one’s enemies.
2.) Ritual sacrifice to the gods, especially of oxen, and the partitioning out of roast meat to all adult male members of the tribe.

Greek oligarchs would commonly exchange “prestige goods” such as sacrificial tripods in a form of ceremonial gift exchange. The would also often exchange brides. Bride exchange, reciprocal gift giving among chieftains and distribution of booty to warriors in raids formed the basis for economic life in Dark-Age Greece. In these institutions, we see the same basic mechanisms at work in tribal societies studied by anthropologists today:

These three simple mechanisms for organising society in the absence of money-the interlocking institutions of booty distribution, reciprocal gift-exchange, and the distribution of the sacrifice-are far from unique to Dark Age Greece. Rather, modern research in anthropology and comparative history has shown them to be cypical of the practices of small-scale, tribal societies.

Of course, such pre-monetary social institutions have assumed many forms, reflecting the peculiar circumstances and beliefs of the peoples in question. But the anthropologists Maurice Bloch and Jonathan Parry have identified a widespread twofold classification. Comparative studies a similar pattern of two related but separate transactional orders: on the one hand, transactions concerned with the reproduction of the long-term social or cosmic order; on the other, a sphere’ of short-term transactions concerned with the arena of individual competition. The premonetary institutions of the Homeric world conform to the scheme.

On the one hand, there was the primeval institution of the sacrifice and the egalitarian distribution and communal consumption of its roast meat-a ritual expression of tribal solidarity before deity probably inherited from the most distant Indo-European past. This was the institution that governed the long-term transactional order. The other, there were the conventions of reciprocal gift-exchange and of booty distribution. These were the rules that governed the “short-term transactional order,” concerned not with cosmic order and harmony between the classes but with the more mundane matter of ensuring that the everyday business of primitive society-drinking and hunting when at peace; rape and pillage when at war-did not dissolve into chaos.[3]

The ritual sacrificial meal was particularly notable. Unlike the more hierarchical societies of the Near East, the sacrificial meal enforced a more egalitarian social order in which every individual member of the community had value in relation to their status. There was also the notion of debt to the gods and redistributive justice. Such rituals were under the control of the warrior aristocracy and were conducted in their estates, which also functioned as early temples. Meat was distributed on metal spits, called obols, and ownership of the spit was to affirm one’s status as an adult male member of the tribe:

…the most important redistributive activity was…a highly ritualized communal sacrificial meal. Conducted in honor of a commonly-worshiped divinity, the tradition consisted of a public killing, roasting, and eating of sacrificial animals. The objective of the ritual was to establish solidarity and social cohesion among the members of the community.

Perhaps the most prominent feature of the communal sacrificial model was its egalitarian emphasis, manifest in “just” and “equal” distribution of roasted bull’s meat among the ritual participants…While the ritual employed the principles of collective participation (koinōnia) and “equal distribution to all”, one’s equal share corresponded to one’s social status…The just shares allocated to ritual participants differed not only in quantity, but in quality as well. The more honored parts of the sacrificial animal, such as the limbs, were customarily allotted to religious officials…

…Purporting to allocate just and equal shares to the members of the not-so-equal community, the all-inclusive rituals of communal sacrificial meals aimed to create an appearance of harmonious and consensual social relations, thus concealing the underlying reality of social hierarchies and economic inequalities…

To service the ritual, sacrificial offerings were made, mostly in oxen, whereby religious officials stipulated the precise quality, type and quantity of cattle to be contributed, thereby establishing the first standardized unit of account guaranteed by the authorities… [4]

This “ox-unit standard” resembled the silver standard used in Mesopotamia insofar as the religious authorities determined the “standard of value” by which everything else was measured. This was the origin of pricing systems – ranking values of disparate things against each other, as David Graeber points out:

Why were cattle so often used as money? The German historian Bernard Laum long ago pointed out that in Homer, when people measure the value of a ship or suit of armor, they always measure it in oxen-even though when they actually exchange things, they never pay for anything in oxen. It is hard to escape the conclusion that this was because an ox was what one of­fered the gods in sacrifice. Hence they represented absolute value. From Sumer to Classical Greece, silver and gold were dedicated as offerings in temples. Everywhere, money seems to have emerged from the thing most appropriate for giving to the gods. [5]

Meat-sharing is an ancient concept which goes back to the hunter-gatherer origins of humanity (and earlier). The offering of specially-selected parts of the sacrificial animal to elites is reminiscent of the “thigh-eating chiefs” of the Kachin hill tribes in Burma studied by Edmund Leach, and the role meat distribution played in their society. Such rituals both reaffirmed the tribe’s debts to their ancestral spirits, and reinforced the status hierarchy in the material world. In these cases, the sacrifice indicated a debt was owed to the spiritual world of the gods and ancestors:

The animal sacrifices of the Kachin, called nat galaw, or “spirit making,” were built on the age-old principle of reciprocal gift-giving. One sacrificed to a nat (a nature spirit) to put him in one’s debt, expecting him to return the favor. The nat took only the nsa, “breath or essence,” from the sacrificial animal, leaving the meat to be shared by humans at a feast…When the Kachin were in rank mode, the ritual required an additional step: one hind leg from each animal sacrificed was given to the hereditary chief. This was a form of tribute, justified by the chief’s genealogical relationship to Madai (a highly-ranked nat). The high nat partook of the essence of the animal, while the chief’s family ate the meat. As some Kachin expressed it, they were ruled by “thigh-eating chiefs.” [6]

It’s worth pointing out once again that distinction between religion and the state which is common in our own modern cultures was nonexistent in past societies. Societies were bound by concepts like kinship, tribal affiliation, geographical origin, language, custom, and religion. The impersonal nation-state which binds strangers together through bureaucracy and the rule of law is an imaginary concept which was yet unknown.

Due to the fact that possession of the sacrificial spits–the oboloi–affirmed one’s membership in the tribe, they acquired a certain value as currency. They were commonly placed in tombs and acquired a symbolic value in exchange apart from their metal content:

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.

Probably the spits were distributed with meat on them. They were dedicated in sanctuaries and placed in tombs, because they had communal prestige deriving from their role in the communally central ritual of sacrificial distribution. It was because they had this communal prestige that they could work as proto-money. Greek money (in contrast to say Babylonian silver) was not just a generally exchangeable commodity: rather, it had a conventional value that depended on communal confidence (and in that sense was a kind of IOU), and so prefigured modern money, which is merely transferable credit. [7]

From the spits by which sacrificial meat was distributed, it appears that bronze, copper and iron ingots determined by weights were utilized as a form of proto-currency as early as 1100 BC in Greek culture. Sparta maintained its currency in the form of metal ingots and never made the transition to coinage in order to preserve the hierarchical non-monetarized relations of its society: “Plutarch states the Spartans had an iron obol of four coppers. They retained the cumbersome and impractical bars rather than proper coins to discourage the pursuit of wealth.”[8] The use of money would have engendered unacceptable levels of inequality and undermined the esprit d’corps required for Sparta’s distinctive warrior society to function.

The Rise of the Greek Polis

As the Dark Ages waned and the Classical World dawned, a new form of social order emerged: the Greek polis, a self-governing community of landholders centered on a city-state. Victor Davis-Hanson, in his book,The Other Greeks, attributes this development primarily to Greek farming practices.

The Greeks had developed a highly efficient method of mixed farming centered around the cultivation of barley, grapes, and olives, supplemented with gardening and animal husbandry (especially of sheep and goats). Grapes and olives were well-suited to the rocky soil of Greece, and allowed farmers to produce a consistent surplus. While large landowners grew cereals (mainly barley) on level, fertile land using many slaves, the hillsides were terraced and intensively cultivated and irrigated by small landowners in order to grow grapes and olives in small plots of 10 to 20 acres using 1 or 2 slaves.

Over time, this marginal land became highly productive, and the independent small landowners became the center of the political life rather than aristocrats with large estates. This led to a much more egalitarian social structure. Small farms fed by rainfall meant that key resources could not be put under the centralized control of a bureaucratic elite, unlike the irrigation agriculture systems of the Near East. The power of the old warrior aristocracies, with their large herds, landed estates, raiding parties, gift exchange, and ancestral temples, gave way to a different social order–the polis. The relative equality in wealth led these middling yeoman farmers (the ‘Other Greeks’) to create a political structure which protected their common interests–i.e. democracy, where leaders were chosen from among the general (male) population, and key decisions were made by citizens. Rather than justice being meted out by a semi-divine king, justice would be dispensed by an assembly of the people, with fines assessed according to the unit of account and paid with the common currency of the polis:

How would the polis affirm the equal worth of its members? It took the idea of sacrificial meat distribution and extended it, distributing standardized lumps of metal in place of the spits with roast meat on them. These metallic pieces could be used in exchange, much as the handfuls of spits were. As with the spits, the value would derive from the communal confidence of members of the polis, and would circulate as token money with values determined by the civic body.

At first, the pieces of metal distributed were the iron spits utilized for the roasting of the sacrificial animals. The production of such spits began on a large scale during the late eighth century BC (or around 700 BC) leading to their mass production during the entire seventh century BC. The roasting spits continued to circulate, though in smaller quantities, until the first half of the sixth century BC. During this period, the roasting spits (which were destined for communal distribution) came to be standardized in size, reflecting the old sacrificial tradition of “equal portions to all”.

Gradually then, the distribution of roasting spits came to be replaced by the allotment of coinage, which likewise came to be standardized. It is no wonder, then, that obolos, a sixth century BC silver Greek coin, derived its name from obelos meaning an iron spit. Another sixth century BC Greek coin of a larger denomination, drachma, originally meant a handful of six spits…the earliest Greek and Lydian coins did not begin as media of exchange in commerce, but functioned “in the same fashion as the portion of food distributed at the sacred meal”…coinage was distributed by the polis to its male citizens. It has also been established that some of the earliest monetary “transactions” were carried out among unequal social partners, and included sexual “exchange” between men and women…the use of coinage in payment for goods evolved out of its use in payment for personal services.

The administration of distributive justice is…key to understanding the origins and functions of early Greek money and coinage…The unequal distribution of wealth prompted a “decline of faith in the reliability of divine justice”, thereby creating a new social problem of instituting “a political means of payment controlled by humans so that they would not have to rely on the uncertain rewards of the gods”

…Introduced by the city-state as a unit of account for expressing the worth of its male citizens, the purpose of coinage was to resolve the crisis of distributive justice…Rather than facilitate trade, whether foreign or domestic, the initial purpose of coinage was to “(re)establish social justice within the polis”. In contrast to the uncertainty associated with divine justice, coinage could compensate virtue “immediately and precisely”, and payment in “stamped tokens” came to be associated with “just recompense”. Possession of coinage came to signify the acceptance of the civic authority of the polis.

In establishing its own model of distributive justice, the emerging authority of the polis adopted the idealized model of communal egalitarian distribution, but substituted durable metal objects for perishable pieces of meat…The emerging authority of the polis, then, attempted to dismantle the aristocratic model of power by distributing metal pieces to those who accepted the political authority of the polis instead. The distribution of metal pieces into the hands of the citizens would subvert the aristocracy’s monopoly over the use of (precious) metal in the closed sphere of aristocratic gift-giving.[10]

The first coins were issued by civic temples, which functioned as the first treasuries. The public temple usurped the role of the landholder’s private estate and ancestral temple and created a radically new egalitarian social structure which facilitated the use of money. They also reaffirm the link between money and the sacred:

…the temple-state was at the center of the polis and its priests mediated the relationship between subjects and deities. Deities were owed sacrifices and the temples who received these goods and services as sacrifices eventually came to replace the cooked flesh of bulls–which was originally given as a gift for contributing to the temple–with coins made of electrum (a natural gold and silver alloy). Coins essentially represented a receipt that subjects had contributed to the temple…Thus…the origins of money can be found in religious sacrifice and recompense mediated by priestly authorities.[11]

Indeed, contributions to religious societies have been offered as another source of the origins of money, going back to the work of Bernard Laum in the 1920’s:

Bernard Laum…traced money back to the contributions of food and other commodities to guild organisations of a religious character. In his view, their root is to be found in the communal sacrifice. Members of temple brotherhoods were obliged to make ceremonial contributions or kindred payments to the temples or other redistributive households. Laum interpreted these payments as early food money, for whose value the monetary metals later were substituted. But although food contributions bore an administered price in the sense of being standardized in amount, it would be a quantum leap to deem them ‘money.’ Along with injury fines these formalities represent personal liabilities, mainly for restitution or, in time, tax assessment, but not yet the freely negotiated market exchange of commodities.

The media for tax payments would seem to be the bridge concept. The German word for money, Geld, derives from Gothic gild, ‘tax,’ but an early connection to paying fines is indicated by Old Icelandic gjald, ‘recompense, punishment, payment’, and Old English gield, ‘substitute, indemnity, sacrifice’. The idea combines the ethic of mutual aid with the idea of a standardized equality of contributions.

In the first instance religious institutions would have sanctified these contributions and given them the connotation of fixed obligatory payments. Such payments to the community’s corporate bodies appear to have been transformed into tributary taxation when cities were conquered by imperial overlords and turned these institutions into collection agents. This inverted the traditional relationship of voluntary gift givers or sacrificers gaining status by their contributions reflecting openhandedness and wealth. As taxes were coercive levies, their payers lost status by submitting to a tributary position. [12]

The issuance of an official currency stamped with the government’s “seal of approval” (e.g. Lydian lion, Athenian owl, Corinthian horse) was an activity that affirmed the identity and independence of the city. As historians Austin and Vidal-Naquet put it, “In the history of Greek cities coinage was always first and foremost a civic emblem. To strike coins with the badge of the city was to proclaim one’s political independence.”

These coins came to acquire value throughout the Greek world, facilitating trading and markets. Their value derived from the faith placed in the polis, the community of equals. In turn, the issuance of money and the rise of markets came to influence the political development of Greek society:

Besides its egalitarian effects, coined money also promoted individual autonomy, which would tend to dissolve the vertical lines of patronage (based on reciprocity) that we find for instance in Homer (e.g. Odysseus and Eumaios). This was, I suspect, a precondition for democracy, which at Athens arrived a mere generation or so after coinage.

Moreover, control of the central supply of money was (in contrast to now) visible and simple. It was usurped first in various cities by the ‘tyrants’ and then, at Athens, by the people (demos), and remained essential to democracy. Many of the numerous city-states minted their own coinage, and so had this potential for democracy. But Athens was a special case, not least because (almost uniquely) it had its own supplies of silver, and then came in the fifth century to control the money supply of most of the Aegean Sea.

Coinage arrived in Attica later than in the cities of the eastern Aegean, where philosophy originated in the early sixth century BCE. Athens was culturally insignificant until the late sixth century BCE, by which time it finally had coinage en masse and moreover had begun to extract much silver from the mines at Laurium in south-east Attica. In a newly monetised world this silver (together with gold and silver from Thrace) was crucial for the development of festivals and of temples, for the origin and splendour of drama, for the building of a fleet, and eventually for Athens as a cultural center to which (as we see in the dialogues of Plato) philosophers were attracted from various parts of the Greek world.[13]

This strongly affirms the idea that money is a creation of the state, or whatever we wish to term the collective entity to which everyone owes a social obligation which exists in every society over band level (often referred to as the ‘sovereign’ by monetary theorists). Monetary theorists point out, for example, that the prime way for a fledgling political entity such as the Islamic State (IS) to define itself as a “legitimate” government is to issue its own “official” currency which is legal tender in the areas under its control. It then assesses taxes in this unit of account. The unit of account must be established by a supra-market entity before monetization of the economy and internal trading can take place.

Coinage and Metals

It is well-known that the first “official” stamped coins (in the West) were minted in Lydia and Ionia on the coast of present-day Turkey. Metal deposits of electrum, an alloy of gold and silver, were under the control of the royal household. This substance was issued in lumps by the government with stamps certifying the government’s authority. It was illegal for any other entity to issue these stamped coins.

It is often stated that what gave the coins their value was the certification by the state of their metal content. Because they were issued by an “official” government mint, it is claimed, a trader or merchant could be assured that he or she was getting the “correct” amount of metal in the coin without the costly and time-consuming process of weighing the coins. He could be assured by the “seal of approval” that coins did indeed contain the quantity of metal that they desired. In this view, issuing standardized “official” lumps of metal greased the wheels of commerce which had existed long before then, but were encumbered by uncertainty. Put another way, “coins were simply the form in which precious metal traveled.”

This fits with the “metallist” doctrine that markets are spontaneous and self-regulating, and that issuing currency is merely a ‘convenience’ on the part of governments. Even without such issuance, the argument goes, “free” markets would muddle along just fine, just with the added inconvenience of having to weigh out the gold and silver everyone is exchanging goods for. Furthermore, changing the “official” metal content in any way is “debasing” the currency, and should never, ever be done, because the amount of metal in the coin is fixed for all time, and it is this metal which gives the coin its value. Furthermore, paper money is just a promise to redeem a certain amount of precious metal in some form.

The problem with this is that throughout history, there has been no consistent metallic standard for coins. While later Lydian coins eventually became standardized in weight and composition, this was more for convenience of manufacture rather than adherence to some sort of standard (defined by whom?). The early coins were amalgams of gold and silver, with no way of determining the proportion of each:

Evidently, the value of the earliest coins could not derive from their metal component: the earliest Lydian coins were made of electrum, a natural alloy of gold and silver, the internal composition of which is highly variable by nature. This means that a coin’s weight, purity and fineness could not be standardized…the final choice of silver as the minting metal for coinage was a political decision and had little to do with the intrinsic properties of the metal…

Given the association of gold with the old aristocracy, and the crisis of redistribution as manifest by unequal distribution of metallic wealth (most importantly, gold and gold artifacts), the polis chose silver as the minting metal, and silver coinage aimed to represent “the community of citizens” who were all equal as they were made of “the same noble substance”.

Rather, it appears that the nominal exchange value of metal coins was set by governments, and always has been. This value was assessed according to the prevailing unit of account. Coins circulated at a value higher than their commodity value, otherwise they would simply have been melted down. In fact, this has happened throughout history when the commodity value of the coin has risen above its nominal value. The commodity value of the metal functions as a “floor” underneath the value of a coin–a level beneath which it will not fall, encouraging its use.

The reason we tend to think that precious metal is what gave the coins value is because coins are what have survived. They are what sit in museums and what are found by the thousands at archaeological sites. Meanwhile, the systems of credit clearing, taxation, and establishment of monetary value by state authorities have long since vanished. So we mistakenly assume that people were exchanging coins for their metal content, despite the fact coins have a dizzying array of metal quantities and standards throughout history, often even in the same time period and geographic location, as Alfred Mitchell-Innes writes:

…throughout the whole range of history, not only is there no evidence of the existence of a metallic standard of value to which the commercial monetary denomination, the “money of account” as it is usually called, corresponds, but there is overwhelming evidence that there never was a monetary unit which depended on the value of coin or on a weight of metal; that there never was, until quite modern days, any fixed relationship between the monetary unit and any metal; that, in fact, there never was such a thing as a metallic standard of value…

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. Some are of gold, some of silver, others are of bronze, while the oldest of all are of an alloy of the gold and silver, known as electrum. So numerous are the variations in size and weight of these coins that hardly any two are alike, and none bear any indication of value. Many learned writers…have essayed to classify these coins so as to discover the standard of value of the different Greek States; but the system adopted by each is different; the weights given by them are merely the mean weight calculated from a number of coins, the weights of which more or less approximate to that mean; and there are many coins which cannot be made to fit into any of the systems, while the weights of the supposed fractional coins do not correspond to those of the units in the system to which they are held to belong.

As to the electrum coins, which are the oldest coins known to us, their composition varies in the most extraordinary way. While some contain more than 60 per cent of gold, others known to be of the same origin contain more than 60 per cent of silver, and between these extremes, there is every degree of alloy, so that they could not possibly have a fixed intrinsic value. All writers are agreed that the bronze coins of ancient Greece are tokens, the value of which does not depend on their weight. All that is definitely known is that, while the various Greek States used the same money denominations, stater, drachma, etc., the value of these units differed greatly in different States, and their relative value was not constant—in modern parlance the exchange between the different States varied at different periods. There is, in fact, no historical evidence in ancient Greece on which a theory of a metallic standard can be based…[15]

Coinage and Mercenaries

It is thought that minting coins eventually evolved into a way for the “state” (i.e. the  sovereign) to procure the resources it needed, and as a way to transfer private goods and services to itself as required.

One of the biggest requirements was paying for professional soldiers in place of the landholding citizen-soldier to facilitate external military conquest. These soldiers were transient, so a form of portable, anonymous wealth was needed. It furthermore appears that sex was one of the first services on offer using coins—women would work in brothels of Sardis to earn money for their dowry– with other services soon following in its wake (mercenaries and prostitutes may tie as the world’s oldest professions). The earliest “free” markets to spring up in coin appear to be for the slaves produced by such conquest.

The way it worked was this: The ruling class required mercenaries, and since they controlled the metal deposits, they issued lumps of metal stamped with the ruler’s insignia, signifying their “official” capacity. They then demanded these coins back from producers, and the only way to get their hands on them was to sell something to soldiers, allowing the soldiers buy the things they wanted and needed from the conquered population. Tim Johnson writes:

Around 4,000 years ago, people started making ornaments out of electrum (an alloy of gold and silver), copper and gold, metals found naturally (i.e. without processing) in nature. Metals have an almost unique, natural, physical property; they reflect light. The only other material that stone-age humans would have come across that reflected light would have been water, so to these people gold would appear to combine the essence of both water and the sun, the basis of life.

Imagine the awe that humans would have felt the first time they spotted a nugget of gold sparkling in a river bed, here was an object that seemed to captured and store life-giving sunlight, the ‘tears of the Sun’ as the Incas said. In the medieval period, European alchemists believed that metals were produced by some mechanism involving rays from different ‘planets’: gold from the Sun, silver from the Moon, mercury from Mercury, copper from Venus, iron from Mars, tin from Jupiter and lead from Saturn.

In ancient Babylon, Egypt and Greece, temples became associated with stores of metals, gold for the Greeks, silver for the Babylonians and copper for the Egyptians. It seems that these metals had developed a religious significance and become important as temple offerings. Consequently followers of the religion would look to acquire the metal, to enable them to make an offering, and so the metal became the commodity in the most universal demand. Athens treasury was in the Temple of Athena, and Jesus cast the money-lenders, exchanging worldly Roman money for divine shekels, out of the Temple.

The earliest tokens used as ‘money’ were not specific weights of a certain metal but roughly cut pieces of metal with an official stamp on them – monopoly money as it were. The emergence of money, in the sense of coins, in Greece coincides with the emergence of mercenary troops, the term ‘soldier’ is derived from the word for a Roman gold coin, solidus. A simple economic model developed, states paid soldiers in gold, who then spent it in the community. The government then recovered the gold by taxing the merchants and innkeepers that the soldiers had paid for food and lodgings.

This model would survive and drive colonialism until the modern age. A power, such as Alexander’s Greece, Imperial Rome, Napoleonic France or Industrial Britain, would take control of a region through force of arms. They would then demand tax from the conquered nation, which would have to be paid in currency specified by the coloniser. The conquered nation could only obtain the currency by exchanging their produce for the specified currency…

Why magic? ⇔ Why gold? (Magic, Maths and Money)

David Graeber describes this as a “military-coinage-slavery” complex, and sees this as a defining feature of the Axial Age. With coinage, slavery becomes a much greater factor in the economy of the Classical world than it ever was in the ancient Near East (inverting the “conventional” view of history as a contest between the “freedom” of the Classical World versus “Oriental Despotism”).

This strongly fits with the idea that supplanting the traditional relations of reciprocity, redistribution and householding with impersonal markets mediated by money was not a spontaneous development based on human instincts to “truck, barter and exchange,” but a top-down project facilitated by ruling elites. All of this is tied to the emergence of inequality and class-based society rather than freedom and egalitarianism. Markets did not emerge out of simple barter. Rather barter occurs after organic social relations have been dismantled and monetized, and the quantity of money becomes curtailed, such as by economic collapse.

The use of coinage was spread by Greek mercenaries throughout the Mediterranean world and beyond. Although coinage spread east to the Persian empire, it appears that older credit/debit systems and householding continued to prevail as the dominant economic paradigm. That changed with the conquest of the Persian Empire by Alexander the Great. Alexander melted down Persian gold and silver and used them to pay his troops. This spread both Hellenic culture and markets throughout the East. Greek silver and coins would find their way as far east as China:

Although silver, by becoming a medium of exchange, must have acquired a value higher than its intrinsic value as a not very useful commodity, the Babylonians did not invent anything like modern coinage, which has…a value in exchange even further above its intrinsic value as metal. Even after the people of Asia Minor had invented coins and they had been adopted by the Greek world, the Babylonians still preferred to measure silver by weight, under the illusion no doubt that that mattered! It was not until Alexander the Great conquered the region that coins were commonly used. It seems quite likely that in the area which was the heartland of the great Persian Empire, documentary credits were used in preference to physical silver.

Was the silver merely stored as a reserve, just as in the modern era gold has been accumulated in the Bank of England and in Fort Knox in the USA? Alexander certainly found vast hoards of gold and silver in the palaces and temples of Persia, and the Greeks thought it was odd it had just been stored…The Greeks probably did not realise that the Babylonians had found a convenient way of monetising precious metals, and had minimised the expensive and risky movement of precious metals by the use of an accounting system.

But with the conquest came no doubt the breakdown of the legal system, together with its religious backing, on which the documentary credits were founded. Alexander coined (monetised) the gold and silver he found, no doubt to pay his soldiers who would have had little use for documentary credits issued by foreign merchants or strange temples. It appears that trade increased dramatically between the nations in the eastern part of Alexander’s empire after the monetisation by coining of the precious metals he found. This and other experience suggests that coins which contain a high proportion of the precious metals did facilitate foreign trade, even though they are unnecessary in a more parochial society. Modern communication systems have made it possible to use documentary credits worldwide, and the case for coins made of precious metals hardly now exists.[16]

This is the “state theory” of money creation. Jack Goody argued that the state made war and war made the state. But we can update that to say that the state made money, and money made markets, and markets are what allowed for the bureaucratic state to form. The state, by issuing currency, could transfer “private” resources to itself via taxation. It could also hire expertise, at first in war, and later in technocratic management. Issuing currency money gave the state the power to transfer resources to itself and pay for armies. This paper describes the process in more detail:

A stylised story based upon the use of stamped metal might go as follows; a ruler might decide what she or he desired, for example, palaces, amphitheatres and an army of conquest. She or he could utilise their monopoly power over the monetary system to obtain what they desired.

They would first define the unit of account and then decide upon the money things acceptable in payment of debts denominated in this unit, say, stamped metal discs clearly marked with her or his head. The disc may contain precious metal. This precious metal content (if any) would be decided upon by the state (the mint standard). The use of precious metal may help prevent counterfeiting and raise the prestige of the issuer but the intrinsic value of the coins provided only a floor value for the currency. The nominal value would be higher and determined by decree.

She or he then imposed a tax on her or his subjects denominated in its chosen standard, payable by the surrender of the stamped discs. The ruler decided the nominal value of the coins and how many each person must pay to satisfy their tax bill. This process gave the coins value. They were tokens showing the holder had a credit on the state. They were really ‘tax credits’.

The ruler could now spend these tokens on whatever she or he wished as long as it was available in her or his own domain –or ‘monetary space.’ The private sector suppliers of goods accepted the tokens, not because they were made of precious metal but rather because the population needed them to pay taxes. The rulers then paid their soldiers with the stamped metal discs and the soldiers, in turn, were able to go to the villages and buy whatever they wished, provided of course it was available! The populace sold the soldiers real goods to obtain the discs to meet tax liabilities. Clearly, the empress or emperor had to spend before she or he could collect. A private agent minting discs with the ruler’s head on without her or his permission would soon be put to the sword. It may appear that the ruler needed to tax before spending but this is an illusion![17]

Money needs to be spent before it can be collected. It is not something “out there” that the government needs to procure from the “private” sector. Rather, it is a social technology which is issued by the government, and given value by collective confidence in the ruling body ,and its ability to make payments, redistribute, and collect taxes and fines. It is then transferred hand-to-hand, facilitating trading among unrelated strangers. How much of this was ‘planned’ and how much accidental is a matter of speculation.

The Emergence of Markets

As Greek society became increasingly monetized, traditional social obligations were transformed into money relationships. The public spaces of the Greek polis, where debate was conducted, started to double as the place where monetary exchanges took place: the market, such as the famous Agora in Athens. Over time, every Greek polis would come to possess its own market along with its own mint. David Graeber describes the transformation:

The world of the Homeric epics is one dominated by heroic warriors who are disdainful of trade. Money existed, but it was not used to buy anything; important men lived their lives in pursuit of honor, which took material form in followers and treasure. Treasures were given as gifts, awarded as prizes, carried off as loot.

All this was to change dramatically when commercial markets began to develop two hundred years later. Greek coinage seem to have been first used mainly to pay soldiers, as well as to pay fines and fees and payments made to and by the government, but by about 6oo BC, just about every Greek city-state was producing its own coins as a mark of civic independence. It did not take long, though, before coins were in common use in everyday transactions. By the fifth century, in Greek cities, the agora, the place of public debate and communal assembly, also doubled as a marketplace.[18]

As city-states minted money, the traditional social obligations of tribal society were now transformed into very different social obligations mediated by the new invention of money:

Everywhere, traditional social obligations were transformed into financial relationships. In Athens, traditional agricultural sharecroppers were converted into contractual tenants paying money rents. The so-called “liturgies”-the ancient, civic obligations of the thousand wealthiest inhabitants of the city to provide public services ranging from choruses for the theatre to ships for the navy-were now assessed in financial terms. By the last quarter of the fifth century BC, not only military stipends, public and private wages, rents and commodity prices, but also social payments such as dowries, regularly appear as sums of cash. The city states of classical Greece had become the first monetary societies. p. 62

Several characteristics of Greek society helped foster the development of money and markets.

As we’ve seen earlier, Greek diversified farming practices ensured that small farmers were relatively equal during the Dark Ages. The mainland of Greece is rocky and mountainous, preventing the large-scale plantations so common in later Roman Italy and North Africa. This is in contrast to the Near Eastern cultures where all land was owned by the gods/potentates, and administered by palaces and temple bureaucracies. Unrelated people had to deal with one another on more-or-less equal terms.

As we saw last time, in Greek culture, writing and numeracy were democratized. The alphabet, transmitted through the Phoenicians, allowed reading and writing to be easily learned and done by the average person, rather than an priesthood which kept such administrative skills to themselves and transmitted them only through esoteric channels. The departure from exclusively oral communication meant that myths gave way to recorded history, causing a questioning of old social forms.

The Greeks were geographically separated, yet there was a shared conception of what it meant to be Greek. The Greek peoples were scattered across hundreds of islands in the Aegean Sea, the Grecian mainland, the coast of Asia minor, and numerous colonies throughout the Mediterranean (“like frogs around a pond,” in Plato’s famous phrase). This alone would require trading. Greek culture was intimately tied with the ability to cultivate olives, and the ability to speak the Greek language (others’ tongues were just gibberish–“bar-bar-bar,” i.e. barbarians).

So we have decentralization, egalitarianism, individualism, and yet shared cultural notions and concepts. This created a need for trade, but without the necessity of mediation by a centralized governing bureaucracy as seen in Near Eastern redistributive economies. Several other distinct aspects of Greek culture and thought also contributed to the development of abstract, impersonal money and markets.

The first was the concept of a universal standard of value derived from the sacrificial feast, as Felix Martin describes:

…the idea of the equal worth of every member of the tribe was a social constant: a standard against which social value could be measured. At the heart of Greek society, in other words, was nothing other than a nascent concept of universal value and a standard against which to measure it, pret-a-porter.

Here was an answer to the question begged by the new perspective on society and the economy. Where the new understanding of physical reality had man, the observer of an objective universe, the new understanding of the social reality had the idea of the self, separate from society, an objective entity consisting of relationships measurable in a standard unit on the universal scale of economic value. It was a critical conceptual development-the missing link, on the intellectual level, in the invention of money. p. 59

Mesopotamia had for millennia possessed one of the three components of money-a system of accounting, based upon its discoveries of writing and numeracy. But the immense sophistiction of Mesopotamia’s bureaucratic, command economy had no need of any universal concept of economic value. It required and had perfected a variety of limited-purpose concepts of value, each with its respective standard. It therefore did not develop the first component of money: a unit of abstract, universally applicable, economic value.

Dark Age Greece, on the other hand, had a primitive concept of universal value and a standard by which to measure it. But the Greek Dark Ages knew neither literacy nor mimeracy, let alone a system of accounting. They had, in nascent form, the first component of money, but lacked the second. Neither civilisation had all the ingredients for money on its own.

But when the ultra-modem technologies of the East-literacy, numeracy, and accounting-were combined with the idea of a universal scale of value incubated in the barbaric West, the conceptual preconditions for money were at last in place…

This spread of money’s first two components-the idea of a universally applicable unit of value and the practice of keeping accounts in it-reinforced the development of the third: the principle of decentralised negotiability. The new idea of universal economic value made possible the offsetting of obligations without reference to a centralised authority. And the new idea of an objective economic space created the confidence that this possibility would exist indefinitely.

Markets require people to be able to negotiate a sale or agree a wage on their own, instead of feeding their preferences into a central authority in order to receive back a directive on how to act. But successful negotiation requires a common language-a shared idea of what words mean. For markets to function there needs to be a shared concept of value and standardised units in which to measure it. Not a shared idea of what particular goods or services are worth-that is where the haggling comes in-but a shared unit of economic value so that the haggling can take place at all. Without general agreement on what a dollar is, we could no more haggle in the marketplace over prices in dollars than we can talk to the birds and the bees. pp. 61-62


Other ideas that were unique to Greek society included the idea that the abstract was more important than the real, derived from philosophy, and the absolute isolation of the individual from one’s close kin, as seen in Greek tragedies such as Oedipus.

There is also evidence that the adoption of money was critical to the development Greek ideas about democratic political governance and scientific thought, as Tim Johnson explains in this excellent blog post (emphasis mine):

Greek culture that emerged around 600 BCE became known for being distinctive in its attitudes to politics and science. Greek science developed a non-mythical cosmology. The central idea emerged in Miletus, in Anatolia, and was apeiron (‘without limit’), something boundless, homogenous, eternal and abstract yet it held and motivated all things. Simultaneously, across the Aegean in Athens, Greek ideas of democracy were codified.

The standard explanations used to argue that the non-mythical cosmology originated in the polis where citizens were equal and ruled by an impersonal law: democracy generates science. This account did not acknowledge the temporal simultaneity of the origins of the ideas but there geographical separation. There needed to be something that preceded democracy and science common to both Athens and Miletus.

A more empirical explanation for origin of the distinctive nature of Greek politics and science lies in the Greek adoption of money in everyday use. Money can be seen as a prototype for the apeiron. Money is ‘fungible’, meaning one money-token is indistinguishable from any other, it is an empty signifier, like a word used in everyday language. The impersonality of money means that it is universal and makes no distinctions; it is used by rich and poor uniting opposites. There is a discrepancy between the value of money and its commodity value because money an abstract concept signified by a concrete token. Because it is abstracted, unlike any substance, money is unlimited. It has the power to transform objects, being able to turn wheat into wine in the market. Together, these properties enable money to perform multiple functions simultaneously. It is used to meet social obligations, such as tribute, legal compensation, and is the dominant means of conducting exchange; it stores value and is the unit of account. Money’s myriad uses means that it becomes a universal aim of all members of the community using it.

Money centralised social power in a single, abstract and impersonal entity. In monetised, Greek, economies personal power arose from the possession of impersonal and non-substantial money. The impersonality of Greek money nurtured the concept of equality, which is the foundation of democracy. The Greek word nomos, associated with ‘law’, is the root of the Greek word for money, nomisma. When combined with ‘auto’ – self – it gives autonomy, the idea that people can govern themselves and out of it, the concept of the individual emerges.

The foundations of Athenian democracy where laid by Solon (c. 638‒558) when he instituted several legal reforms. These sought to address instability created by conflicts in society caused by growing inequality created by the financialisation of society. Solon’s reforms solved the problems by substituting judicial violence with fines, something that was only possible because money was widely used. In the process, justice was depersonalised so that hostility between people was replaced by an impersonal quantification between an injury and its compensation. While money was disruptive of society it was also integral to Solon’s reforms that created a political system in which all citizens were equal.

Greek’s [sic] highlighted how their culture was distinctive from that of their neighbours, notably those in the civilised East…The essential difference was that Greek society was monetised and operated through inter-personal exchange where as that of the neighbouring societies were re-distributive.

In re-distributive societies, power originated in the gods. Priests (or a king, the distinction was often blurred) were the direct servants of the gods who mediated between the population and the divine. All that the community produced was owned, exclusively, by the gods and managed by a hierarchy of priests/kings. Produce was delivered to the temple (or palace) and the priests, from behind closed doors, would re-distribute the aggregate production per their own rules, taking a cut for their own use. In return, the priest/kings were expected to provide material and social security: food stores, walls, law and order. These societies maintained themselves so long as the priest/kings prevented famine and ensured peace and justice. It was passed through the priests/kings into the community through a clear hierarchy. The transference of power was often done through seals (amulets, talisman) that magically carried the power of the god.

Greek religious practice diverged from this standard model. The Greek gods lived on ambrosia and nectar, not on mortal food. When Homeric Greeks, in around 800 BCE, performed an animal sacrifice the smoke ‘honoured’ the gods, who were not located in their icons but ‘somewhere else’, alienated from the people. The sacrificial meat was then shared out amongst the community. The fairness of this sharing was fundamental to Greek culture, with both the Iliad and the Odyssey resting on problems resulting from unfair distribution. Consequently, the wealth of the Greek temples was owned and managed, inclusively, by the community in an egalitarian manner, in contrast to the wealth of temples in re-distributive societies.

There is a relationship between these Greek religious practices and the emergence of money in Greek society. The lowest value Greek coin was the obolos that took its name from the cooking spits (obelos) that were used to distribute sacrificial food and it is almost certain that the word drachma comes from obeliskon drachmai ‒ handfuls of spits.

A Financial Approach to the ‘Clash of Cultures’ (Magic, Maths and Money)

One deleterious result of the money economy was people falling into debt and relinquishing their freedom. This led to steep class divisions, as those who defaulted sold themselves into slavery (debt serfdom). Debt serfdom several times threatened the security of the polis, as debt serfs were unable to maintain military training to help defend the city-state (one reason why Sparta steadfastly refused to use coins). Rather than regular Clean Slates as in the Near East, periodic debt cancellations were legislated under rulers like Solon. The debt serfs would then be shipped off to found colonies across the Mediterranean. This dynamic drove Greek expansion and colonization, as David Graeber explains:

One of the first effects of the arrival of a commercial economy was a series of debt crises, of the sort long familiar from Mesopotamia and Israel. Revolutionary factions emerged, demanding amnesties, and most Greek cities were at least for a while taken over by populist strongmen swept into power partly by the demand for radical debt relief. The solution most cities ultimately found, however, was quite different than it had been in the Near East.

Rather than institutionalize periodic amnesties, Greek cities tended to adopt legislation limiting or abolishing debt peonage altogether, and then, to forestall future crises, they would turn to a policy of expansion, shipping off the children of the poor to found military colonies overseas.
Before long, the entire coast from Crimea to Marseille was dotted with Greek cities, which served, in turn, as conduits for a lively trade in slaves. The sudden abundance of chattel slaves, in turn, completely transformed the nature of Greek society.

First and most famously, it allowed even citizens of modest means to take part in the political and cultural life of the city and have a genuine sense of citizenship. But this, in turn, drove the old aristocratic classes to develop more and more elaborate means of setting themselves off from what they considered the tawdriness and moral corruption of the new democratic state…[20]

The decentralization of economic life and establishment of self-rule had dramatic effects. According to Josiah Ober, at the bottom point of Iron Age circa 1000 B.C., the Greek world was sparsely populated and living near the subsistence level. Almost 700 years later, in the age of Aristotle, the population of the Greek world had increased twentyfold and per capita consumption had doubled, achieving growth rates comparable to those of England or Holland in Early Modern Europe. Ober attributes this growth to low levels of inequality (which Davis-Hanson attributes to farming practices), which led to investments in human capital, economic and political stability, non-authoritarian political structures, and high levels of social trust:

In the 12th century BCE, the palace-centered civilization of Bronze Age Greece collapsed, utterly destroying political and social hierarchies. Surviving Greeks lived in tiny communities, where no one was rich or very powerful.

As Greece slowly recovered, some communities rejected attempts by local elites to install themselves as rulers. Instead, ordinary men established fair rules (fair, that is, for themselves) and governed themselves collectively, as political equals. Women and slaves were, of course, a very different story. But because these emerging citizen-centered states often out-competed elite-dominated rivals, militarily and economically, citizenship proved to be adaptive. Because participatory citizenship was not scalable, Greek states stayed small as they became increasingly democratic. Under conditions of increasingly fair rules, individuals and states rationally invested in human capital, leading to increased specialization and exchange.

The spread of fair rules and a shared culture across an expanding Greek world of independent city-states drove down transaction costs. Meanwhile competition encouraged continuous institutional and technological innovation. The result was 700+ years of world-class efflorescence, marked by exceptional demographic and per capita growth, and by immensely influential ideas, literature, art, and science. But, unlike the more familiar story of ancient empires, no one was in running the show: Greece remained a decentralized ecology of small states. [21]

Greek colonization spreads ideas of democracy, science, religion, money, markets, slavery and debt to other cultures, including the militarized cultures of the Italian peninsula. Eventually, these ideas gave rise to two great powers who fought over control of the Mediterranean: the Latin empire centered in Rome, and the Phoenician-derived colony of Carthage. With the victory of Rome, the entire Mediterranean becomes a giant free-trade zone, and the coinage-mercenary-slave complex expands to an unprecedented degree. We’ll take a brief look at that next time.

[1] Ernest Cline; 1177 B.C.: The Year Civilization Collapsed


[3]Felix Martin; Money: THe Unauthorized Biograhy, p. 38

[4] Semenova and Wray; The Rise of Money and Class Society: The Contributions of John F. Henry. Levy Economics Institute Working papaer no. 832

[5] David Graeber; Debt: The First 5000 Years.

[6] Kent Flannery and Joyce Marcus; The Creation of Inequality, pp. 193-195

[7] Radical Anthropology; Interview with Richard Seaford:

[8] Semenova and Wray; The Rise of Money and Class Society: The Contributions of John F. Henry. Levy Economics Institute Working papaer no. 832

[9] Not Used


[11] Tim Di Muzio, Richard H. Robbins; An Anthropology of Money: A Critical Introduction, p. 48

[12] Wray et. al.; The Credit and State Theories of Money, pp. 96-97

[13] Radical Anthropology; Interview with Richard Seaford:

[14] Semenova and Wray; The Rise of Money and Class Society: The Contributions of John F. Henry. Levy Economics Institute Working papaer no. 832

[15] Wray et. al.; The Credit and State Theories of Money, pp. 96-97

[16] hWray et. al.; The Credit and State Theories of Money, p. 138,

[17] Phil Armstrong; Heterodox Views of Money and Modern Monetary Theory (MMT)

[18] David Graeber; Debt: The First 5000 Years.

[19] Felix Martin; Money: The Unauthorized Biography, p. 60

[20] David Graeber; Debt: The First 5000 Years.


The Origin of Money – 4

2. The First IT Revolution

In order for something like the general-purpose universally-applicable money that we know to form, two critical innovations were needed: numeracy/literacy and standardized measurement.

In order to manage the redistributive economy of ancient Mesopotamia, increasingly sophisticated “information-processing” technologies were invented. We might call this the “First IT Revolution,” and it eventually ushered in writing and mathematics. It is now known that these originally developed in the service of keeping track of goods and labor for this economy– accounting, in other words:

This prehistoric communication revolution began some 9000 Years ago among the early agricultural communities of northern Mesopotamia and Syria. Like the invention of the computer, it involved the creation of an ingenious device which served both to transmit information and to record it for future reference.

In Neolithic Mesopotamia this new device served also to identify property and to ensure its security, and in that sense to signal to us not only that society was becoming more differentiated (that is, that there were those with goods to protect or secure) but that man could no longer trust his fellow man…

…the earliest stage of recording numeracy utilized the geometric token, followed by the use of the complex token and bulla, and still later, with an increasing complexity of communication needs, the cylinder seal was used for securing and identifying property; and finally, the seminal tool of bureaucratic administration, the inscribed tablet.

A theoretical account of this process was developed by Denise Schmandt-Besserat beginning in the 1970’s. She realized that the earliest shapes in cuneiform writing were based on the shapes of tokens found on archaeological sites. This led her to formulating the following sequence describing the development of writing:

1. Small clay tokens about 1-3 centimeters in length shaped into simple geometric forms are found scattered throughout Mesopotamian archaeological sites after about 9000 BC. The tokens represented various primary commodities –grain, jars of olive oil, sheep, beer, etc. They came in a variety of sizes and shapes–cones cylinders, spheres, ovoids, disks and tetrahedrons (three dimensional triangles), often covered with various dots and markings.

Simple tokens represented basic items such as grain and cattle, whereas more incised and perforated tokens represented services and manufactured items. One might think of game pieces (which at one point they were believed to be), or animal crackers. This allowed for a much greater control over varied items than just simple notches on tally sticks. The tokens could be matched one-to-one with the various standardized goods and services.

Number was represented by a phenomenon called correspondence (one-to-one) counting. Five ovoids meant five jars of olive oil, three tokens meant three jars, and so on; there was no abstract notion of “fiveness” apart from the thing being counted. The tokens were “non-lingual,” that is, no matter what language you spoke, both parties could understand that that five ovoid tokens meant five jars of olive oil:

The direct antecedent of the Mesopotamian script was a recording device consisting of clay tokens of multiple shapes. The artifacts, mostly of geometric forms such as cones, spheres, disks, cylinders and ovoids, are recovered in archaeological sites dating 8000–3000 BC.

The tokens, used as counters to keep track of goods, were the earliest code—a system of signs for transmitting information. Each token shape was semantic, referring to a particular unit of merchandise. For example, a cone and a sphere stood respectively for a small and a large measure of grain, and ovoids represented jars of oil.

The repertory of some three hundred types of counters made it feasible to manipulate and store information on multiple categories of goods…The token system showed the number of units of merchandize [sic] in one-to-one correspondence, in other words, the number of tokens matched the number of units counted: x jars of oil were represented by x ovoids. Repeating ‘jar of oil’ x times in order to express plurality is unlike spoken language. [1]

2. The economy expanded and became more complex as urbanization proceeded. The clay tokens also began to get more numerous and more elaborate, tracking the various “secondary commodities” of the Mesopotamian economy –wool, clothing, metals, honey, bread, oil, beer, textiles, garments, rope, mats, carpets, furniture, jewelry, tools, hides, perfume, and so on.

The tokens represented the various items stored in the “holy storehouse” of the temple. Standardized tokens could be used for keeping track of inventory, or recording tax payments, and even for establishing future transactions–essentially forming the first economic contracts. Tokens could represent anticipated tax payments, deferred payments, or a provide a record of previous payments. They could also provide for secure transmission of goods between stewards.

In order for this to work, some method needed to be developed to keep the transaction secure, that is, safe from tampering after the fact. Two methods were devised to do this. One was using tokens with perforations in them and stringing them together with a cord like a bracelet or necklace, and binding the ends of the cord with a lump of clay called a bulla. This prevented tokens from being added or removed to the string without breaking the clay “seal.”

The other involved sealing them inside a hollow clay “envelope” about 3-5 cm in diameter also called a bulla. The tokens were placed inside and the opening was pinched shut, and then the envelope was then fired. After it was fired, tokens could not be added or removed without breaking open the bulla.

Officials marked the bullae with clay seals testifying to the authenticity of the transaction. There were two types of seals-stamp seals and cylinder seals, which made impressions by being rolled across the wet clay. The seals were unique to the steward and usually depicted some type of religious imagery. The outer surface of the clay envelopes were often covered with seals, probably to make sure that a hole could not be made to add or remove items from the bulla without an official knowing. If any dispute arose about the contents of the bulla, both parties to the contract could break open the clay envelope and verify what was inside.

For some unknown reason, plain tokens were secured by envelopes, while more complex ones were secured with a cord. Both the seals and the tokens are found in burials, indicating that certain designated individuals were in charge of managing the surplus—a sure sign of burgeoning class inequality. Seals found buried with children indicate the transmission of intergenerational status.

3. Because it was unknown exactly what was inside the clay envelopes once they were fired, scribes made impressions in the outer surface of the wet clay to indicate what was inside. These markings are the first definite signs of writing in the sense of using abstract shapes impressed in clay to represent specific items and quantities. Number was still indicated by correspondence counting rather than abstract numerals.

After four millennia, the token system led to writing. The transition from counters to script took place simultaneously in Sumer and Elam, present-day western Iran when, around 3500 BC, Elam was under Sumerian domination. It occurred when tokens, probably representing a debt, were stored in envelopes until payment. These envelopes made of clay in the shape of a hollow ball had the disadvantage of hiding the tokens held inside. Some accountants, therefore, impressed the tokens on the surface of the envelope before enclosing them inside, so that the shape and number of counters held inside could be verified at all times. These markings were the first signs of writing. [1]

4. By the middle of the fourth millennium, instead of just being recorded on the bullae, impressions of tokens are recorded on flat clay tablets and fired. By 3200 BC, puffy clay tablet “receipts” are found recording various disbursements and transactions in temple archives. The tablets simply list numbers of quantities of items without purpose or context. The level of detail recorded by the tablets varied according to administrative level—more detail was recorded by scribes at higher administrative levels.

About 3200 BC, once the system of impressed signs was understood, clay tablets—solid cushion-shaped clay artifacts bearing the impressions of tokens—replaced the envelopes filled with tokens. The impression of a cone and a sphere token, representing measures of grain, resulted respectively in a wedge and a circular marking which bore the same meaning as the tokens they signified. They were ideograms—signs representing one concept. The impressed tablets continued to be used exclusively to record quantities of goods received or disbursed. They still expressed plurality in one-to-one correspondence. [1]

Eventually the clay tablets alone served to record transactions, taking the place of bullae. The tablets become the primary means of recording past and future transactions, even though both “technologies” continued to be used side-by-side for millennia. For unknown reasons, the clay tablet method was extensively adopted in southern Mesopotamia, whereas tokens continued to be the main method used in northern Mesopotamia. Clay tablet records were stored in temple archives, managing payments, contracts, receipts, loans, debts, and so on.

5. Eventually, when the quantities under consideration become too big for correspondence counting to work, symbols were established to separate quantity from the thing being counted – a symbol for “five” and “sheep” are combined together instead of repeating “sheep” five times. These numerals impressed in clay were derived from the shape of the token itself.

Early numerals were not abstract, but derived their value from association with the items they counted. The Sumerians used 60 different number signs grouped in a dozen or so metrological systems. For example, one system counted discrete objects like sheep, while other systems measured areas or volumes.

At the same time, the clay markings evolved into abstract symbols (pictographs) made with a wedge-shaped stylus rather than impressions of tokens. The wedge-shaped pictographs derived from the object they described:

Pictographs—signs representing tokens traced with a stylus rather than impressed—appeared about 3100 BC. These pictographs referring to goods mark an important step in the evolution of writing because they were never repeated in one-to-one correspondence to express numerosity.

Besides them, numerals—signs representing plurality—indicated the quantity of units recorded. For example, ‘33 jars of oil’ were shown by the incised pictographic sign ‘jar of oil’, preceded by three impressed circles and three wedges, the numerals standing respectively for ‘10’ and ‘1’.

The symbols for numerals were not new. They were the impressions of cones and spheres formerly representing measures of grain, which then had acquired a second, abstract, numerical meaning. The invention of numerals meant a considerable economy of signs since 33 jars of oil could be written with 7 rather then [sic] 33 markings. [1]

Sometime around the end of the third millennium BC during the Ur III period, a sexigecimal (base 60) place value notation system was devised. Each place represents a multiple of sixty (just as in our system, each place represents a multiple of ten. Sixty is the first number that 1,2,3,4,5, and 6 all factor into. It’s thought that counting was done by marking the phalanges of outstretched fingers in each hand with the thumb (three phalanges times four outstretched fingers). This could be repeated five times, using the fingers of the other hand to keep track (5 x 12 = 60). Base-60 actually has quite a few advantages. 60 is highly composite and easily divisible by 12 numbers simplifying fractional/decimal notation.

…the origin of the base 12 and of the related base 60 is an often-recurring question, even to non-mathematicians. The usual arithmetic (based on the divisors of 12) and or astronomical explanations (based on the number of moon-months) both are a posterior…

….a counting technique that considers parts of the fingers to represent the numbers from 1 to 12, is still in use in Egypt, Syria, Turkey, Iraq, Iran and Afghanistan, Pakistan, Indochina, India. The thumb of a hand counts the bones in the fingers of the same hand. Four fingers, with each three little bones, evidently yield 12 as a counting unit. The thumb itself is the counting tool, and its bones are not considered. Also, each dozen is counted by the fingers of the other hand, including the thumb, and the multiple 5 x 12 = 60 provides an additional indication of the often simultaneous occurrence of the duodecimal and sexagesimal base…

This physiological explanation for the duodecimal base is only a hypothesis, but number words as present day tribes in Africa use them, provide further evidence. N. W. Thomas [Tho] reported on such number words in his study of the West-African tribes in the region of the actual Nigeria. Between the rivers Benue and Gurara, which flow into the river Niger more westwards, live the Yasgua, the Koro and the Ham.

This explanation is not posterior like the arithmetical or the astronomical ones. This duodecimal base was indeed a practical one for what these early civilisations wanted to count or to represent. In the matriarchal societies, they could associate the number 1 to the woman, the number 3 to the man, and 4 to the union of woman and man. Or, in after some rather general evolution, they designated the male genitals by the number 3, and the genital symbol of women by 4, making 7 the symbol of their union. The number 4 seems to have been the most widespread of the mystical numbers. It was established by associations with colours, with social organisation, and with various customs among numerous tribes. The use of six as a mystical or sacred number was less extensively distributed through history and throughout the world than the four-cult, but sometimes a mythology past from quarters cult to a six cult. For example, the four cardinal points (such as North, South, East, West) are simply augmented by the addition of two other points (such as the zenith, above and nadir, below). On the other hand, the counting skills they obtained in this way, allowed them to note that there are 13 (moon)-months in one (solar) year, and not 12. [2]

The Babylonian cuneiform was not a true sexagesimal system as in there were not 60 different symbols. They basically represented numbers in a hybrid base-60 of a base-10. For example, thirty was made by repeating the symbol for 10 three times, forty was 10 repeated four times, and so on. Base sixty was likely chosen for ease of time/value calculations based on the length of the Mesopotamian year (a 360-day ‘fiscal year” with 5-and-change days set aside for festivals and debt forgiveness). Our divisions of a circle (degrees) and hours/minutes are also derived from this Mesopotamian base sixty, and are still in use.

…the sexagecimal number system of Mesopotamia in the historical period must have arisen from a fusion of a decimal system and a duodecimal system, and possible of a third element based on twenty. The widespread evidence for the very early duodecimal system, especially in the diffusion of the practice of dividing into twelve parts the wide band of fixed stars through which the sun passes its annual revolution (the zodiac), and the association of this feature with painted pottery gardening would indicate that the duodecimal system was characteristic of the Highland Zone Neolithic peasant cultures. The decimal usage probably came from the Semite peoples within the Fertile Crescent. If a vigecimal system also entered the mixture, it might have come from the south or southeast, for there seem to be, in the substrata of Mesopotamian culture, elements of tropical forest origin from this direction. [3]

We continue to use this counting method for time, which may make it somewhat clearer. Think of the value holders like this: (Hours) : (Minutes) : (seconds).

01:00 = 60
01:01 = 61
02:00 = 120
It takes the 60th count to turn the next value holder 1. So,

Interestingly, there is some evidence that the markings on the Ishango bone are based on a base-12 number system.

A good account of this process is given in this BBC article: How the world’s first accountants counted on cuneiform

6. Eventually, the need for recording proper names in contracts gave rise to the establishment of phonetic alphabets where symbols represented not words, but spoken sounds, typically syllables. This was done by using the word attached to a symbol to represent sounds.

For example, when Coca-Cola first arrived in China, shopkeepers needed a way to represent this new product. There was no pre-existing ideogram for “Coca Cola” in Chinese. They used a combination of Chinese characters which phonetically spelled out the sounds “Ko-ka-ko-la.” Many of these signs used the character pronounced “la” meaning “wax.” This led to all sorts of nonsensical phrases when it was read out loud, such as “female horse fastened with wax,” “wax-flattened mare,” and, most famously, “bite the wax tadpole” (eventually the company provided an ‘official’ transcription meaning, roughly, “to allow the mouth to be able to rejoice”). Nonetheless, clearly phonetic sounds were separated from what the ideograms represented. In such a way one could begin to separate the sound of the word from the pictographic image of what it represented.

In a similar fashion, when the system became adopted by the Akkadian culture, and Akkadian became the lingua franca of commerce during the Bronze Age, the need to transcribe proper names in written contracts led to ideograms being used to represent sounds rather than concepts. Transactions could be described in writing rather than just items and numbers, making them more meaningful:

With state formation, new regulations required that the names of the individuals who generated or received registered merchandise were entered on the tablets.

The personal names were transcribed by the mean of logograms—signs representing a word in a particular tongue. Logograms were easily drawn pictures of words with a sound close to that desired (for example in English the name Neil could be written with a sign showing bent knees ‘kneel’).

Because Sumerian was mostly a monosyllabic language, the logograms had a syllabic value. A syllable is a unit of spoken language consisting of one or more vowel sounds, alone, or with one or more consonants. When a name required several phonetic units, they were assembled in a rebus fashion. A typical Sumerian name ‘An Gives Life’ combined a star, the logogram for An, god of heaven, and an arrow, because the words for ‘arrow’ and ‘life’ were homonyms. The verb was not transcribed, but inferred, which was easy because the name was common. Phonetic signs allowed writing to break away from accounting…

After 2600–2500 BC, the Sumerian script became a complex system of ideograms mixed more and more frequently with phonetic signs. The resulting syllabary—system of phonetic signs expressing syllables—further modeled writing on to spoken language. With a repertory of about 400 signs, the script could express any topic of human endeavor. Some of the earliest syllabic texts were royal inscriptions, and religious, magic and literary texts. [1]

Far away in Egypt, totemic symbols were adapted to represent these sounds, resulting in the creation of hieroglyphic script. Proper names were recorded, and eventually the sounds of Egyptian speech were written down to transcribe the entire spoken language. Hieroglyphs are found on buildings such as tombs and temples. Early transactions were recorded on pottery shards. Later, the invention of papyrus from sedges growing along the Nile lead to the first written paper scripts.

Phonetic signs to transcribe personal names…created an avenue for writing to spread outside of Mesopotamia…The first Egyptian inscriptions…consisted of ivory labels and ceremonial artifacts such as maces and palettes bearing personal names, written phonetically as a rebus, visibly imitating Sumer…This explains why the Egyptian script was instantaneously phonetic. It also explains why the Egyptians never borrowed Sumerian signs. Their repertory consisted of hieroglyphs representing items familiar in the Egyptian culture that evoked sounds in their own tongue.

The phonetic transcription of personal names also played an important role in the dissemination of writing to the Indus Valley where, during a period of increased contact with Mesopotamia, c. 2500 BC, writing appears on seals featuring individuals’ names and titles. In turn, the Sumerian cuneiform syllabic script was adopted by many Near Eastern cultures who adapted it to their different linguistic families and in particular, Semitic (Akkadians and Eblaites); Indo-European (Mitanni, Hittites, and Persians); Caucasian (Hurriansand Urartians); and finally, Elamite and Kassite. It is likely that Linear A and B, the phonetic scripts of Crete and mainland Greece, c. 1400–1200 BC, were also influenced by the Near East. [1]

7. This system transformed from syllables to the letters as we know them today and spread via the activities of Semitic merchants and traders operating in the eastern Mediterranean. These traders would been familiar with the accounting techniques of the Near East, and their business was conducted with strangers. Since these were strangers, you needed contracts, and so you needed ways to write names and forms of speech. This allowed writing and numbers to grow beyond their original roots in managing centralized economies.

Semitic traders simplified the system into easily written “scratches” to represent distinct consonant sounds. A small repeating number of these “letters” could represent any language the Phoenician traders encountered.

Most vowels were not written in this system, a tradition which persists to this day in the Semitic alphabets of Hebrew and Arabic (although vowel marks are sometimes added). This may seem odd, but it works: I bt y cn rd ths sntnc evn wtht vwls.

The invention of the alphabet about 1500 BC ushered in the third phase in the evolution of writing in the ancient Near East. The first, so-called Proto-Sinaitic or Proto-Canaanite alphabet, which originated in the region of present-day Lebanon, took advantage of the fact that the sounds of any language are few. It consisted of a set of 22 letters, each standing for a single sound of voice, which, combined in countless ways, allowed for an unprecedented flexibility for transcribing speech.

This earliest alphabet was a complete departure from the previous syllabaries. First, the system was based on acrophony—signs to represent the first letter of the word they stood for—for example an ox head (alpu) was ‘a,’ a house (betu) was b. Second, it was consonantal—it dealt only with speech sounds characterized by constriction or closure at one or more points in the breath channel, like b, d, l, m, n, p, etc. Third, it streamlined the system to 22 signs, instead of several hundred. [1]

In the decentralized world after the Bronze Age collapse, this new system took the place of the Linear A and B recording systems of the earlier palace economies.

Alphabets appear to have arisen in only a few places and diffused from there, as this Reddit comment points out:

The cuneiform alphabets of the Middle East were ledgers first, then evolved into words. Egyptian hieroglyphs were totemic first, then evolved numbers and words. Chinese Han characters started as divination marks on turtle shells and ox bones. The Mayans started recording calendar days, and that evolved into a syllabic alphabet. My guess is that recording abstract information is a natural product of structured civilisation, which grows around cereal-based agriculture. That’s the common theme between all of them. Simple writing systems and totemic pictographs are a common theme all round the world. Where they really come into their own is in a trade-based central civilisation.

The “democratization” of script was to have a profound influence on Greek culture. Rather than just remaining in the hands of temple scribes and priests, many more people could use letters and numbers up and down the social ladder. They were not under the exclusive control of one particular social class. Due to the democratization of words and numbers, economic planning passed out of the hands of temple scribes and priests and engendered a radically decentralized approach to economic life. This eventually lead to markets and metallic coinage similar to our own system, as we’ll see.

2. Systems of Measurement

The other crucial innovation of accounting was metrology: partitioning items into discrete units that are divisible by one another. Although we take such measurement for granted today, the creation of standardized weights and measures continued until well into the nineteenth century with the establishment of the system international (SI) units of meter (distance), second (time), kilogram (mass), kelvin (temperature), pascal (pressure), and others. Standard weights and measures are as critical to bureaucracy as are writing and numerals.

Standardization is a fundamental aspect of state formation that is often overlooked. In this review of James C. Scott’s book, Seeing Like a State, Scott Alexander quotes Scott describing the difficulties faced by regional tax collectors in medieval Europe:

A hypothetical case of customary land tenure practices may help demonstrate how difficult it is to assimilate such practices to the barebones scheme of a modern cadastral map [land survey suitable for tax assessment][…]

Let us imagine a community in which families have usufruct rights to parcels of cropland during the main growing season. Only certain crops, however, may be planted, and every seven years the usufruct land is distributed among resident families according to each family’s size and its number of able-bodied adults. After the harvest of the main-season crop, all cropland reverts to common land where any family may glean, graze their fowl and livestock, and even plant quickly maturing, dry-season crops. Rights to graze fowl and livestock on pasture-land held in common by the village is extended to all local families, but the number of animals that can be grazed is restricted according to family size, especially in dry years when forage is scarce. Families not using their grazing rights can give them to other villagers but not to outsiders. Everyone has the right to gather firewood for normal family needs, and the village blacksmith and baker are given larger allotments. No commercial sale from village woodlands is permitted.

Trees that have been planted and any fruit they may bear are the property of the family who planted them, no matter where they are now growing. Fruit fallen from such tree, however, is the property of anyone who gathers it. When a family fells one of its trees or a tree is felled by a storm, the trunk belongs to the family, the branches to the immediate neighbors, and the “tops” (leaves and twigs) to any poorer villager who carries them off. Land is set aside for use or leasing out by widows with children and dependents of conscripted males. Usufruct rights to land and trees may be let to anyone in the village; the only time they may be let to someone outside the village is if no one in the community wishes to claim them. After a crop failure leading to a food shortage, many of these arrangements are readjusted.

Book Review: Seeing Like a State (Slate Star Codex)

Scott’s book reminds us just how much measurement and taxation are the harbingers of the coming of the state, even though these early states were not the impersonal professional bureaucracies that we associate with states today (China appears to have been the first to develop this). The creation of money and markets is what allowed for the state’s ability to channel resources to itself  to pay for soldiers and bureaucratic expertise, as we’ll see.

By the Babylonian period, complex time and material calculations were undertaken in the temples by officials in order to allow for mass production on a much larger scale than cottage industries. These activities, centered in the temples, were the first intentional surplus-generating activities to be undertaken by society. Such activities are not commonplace in traditional societies: production is mainly undertaken for subsistence and hoarding is explicitly discouraged.

Some tablets from the later Old Sumerian period detail bread baking, where a specific amount of bread is listed against the specification of its cereal ingredients, depending on quality as reflected in a production rate for a given type of bread. Other tablets included entries for bread and beer rations and the ingredients required to make them.

These tablets began by listing the names of individuals with the largest rations followed by those with smaller rations. At the end of the tablet, the amounts of bread and beer are totalled by type and the grand total for the flour and barley used was also recorded. The tablets were dated daily, and the scribes showed how the amount of flour corresponded exactly to the amount actually used in baking the bread, and the same applied to barley and beer…

…this checking of actual against theoretical amounts was “Perhaps the most important accounting operation introduced during the third millennium B.C.”…Deficits in one year, arising from shortage of actual amounts compared to theoretical amounts, were carried forward to the following year and were liable to later reimbursement…

…the entries record labour performance, along with theoretical credits and duties. The balancing of expected and actual labour performance was recorded at regular intervals for the foremen of the state-controlled labour force, using an accounting period of a 12-month-year, with each month being 30 days long, a time conception that corresponds exactly to that of ancient Egypt. Balances were carried forward to next periods; most frequently the balances were deficits (overdrawn) as the expected performances seem to have been “fixed as the maximum of what a foreman could reasonably demand of his workers”. Such balancing periodic entries were underpinned by some measure of standardisation of performance and a value equivalence system…[4]

In fact, the entire concept of leadership in these ancient societies appears to have been centered around concepts of fair and accurate standards of measurement, as Michael Hudson describes:

With writing and account-keeping came weights, measures, and standardizarion…Politically, the ideology of Mesopotamian cities was to create an evenly measured and “straight” cosmology of economic and social relations. Sumerian and Babylonian iconography represents rulers characteristically holding the measuring stick and coiled measuring rope to layout temple precincts. This defining royal task is illustrated on Gudea’s statues F and B in Lagash at the end of the third millennium. Such orientation aimed at grounding cities and their rule symbolically in the eternal regularities of natural order, as reflected in the celestial movements of the heavens.[5]

This “natural order” extended to the levies which were collected by the temples. This likely grew out of their role in coordinating the labor required to maintain the canal system which agriculture depended on. Their ability to accurately measure and plan future activities was a logical extension of their ability to scan the heavens and predict future floods and eclipses. From astronomy came the rest of their abilities.

These institutions were not dependent upon “taxpayer funds” unlike governments today; rather they were self-supporting enterprises, with prebends and dependent staff who were paid stipends (salaries) for their work. Because of their pro-social nature (they regularly aided widows and orphans), religious justification, and role in expanding the economy (they regularly produced goods for export), they were allowed to undertake activities such as charging rent and interest–the first written examples of this behavior. We might consider them to be the first antecedents of the modern business corporation (see future chapter).

What gave the ancient Sumerians the idea of charging one another interest? Linguistic evidence provides a clue. In the Sumerian language, the word for interest, mash, was also the term for calves. In ancient Greek, the word for interest, tokos, also refers to the offspring of cattle. The Latin term tecus, or flock, is the root of our word “pecuniary.” The Egyptian word for interest, like the Sumerian word, is ms, and means “to give birth.” All these terms point to the derivation of interest rates from the natural multiplication of livestock. If you lend someone a herd of thirty cattle for one year, you expect to be repaid with more than thirty cattle. The herd multiplies-the herder’s wealth has a natural rate of increase equal to the rate of reproduction of the livestock. If cattle were the standard currency, then loans in all comparable commodities would be expected to “give birth” as well. The idea of interest seems to be a natural one for an agricultural or pastoral society, but not so for hunter-gatherers. [6]

Just as with the scribes and viziers of ancient Egypt, a method had to be devised to standardize various tax, tithe, tribute, fines, and other payments owed to the central institutions from various entities. They also needed a way to evaluate how much was needed for time and material calculations. The way they accomplished this was to create a measurement unit, and to then use that unit to standardize the various goods and services produced by the diversifying Sumerian economy. In other words, a “unit of account.”

The earliest unit of account appears to have been a standard weight of a basket of barley, barley being the staple crop of the Sumerian economy. However, a more stable method was developed based on various weights of silver. This seems to have been related to silver’s role as a sacred substance whose storage and trade was controlled and manipulated by centralized institutions, that is, the temples and their high priests (what anthologists might call ‘prestige goods’):

…At about the same time as cities began to appear people started making ornaments out of electrum (an alloy of gold and silver), copper and gold, metals found naturally in nature. Metals have an almost unique, natural, physical property; they reflect light. The only other material that stone-age humans would have come across that reflected light would have been water, which along with sunlight is the basis of life. The first time a human spotted a nugget of gold sparkling in a river bed they must have experienced a sense of awe, here was an object that seemed to capture life-giving sunlight and water.

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. 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.

We don’t know much about economics in the ancient cities apart from for Mesopotamia, which has left hordes of clay tablets describing financial transactions. The economy was dominated by the temples who received rents and tribute, provided religious services and loans. The cuneiform tablets recorded the debits and credits associated with these activities. The transactions were denominated in shekels, crude bars of silver. Coins, metal tokens, rarely, if ever, actually changed hands.

Lady Credit (Magic, Maths and Money)

Another theory behind the use of silver bullion is derived from the fact that Mesopotamian city-states were not self-sufficient and needed to trade with each other on a regular basis. Silver was a universal standard of value, since the same religious ideas predominated across the Tigris/Euphrates valley, and this is what allowed is what allowed inter-city trading to take place. The value of silver percolated down through the rest of the society in “private” economic transactions by osmosis from temple activities (debt collection, tithes, trade, etc.)

In either case, money is a creation of the state through writing and measurement; it is not a spontaneous development arising out of countless market transactions. Silver derived from its ability to be accepted as payment to centralized institutions, and not from any intrinsic value. Impersonal economic transactions, to the extent that they existed, used this standard of value long before the emergence of coins or markets. As G.F. Knapp put it, “Within a state the validity of the kinds of money is not a trade phenomenon but rests on authority.”

Michael Hudson summarizes the creation of money in ancient Mesopotamia:

The kind of general-purpose money our civilisation has come to use commercially was developed by the temples and palaces of Sumer (southern Mesopotamia) in the third millennium BC…Their large scale and specialisation of economic functions required an integrated system of weights, measures and price equivalencies to track the crops, wool and other raw materials distributed to their dependent labour force, and to schedule and calculate the flow of rents, debts and interest owed to them. The most important such debts were those owed for consigning handicrafts to merchants for long-distance trade, and land, workshops, ale houses and professional tools of trade to ‘entrepreneurs’ acting as subcontractors.

Accounting prices were assigned to the resources of these large institutions, expressed in silver weight-equivalency, as were public fees and obligations. Setting the value of a unit of silver as equal to the monthly barley ration and land-unit crop yield enabled it to become the standard measure of value and means of payment…Under normal conditions these official proportions were reflected in transactions with the rest of the economy.

…The use of silver in their transactions was economized by the system functioning largely on the basis of debts mounting up as unpaid balances due. For small retail sales…the common practice for consumers was not to pay on the spot but to ‘run up a tab,’ much as is done in bars today[114]…such balances typically were cleared at harvest time, the New Year, the seasonal return of commercial voyages or similar periodic occasions. The most important debts were owed to the chiefs in tribal communities or to the public institutions in redistributive economies…[102]… and their official ‘collectors.’ …it also was through the commercial role of these institutions in long-distance trade that the monetary metals were imported and put into circulation.

The major way most families obtained silver evidently was to sell surplus crops produced on their own land or land leased from these institutions on a sharecropping basis. The palace also may have distributed silver to fighters after military victories, or perhaps on the occasion of the New Year or royal coronation…[115]

Silver’s use in exchange derived from its role as a unit of account. This is what gave it a general character beyond that of just another commodity… these public institutions were the ultimate guarantors of the value of silver, by accepting it in payment of obligations owed to them…

The units of measurement–the shekel in Babylonia and the deben in Egypt, and their various partitions– were the standard by which value was measured in these ancient societies. Yet all the evidence indicates that these standardized units were established and used thousands of years before “free” markets and profits played any significant role in daily economic life. While individual transactions in silver are recorded, it appears that most “commercial” transactions were written contracts – credit/debit relations. There were no coins. Daily transactions were likely undertaken through the traditional methods of redistribution, reciprocity and householding, as well as credit. As Henry summarizes in the case of Egypt:

…goods were…valued in terms of the deben (and labour services in the pyramid cities determined by the deben value of consumption goods), but no debens ever changed hands…In other words, money does not originate as a medium of exchange but as a unit of account (and something of a store of value with regard to the king’s treasury), where the measure of value is arbitrarily specified by decree, and goods and services of various qualities and quantities can then be assigned a monetary value to allow a reasonable form of bookkeeping to keep track of tax obligations and payments and to maintain the separate accounts of the king. It should also be noted that the deben did not serve as means of payment (as with modern money), but did function as the means (or measure) through which payment was made.

He quotes Alfred Mitchell-Innes, who came to the same conclusion from his survey of economic history in his pathbreaking article for the Banking Law Journal:

The theory of an abstract standard is not so extraordinary as it at first appears…All our measures are the same. No one has ever seen an ounce or a foot or an hour .. . We divide, as it were, infinite distance or space into arbitrary parts, and devise more or less accurate implements for measuring such parts when applied to things having a corporeal existence …

Credit and debt are abstract ideas, and we could not, if we would, measure them by the standard of any tangible thing. We divide, as it were, infinite credit and debt into arbitrary parts called a dollar or a pound, and long habit makes us think of these measures as something fixed and accurate; whereas, as a matter of fact, they are peculiarly liable to fluctuations (Innes, 1914, p. 155).

Essentially, the privileging of the “medium of exchange” aspect of money is not rooted in historical fact, but is based on economists’ desire to set up “free markets” and “private enterprise” as primordial and all state activity as an unnecessary and parasitical appendage. They need this in order to make their philosophical assumptions valid. In other words, this ahistorical view stems from the libertarian bias of modern economic “science” and not from true historical reality.

It is important to note that in Egypt (and this would accord with Mesopotamia and other areas) money was developed in a non-market, non-exchange economy. While some economic historians and anthropologists of a neoclassical persuasion diligently speculate that the Egyptian economy must have paralleled that with which we are now familiar, there is no evidence for exchange in the Old Kingdom. The Egyptians had no vocabulary for buying, selling, or even money; there was no conception of trading at a profit. It is very clear that there was no market in grains. A market economy (of a sort) and the monetization of the economy, including the production of coins, had to wait until Greek domination…

When these concepts become imported into Greek culture by Middle-Eastern traders after the Bronze Age collapse, they will become transmogrified into something closer to the kind of money and markets we know of today. This is the next crucial step in the evolution of money. We’ll consider that history next time.


[2] Vladimir Pletser: Does the Ishango Bone Indicate Knowledge of the base 12? An Interpretation of a Prehistoric Discovery.

[3] Carroll Quigley: The Evolution of Civilizations, pp. 213-214

[4] Carmona and Ezzamel: Accounting and Forms of Accountability in Ancient Civilizations: Mesopotamia and Ancient Egypt. IE Working Paper WP05-21

[5] Urbanization and land ownership summary review

[6] William Goetzmann: Money Changes Everything: How Finance Made Civilization Possible.

[7] Wray, et. al.: Credit and State Theories of Money: The Contributions of Alfred Mitchell-Innes

The Origin of Money 3 – Two Paths to Money

1. Class and Religion

As the very first proto-states began to form in the great alluvial river valleys of the world some time around 8000 years ago, social relations were profoundly transformed. The switch from shifting cultivation to permanent holdings must have called for some sort of land distribution method. The resulting increase in population density created the need for some sort of authority which could allocate resources which were now becoming scarce—things like land and water. New and specialized tasks were called for, from creating bricks, timber and plaster for now-permanent dwellings, to creating storage vessels for grain (granaries, pottery), to digging drainage ditches, irrigation channels and water wells for cereal cultivation (as well as the need to manage all these activities).

Evidence indicates that at this time, class stratification emerged. Increasingly elaborate burials signify that some individuals had gained a measure of control over surplus resources. It is this development which is key to the development of money, not market transactions.

Egyptologist John Henry argues that the origin of money is intrinsically bound up with the transformation from egalitarian tribal societies to class-based societies. It is the ability of one class to impose non-reciprocal obligations on another, he argues, that is the basis of money, not voluntary self-interested transactions among equals. In other words, “…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” [1]

Henry points out that traditional societies are egalitarian and have no need for money. They practice the “rule of hospitality” such that everyone is assured access to basic subsistence. Critical resources are owned and managed collectively. Everyone must contribute to the survival of the collective, but such obligations are reciprocal and not top-down. As the tribes made political decisions on a consensus basis, there was no way for one group to impose its will on the majority and gain control over all the surplus resources.

He argues that the uneven nature of creditor-debtor relationships would have precluded money from emerging under such conditions, since money presupposes a credit/debt relationship, and debtors are under one-way obligations to creditors (although this is not entirely correct–as we have seen, feasting is often used to create such unequal arrangements, albeit without formalized “money”).

In this society, there could be no debt. For every debtor there must be a creditor, and such a relationship is one of inequality with creditors having economic power over debtors. Such an arrangement runs counter to the rule of hospitality, violating the right of some – debtors – to subsistence. True, tribal members were placed under various obligations – they must contribute to production, provide for the well-being of their members, etc. – and debt is an obligation. But, such obligations were internal to the collective itself and of a reciprocal nature: all had obligations to all. There was no arrangement in which some would owe obligations to others in a non-egalitarian relationship [2]

Evidence indicates increasing cultural unification among villages along the Nile during the Naqada (pre-dynastic) period. Cereal farming practices spread southward from the delta during Naqada IA-IIB, and southern pottery depicts images of paddled boats which likely unified north and south. During Naqada IIC-D, we see a “cultural unification of Egypt” as funerary practices spread as well. More elaborate burial goods and segregated cemeteries indicate the presence of hierarchy at this time. During Naqada IIIA-B, it is thought that rule by hereditary kings was established (Dynasty 0), and by Naqada IIIC the first dynasty was founded, ushering in “official” Egyptian history. As Henry sums up: “Up to about 4400 BC, the evidence is that Egyptian populations lived in egalitarian, tribal arrangements. By the period 3200-3000, tribal society had been transformed into class society, and over the next 500 years the class structures became solidified around a semi-divine kingship.”

As class stratification emerged, reciprocal tribal obligations would have gradually been transformed into non-reciprocal obligations levied on the majority by a minority–a managerial class who controlled and managed surplus economic production. But how could a small subgroup gain control over the resources produced by the whole tribe? Such a transformation would not have been simply acquiesced to by the majority. As Henry states, “A segment of an egalitarian society cannot (and would not) simply set itself up as a separate and unequal class de novathe practice of inequality…would have to develop as a consequence of historical accident rather than conscious plan…

Henry’s hypothesizes that taxes began when reciprocal tribal levies became concentrated in the hands of administrator elites operating out of the Pharaoh’s household who were tasked with creation and maintenance of the hydraulic system. Through their role as managers of the Nile river, the hydraulic engineers would come to play an increasingly important role in the expansion of the Egyptian economy.

The need for material support for their efforts gave rise to levies to support these activities. While all members of society would benefit from such efforts, the hydraulic engineers would benefit more. Even a small degree of wealth differential would add up over time. At the same time, the engineers would have also garnered control over the trade in the goods moving up and down the Nile. Henry writes:

Given the traditional arrangements of tribal society, it is probable that members of a particular clan (or kinship group) were designated as hydraulic engineers. Such a group would organize the labour which was rotated out of other clans to construct the dykes, levees, and canals. They would also be in charge of the distribution of food, clothing, tools, etc. produced in the tribal villages and regularly sent to wherever the hydraulic system was being worked. And, they would gradually organize the increasingly regularized trade relations that the expansion of the hydraulic system required as the engineers would have the requisite knowledge of those requirements. This would also place them in the position of organizing the goods that served as exportables. In other words, these full-time engineers learned administrative skills beyond those required in the small communities of which tribal society consisted.

…As full-time specialists, they would develop skills and, in particular, knowledge that was not shared by all members of the community. And, as these populations became increasingly dependent on agriculture, they also become increasingly dependent on the specialized knowledge of the engineers…They were now full-time specialists who controlled a significant flow of goods and labour and upon whom the majority of the population were dependent. The old collective rights and obligations of tribal society were being abridged and one group – the majority – was increasingly obligated to another. Inequality was growing and now becoming marked…

As this process unfolded, the appearance of tribal society remained intact, while the substance was transformed.This prevented rival institutions from forming.

Egyptian society was traditionally organized on the basis of phyles. It is thought that these originated in prehistoric times as “totemic clans.” Members of various clans would rotate in and out of service in the king’s household. Increasingly, the king’s administrators usurped the roles formerly played by clan leaders:

The temple staff was organized into groups for which the conventional modern term is phyle (a Greek term meaning company, tribe). This was the common form of temple organization, with five phyles in the Old Kingdom, each one subdivided into two divisions, which apparently worked at different times. Each subdivision, of around twenty men, served for only one month in ten.

Presumably for the extended leave periods they reverted to agricultural or other work in their villages, so that the undoubted benefits of temple service—payments as well as prestige—were widely spread. Whatever ancient reasoning lay behind the system, the practical consequence was a sharing out of jobs by the state. The number of employees required was multiplied by many times, hugely increasing the numbers of people receiving partial support from the state.

Thus, it was a transformation of existing structures, rather than the creation of new ones, that ushered in class society. The same process took place roughly at the same time in Mesopotamia, where the household model remained intact while becoming “institutionalized:”

Johannes Renger (1995) succinctly states: “The records, both written and archaeological, indicate that large institutional households decisively determined the social and economic reality in southern Mesopotamia, i.e., Babylonia, at least since the latter part of the fourth and the beginning of the third millennium.” Kinship was neither marginalized nor replaced by a meritocracy of individualism, rather, an increasing managerial bureaucracy emerged that was controlled by kin-related individuals. Written records and archaeology provide evidence for the existence of large institutional households (oikoi) by the end of the fourth millennium. These institutional households were self-sustaining and autarchic economic units. The household (oikos) constituted the center of the productive economic activities we now handle through the market…[4]

The interdependence of villages up and down the river (and across the canal system in Mesopotamia) would have called for the engineers to apply their skills in a broader context than that of a single village. They would have formed a supra-regional authority to manage the entire watershed, since the agricultural activities one village affected all the others downstream. This would have expanded their reach beyond that of a single village, and far beyond that of the simple territorial clan leaders:

During years of low inundation, one village taking too much of the available water would endanger the production process of villages downstream. During periods of high inundation, failure to attend to needed repairs to the levees in one region would obviously affect not only that area but the whole valley beyond the breach. We also know that in this period, there was a significant shift in the ecology of this region resulting in greater aridity, thus a reduced water flow. Such a development would promote the need for control superseding any particular tribe’s needs or abilities.

Thus, the engineer-administrators, originally based in one tribal organization and practising egalitarian relations with other members of their tribe, would now be called upon to use their knowledge and skills to administer an extended physical area that would include any number of tribes. That is, the engineers increasingly saw themselves as independent of any particular tribe and were now responsible for the well-being of a large population, independent of tribal status…

To keep resources flowing in their direction, the old reciprocal back-and-forth tribal obligations had to be transformed into one-way, non-reciprocal ones. Henry speculates that this was accomplished by religious ideology. The hydraulic engineers became a full-time priesthood. “The older tribal obligations to provide the resources to construct and maintain the hydraulic system were now converted – in part – to maintain a privileged section of the population that no longer functioned, except in a ceremonial fashion, as specialized labour in the production process.”

Tribal societies practice totemic magic; where communication with long-deceased ancestors by the living is used to gain control over the invisible world underlying complex natural phenomena, such as the change of seasons and movements of stars, which were not understood by pre-scientific populations.

Totemism became supplanted by a specialized priesthood practicing “magic” which could intercede with the gods on behalf of humanity. The old tribal totems were converted to a pantheon of animal-headed gods(Horus, Thoth, Anubis, The pharaoh became a divine entity who could intercede with the gods on behalf of humanity. An elaborate funerary architecture and death cult was established to justify these practices. Cosmological symbolism, reaching back to the herding origin of Egyptian culture, was appropriated to create a rich and complex mythology centered around the afterlife. The temples played an increasing role in both the spiritual and also the material management of Egyptian culture. But then again, magic has always really been about manipulating people’s psychology rather than any so-called invisible forces:

“The king had been chosen and approved by the gods and after his death he retired into their company. Contact with the gods, achieved through ritual, was his prerogative, although for practical purposes the more mundane elements were delegated to priests. For the people of Egypt, their king was a guarantor of the continued orderly running of their world: the regular change of seasons, the return of the annual inundation of the Nile, and the predictable movements of the heavenly bodies, but also safety from the threatening forces of nature as well as enemies outside Egypt’s borders.”


Essentially, the spirit world was converted to one of gods, and the control of nature, previously seen as a generally sympathetic force, was now in the hands of the priests. Nature itself became hostile and its forces, controlled by gods, required pacification through offerings. The king -the ‘one true priest’ – and the priests placed themselves as the central unifying force around which continued economic success depended. In so doing, they could maintain the flow of resources that provided their enormously high levels of conspicuous consumption and wasteful expenditures that certified their status as envoys to the natural world.

This encoding of celestial movements in the very earliest monoliths indicates that studying the movements of the stars, planets, sun and moon was associated with management of mass labor and religious concepts from the start. This association can be seen encoded in the form of the earliest cities. Every major priesthood in both the Old world and the New was obsessed with observing the heavens. The bones found with calendrical markings indicate that this probably dated back to the Ice Age with certain “sky chiefs” or shamans.

This ability to mark time and track the movements of the heavens was probably just as responsible for the establishment of the priesthood as was hydraulic engineering, as Carroll Quigley  observes:

…we might infer that, at some remote date, some unsung genius or, better, some observant family, saw a connection between the advent of the flood and the movements of the sun–two events that had not previously seemed connected. This individual or family noted that the rising sun appeared at a slightly different point on the horizon each morning, finally reaching a limit where it hesitated for a few days before it began to return…Thus was born a rudimentary idea of the solar year, the full duration of the sun’s movement back to its starting point. With this information the observer was able to estimate roughly the day on which the flood would arrive each year. This calculation the discoverers kept secret, for their own profit, using the knowledge to work on the fears and superstitions of their neighbors, trying to convince others that they possessed magical powers enabling them to foretell the arrival of the flood, or even the power to make it arrive.

The original discoverers of this information could hardly have told the arrival of the flood within a span of time much less than ten days. However, the fear engendered by the flood was so great, increased by the realization that the crops would fail if it did not arrive, that some, at least, accepted the discoverers’ claims and yielded to their demands for tribute. The discoverers probably offered to reveal the time of the flood in advance to those who would contribute a share of their crops, or perhaps they even threatened to bring the flood or to keep it away if they failed to obtain promises of tithes from the crops of their neighbors. However skeptical these neighbors might be of such claims the first year, no more than one lucky forecast was needed for most of them to become willing givers…The ignorance of the majority made it easy for the possessors of this specialized knowledge to use it as proof that they had supernatural powers.

Moreover, it was not necessary to convince a majority or even many of their neighbors. If any small number contributed, a surplus would accumulate which could be used, in the form of flood protection embankments or irrigation ditches, to provide very concrete evidence that it was worthwhile to belong to the new organization. Thus came into existence the central institution of ancient Mesopotamia–the Sumerian priesthood.

This priesthood became a closed group, able to control enormous wealth and incomes, and concentrated very largely within the study of solar and astronomical periodicities on which their influence was originally based. With the surplus thus created, the priesthood was able to command human labor in large amounts and to direct this labor from the simple tillage of the peasant peoples to the diversified and specialized activities that constitute civilized living. Above all, this centralized direction provided the system of flood control and irrigation on which all subsequent progress was founded. Similarly, these priest-controlled surpluses provided the capital for the many inventions of the age of expansion of Mesopotamian civilization. [5]

Mass labor was channeled to building the elaborate funerary architecture and temples of the Egyptian state religion. In the days before mass media, the prevailing cultural ideology had to be encoded and reinforced by brick and stone. This labor was also organized by phyle. The priestly caste, rather than the tribal leaders, were now perforce the ruling class:

Under the new social organization, tribal obligations were converted into levies (or taxes, if one views this term broadly enough). The economic unit taxed was not the individual but the village. As well, the king and priests did not arbitrarily assign a tax level on the village, but tax assessors and collectors (scribes) met with the village chief who would assemble the village council to negotiate the tax. This appears to have been done on a biennial basis known as ‘counting of cattle’, a census that also served as the dating for the various reigns of the king. Should a village renege on its obligation (default), the chief responsible for the collection of taxes could be flogged by the scribes.

Note that such a punishment makes the chief responsible to the priests rather than to the clan, further eroding the substance of tribal relations. Supervising all the local or regional scribes, and assuring both competence and honesty in this process, was a vizier who exercised central authority in the name of the king.

The central authority used their control over society’s resources to establish a redistributive economy, run through pharaoh’s household. The redistributive economy reinforced the need for levies-cum-taxes from the general population, which were channeled through the Pharaoh’s household and back through all strata of the Egyptian economy:

Tribal reciprocity, though not totally abrogated, was no longer the universal standard among the Egyptian populations, and was replaced by an economy of limited redistribution...while the substance of tribal society was increasingly gutted, the emerging class had to maintain the forms of that organization. This was necessary in order to present the veneer that nothing fundamental had changed when, in fact, everything of substance had been altered…

The economic surplus collected in the form of taxes was directed toward the priests who then redistributed some portion through the various levels of the bureaucracy, the temple artisans, and the workers who laboured on the various religious and hydraulic projects. Hence, Egyptian society (along with others of this type) can be labelled an economy based on ‘redistribution’.

However, it is important not to misunderstand the nature of this term. Such economies did not engage in full redistribution as it would defeat the whole purpose of such an economy if all production were to be first directed to the centre, then flow back through all segments of society in some elaborate redistribution system. Not only would such a system be markedly inefficient, but what would be the point?

Rather, only a portion of the economic surplus, produced by the majority of the population, would flow to the centre, and this share of output would then be apportioned among the minority segments of society as stated above. The priests, of course, would claim the lion’s share.

Simple redistribution would not be enough to secure coercive power, however. In that case, you would be just an intermediary, collecting everything and giving it away. Instead, many of the resources thus collected would be channeled into image building activities: construction projects, hiring specialized craftsmen, acquiring a retinue of retainers and advisors, engaging in overseas trading missions, infrastructure improvements, military campaigns, religious rituals, and other such activities. It is through these activities that redistributive economies, made possible through taxation, became centralized institutions of power cemented in the hands of a hereditary elite.

As long as a chief merely returns everything he has been handed, he gains nothing in wealth or power. Only when he begins to keep a large part of it, sharing it with his retainers and supporters but not beyond that, does power begin to augment…the power of a chief to appropriate and retain food does not flow automatically from his right to collect and redistribute it. Villagers freely allow a chief to equalize each family’s share of meat or crops through redistribution because they benefit from it. But they will not willingly suffer the same chief to keep the lion’s share of food for himself. Before doing this, he must acquire additional power, and that power must come from another source.

The word “redistribution” is often used very loosely. Whenever the word is applied in describing the activity of a chief we should ask two questions (1) “What percentage of the food or goods taken in by the chief is actually redistributed?” (2) “To what percentage of the population are they redistributed?” For chiefly disbursement to be genuine redistribution, both percentages should be high. If the percentages are small, what we have is not real redistribution at all, but something more akin to taxation. And it is in taxation that the sinews of government really lie. When a chief can compel the population to turn food and goods over to him, which he can then apply at will, he is at last manifesting power.

By the selective distribution of food, goods, booty, women and the like the chief rewards those who have rendered him service. Thus he builds up a core of officials, warriors, henchmen, retainers, and the like who will be personally loyal to him and through whom he can issue orders and be obeyed. In short, it is through shrewd and self-interested disbursement of taxes that the administrative machinery of the chiefdom (and the state) is built up. However, the chief who does this is no longer a redistributor, he is an appropriator and a concentrator… Summarizing his findings for chiefdoms generally, Steponaitis noted: “What formally appears to be a redistribution in complex chiefdoms is functionally more akin to the collection of tribute than the institutionalized sharing of surplus.” [6]

This process probably came about through military conquest.

By the fourth millennium BC, three proto-states emerged along the Nile River: This, Naqada, and Heirakonopolis, each centered on a capital city. These shared a common culture, but competed politically. These polities came to be dominated by Heirakonoplis (Nekhen), which went on to unify Upper (southern) Egypt. Upper Egypt conquered the chiefdoms of Lower Egypt (the Nile Delta), creating the Egyptian state and the first dynasty, as depicted on the Narmer Palette. Depictions of martial conquest remained in royal iconography through Egyptian history.

A military needs supplies–food, weapons, and so forth, to wage war. In cases of attack by outsiders, everyone is expected to contribute to common defense. Military operations would also have required levies from the general population. Armies need to be provisioned and fed, and this can only be done with forward planning and large storehouses. But it’s not fair to just requisition supplies from producers who make things directly related to military use. It would have violated egalitarian norms of shared sacrifice in wartime. The answer for this situation was to raise a general levy across the population to support military efforts, even from who produced items not directly related to military use like coppersmiths and chariot-makers.

These contributions would have been paid to those who could organize the surplus in collective defense of the territory, mobilize labor in the form of troops, and engage in successful territorial expansion. The resources of the conquered territories would then flow into the same bureaucratic structure. This process continued apace, as the villages along the Nile became assimilated into a single culture under the reign of a single ruler.

No state is known to have arisen directly from the fusion of autonomous villages. all seem to have been formed through the coalescing of groups already aggregated into supravillage units. Such units were, by my definition, chiefdoms. Moreover, because the aggregation of villages occurs only through war, or the threat of it, any theory of the origin of chiefdoms that foregoes this mechanism is severely handicapped…Once chiefdoms begin to form in a region, the process proceeds rapidly. The military advantage that size alone confers on a society means that even a minimal chiefdom will have a significant edge over its neighbors if they are still independent villages. as a result, it will not be long before autonomous villages as such will cease to exist. Either they will be defeated by and incorporated into one of the existing chiefdoms or they will join forces with other such villages in a defensive alliance, which will itself tend to become a chiefdom. [7]

Eventually, foreigners would become subjugated as well. When populations were overrun, they became subject populations where wealth was regularly extracted from them in the form of tribute. Tribute is essentially an extortion payment from a militarily weak population to a stronger one in order to leave them alone. To collect this tribute, a top-down political apparatus was established which funneled resources from the periphery to a core.

In addition to the portion of the surplus collected now as taxes, the king also collected royal gifts as a form of tribute from foreign populations. As the goods that formed this income could be in the same form as the income that flowed from the internal population, but was the property of the king proper, it had to be kept apart from the internally generated income…

The later Haxamanishya-Akhaemenid-dynasty Persian emperors of 550 to 330 BC, who ended up controlling much of the Near East, perfected this technique. Rather than killing or enslaving defeated populations, they kept them alive and allowed them to live in peace under the rule and laws of the imperial power. In exchange, they set up a tax system which funneled a portion of their economic output into the imperial treasuries. They became, in essence, farmers who kept peasants instead of livestock. This goes to prove Stanley Diamond’s observation that “Civilization originates in conquest abroad and repression at home.” [8]

The necessity of managing these diverse resource flows called for the creation of a bureaucratic structure. Taxes and tribute were assessed in a unit of account, usually a reference to a certain set measure of weight. It was this standard, that is the origin of money, not some sort of intermediate good chosen to reduce barter costs. On this point, the evidence is unambiguous:

At some early point in the Old Kingdom, the growing complexities of the new economic arrangements required the introduction of a unit of account in which taxes and their payment could be reckoned and the various accounts in the treasury could be kept separate and maintained. This unit was the deben (and its fractional denomination, the shdt- 1/12 of a deben)…The fact that the deben bore no relation to any specific object, but referred to an arbitrary unit of weight only, is a certain indication that Egyptian money was decidedly not based on some ‘intrinsic value.’…In other words, money does not originate as a medium of exchange but as a unit of account (and something of a store of value with regard to the king’s treasury), where the measure of value is arbitrarily specified by decree, and goods and services of various qualities and quantities can then be assigned a monetary value to allow a reasonable form of bookkeeping to keep track of tax obligations and payments and to maintain the separate accounts of the king.

It should also be noted that the deben did not serve as means of payment (as with modern money), but did function as the means (or measure) through which payment was made….money as simply a non-tangible abstract unit in which obligations are created and discharged, while it may appear obtuse to a modern economist, should not be all that difficult to comprehend….

2. Tribal obligations and Weregild

A second route to money stems from ancient penal systems set up by tribal societies.

In tribal societies, when a crime is committed, the transgressor is required to make restitution payments to the victim and/or the victim’s family/clan/tribe. The transgressor is considered to be “indebted” or “liable” to the victim(s) until such payment is made. In many languages, the word for “debt” is analogous to the words designating “sin” or “transgression.” Also, the verb “to pay” has its roots in words meaning “to pacify, “to appease” or “to satisfy.” This indebtedness continues until such time as restitution is paid to the victim and balance is restored.

Many Indo-European cultures practice the notion of “blood-wealth,” or Weregild. The term derives from wair meaning man, and gildan meaning “to pay” or “to render.” These were fines assessed by tribal councils and public assemblies and paid directly to the victims or their families in order to prevent blood feuds from escalating out of control. “A long list fines for each possible transgression was developed, and a designated “rememberer” would be responsible for passing it down to the next generation. Note that each fine was levied in terms of a particular good that was both useful to the victim and more-or-less easily obtained by the perpetrator.”

Often, violations were associated with a specific fine based on the severity of the offense. The Code of Hammurabi and the Salic law both specified very specific compensation payments for various offenses (such as gouging out an eye, or cutting off a nose, or manslaughter—must have been fun times back then!). In tribal societies, these could be assessed in terms of cattle, grain, goats, chickens, and even (in ancient Ireland, for example) slave girls!

These payments were originally assessed on a case-by-case basis rather than a regular unit of account. However, over time the idea of weregild gave rise to the idea of general monetary debts owed to authorities, including fees, tithes, taxes, and tribute. “The key innovation, then, lay in the transformation of what had been the transgressor’s debt to the victim to a universal “debt” or tax obligation imposed by and payable to the authority.”

It is almost certain that weregild fines were gradually converted to payments made to an authority. This could not occur in an egalitarian tribal society, but had to await the rise of some sort of ruling class. As Henry argues for the case of Egypt, the earliest ruling classes were probably religious officials, who demanded tithes (ostensibly, to keep the gods happy). Alternatively, conquerors require payments of tribute by a subject population. Tithes and tribute thus came to replace weregild fines, and fines for “transgressions against society”, paid to the rightful ruler, could be levied for almost any conceivable activity. Eventually, taxes would replace most fees, fines and tribute.

Once debts are paid to a central authority, it is unwieldy to juggle all the various types of objects that can be paid. “When all payments are made to the single authority…this wergild sort of system becomes cumbersome. Unless well-developed markets exist, those with liabilities denominated in specific goods or services could find it difficult to make such payments. Or, the authority could find itself blessed with an overabundance of one type of good while short of others.” [9]

For example, tribal payments in ancient Ireland were made in slave girls called kumals. But over time, this became cumbersome, and kumals became simply an abstract unit of account:

Probably the second century a.d. saw the kumal transformed into an abstract unit of account. The laws under King Fegus, king of Uldah, required a blood money payment of “seven kumals of silver” and “seven kumals of land” for the murder of anyone under the king’s protection. These laws clearly show that land and silver were mediums of exchange, and kumals were only a unit of account. These laws were set forth in two legal texts, the Senchus Mor and the Book of Aicill, both of which contained a table legally sanctioning the kumal standard. According to this table:

8 wheat-grains = 1 pinginn of silver
3 pinginns = 1 screpall
3 screpalls = 1 sheep
4 sheep = 1 heifer
6 heifers = 1 cow
3 cows = 1 kumal

The example of slave-girl money in Ireland brings to the forefront four separate functions of money. Money serves as a medium of exchange, a store of wealth, a unit of account or measure of value, and a standard of deferred payment. The slave-girl money evolved into a unit of account only, while the other roles of money were filled by various commodities, land, and precious metals.

Slave Currency of Ancient Ireland (Encyclopedia of Money)

Once again, money arises out of the ability to extinguish a debt, in this case one’s “debt to society”:

According to this view, money is essentially an instrument that denominates and extinguishes social debt obligation. It first quantifies debt obligation between individuals. For example, Joshua has conducted wrongdoing to Henry; hence the public authority determines that Joshua owes to Henry one cattle. In this case, that cattle is the “money” that effectively extinguishes Joshua’s liability/debt to Henry. …Money of account might be a cattle between Joshua and Henry, and then ten watermelons between Helen and Linda, etc.

However, when there emerges the need to denominate debt obligation between individuals and the “society”/central authority in various forms (such as fines, fees, taxes, etc.), a standard unit of account for money was needed to serve as the standard measure of value. 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” (Keynes, 1930). 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.

3. Conclusion

Although these paths to money differ, they are fundamentally similar and provide a historically supported and logically consistent account of the transformation from primitive money to more modern forms.

In both of these scenarios, payments are made to some sort of institutional authority tasked with social maintenance, whether adjudication of disputes, execution of justice, military operations, communal redistribution and welfare, or maintenance of critical infrastructure. As Wray states, “The unit of account is the numeraire in which credits and debts are measured.” Only when this “unit of account” is established can markets form. Thus, both money and markets are creations of the state and are rooted in social hierarchy and inequality.

Two further critical inventions are required to create such a numeraire: accounting and measurement. We’ll discuss how those innovations came about next time.

[1] Semenova and Wray. The Rise of Money and Class Society: The Contributions of John F. Henry (WP 832) (2)

[2] John Henry: The Social Origins of Money: The Case of Egypt. In Credit and State Theories of Money: The Contributions of Alfred Mitchell-Innes. Randall Wray and Edward Elgar, editors. Subsequent passages from Henry are also taken from this work unless noted otherwise.

[3] Barry Kemp: Egypt: Anatomy of a Civilization, pp. 166-168

[4] C.C. Lamberg-Karlovsky: Households, Land tenure, and Communication Systems in the 6th-4th Millennia of Greater Mesopotamia. In Urbanization and Land Ownership in the Ancient Near East. Michael Hudson and Baruch Levine, editors.

[5] Carroll Quigley: The Evolution of Civilizations, pp. 211-213

[6] The Transition to Statehood in the New World. edited by Grant D. Jones, Robert R. Kautz, Cambridge University Press

[7] ibid.

[8] Stanley Diamond: In Search of the Primitive: A Critique of Civilization

[9] L. Randall Wray: The Credit Money and State Money Approaches (Working Paper 32)

Trump Appoints Bane to National Security Council

Bane will sit on the National Defense Council, and several government agencies will be under his exclusive control.

WASHINGTON, D.C.—In an unexpected development, this week Donald Trump announced the appointment of Bane as senior advisor to the White House. In a move certain to raise consternation inside Beltway circles, President Trump also issued an executive order giving Bane a prominent seat on the National Security Council, a position which is normally reserved for cabinet secretaries and high-ranking military personnel, as well as absolute control over several secretive government agencies answerable only to Bane himself. Despite the sudden, extraordinary and very unusual nature of this move, little is known about the president’s latest advisor.

Journalists immediately began digging into Bane’s past to uncover any details about the appointee. Next to nothing is known about Bane’s life before about six months ago. His age, birthplace, birth date, parentage, and real name are a total mystery. Almost immediately, rumors began circulating on the internet claiming that he was born and raised in a centuries-old foreign penitentiary known as “the Pit.” Some sources have claimed a connection between Bane and a number of foreign countries, including Russia, but none of these stories have been substantiated. However, Bane’s more recent political connections are sure to cause some controversy, particularly his association with the so-called Alt-Right, his prior membership in the League of Shadows, and his work for Goldman Sachs.

In a press conference Monday, Mr. Trump criticized journalists for going on what he referred to as a “witch hunt,” and especially singled out news sources owned by Wayne Enterprises as purveyors of “fake news,” accusing Mr. Wayne of “holding a grudge,” and being against the Trump administration from “day one” to pro-Democrat leanings. He also dismissed as a “totally false” reports that Bane had some sort of “inside information” on President Trump and his family, or a thermonuclear device hidden somewhere in a major American city, adding “We’ve got a lot of killers in this country.” As Trump was escorted out of the conference by several burly men, members of the assembled press corps began shouting, “Tell us about Bane! Why does he wear the mask?”

In his first meeting with the assembled journalists, surrounded by anonymous henchmen, Bane noted that, “No one cared who I was until I put on the mask,” setting up an adversarial tone for the rest of the interview. Refusing to answer any questions, Bane then made the following remarks directly to the camera, bypassing the reporters:

“We don’t believe there is a functional conservative party in this country and we certainly don’t think the Republican Party is that. It’s going to be an insurgent, center-right populist movement that is virulently anti-establishment, and it’s going to continue to hammer this city, both the progressive left and the institutional Republican Party. It doesn’t matter who we are. What matters is our plan.”

“Now we came here not as conquerors, but as liberators to return control of this country to the people. We take America from the corrupt! The rich! The oppressors of generations who have kept you down with myths of opportunity, and we give it back to you–the people. America is yours! None shall interfere. Do as you please. Step forward those who would serve. For an army will be raised. The powerful will be ripped from their decadent nests, and cast out into the cold world that we know and endure. Courts will be convened. Spoils will be enjoyed. Blood will be shed. The police will survive, as they learn to serve true justice. This great nation, it will endure. America will survive! America, take control! Take control of your country. This… this is the instrument of your liberation!”

There are very few official interviews on record with Bane, even with right-wing affiliated media outlets such as Breitbart and FOX, so the media are mostly in the dark as to his political philosophies and core beliefs, which remain a mystery. However, on 22 August 2016, writer Ronald Radosh recounted a conversation he reportedly had with Bane at a party he attended in 2013:

[…] we had a long talk about his approach to politics. He never called himself a “populist” or an “American nationalist,” as so many think of him today. “I’m a Leninist,” Bane proudly proclaimed. “I’m necessary evil.”

Shocked, I asked him what he meant.

“Lenin,” he answered, “wanted to destroy the state, and that’s my goal too. I want to bring everything crashing down, and destroy all of today’s establishment. Your money and infrastructure have been important–until now. I’m America’s reckoning, here to end the borrowed time you’ve all been living on.”

At the same party, Bane is allegedly said to have remarked to prominent businessman and Democratic donor Bruce Wayne, “The shadows betray you, because they belong to me. We will destroy America and then, when it is done and the United States is ashes, then you have my permission to die.” Bane is also alleged to want to bring about something he calls “The Fourth Turning.” Later that same evening, according to eyewitnesses, an unknown member of the waitstaff was allegedly heard asking Bane, “have we started the Turning?” to which Bane replied, “Yes, the Turning rises.” He told Vanity Fair last summer that Trump was “a blunt instrument for us … I don’t know whether he really gets it or not.”

An anonymous White House staffer told the Washington Post off the record that Bane’s influence over the President and his cabinet is considerable. He recounted once seeing Bane casually place an open palm on Vice President Mike Pence’s shoulder while quietly asking, “Do you feel in charge?” Such stories, even unconfirmed, are sure to raise fresh concerns about the outsized role unelected advisors will play inside the Trump White House.

Also, on Tuesday, a vote is expected on Betsy DeVos, a wealthy Republican Party donor and a former Michigan Republican Party chairwoman whose brother is Erik Prince, the founder of the controversial private security company Blackwater.

Summary of “The Great Transformation” by Karl Polanyi

“Elections cannot be allowed to change the economic policies of any country.”
–Wolfgang Schäuble (quoted by Yanis Varoufakis)

Libertarians contend that markets are somehow “natural” and that governments are somehow “unnatural.” Furthermore, they do not believe governments make markets; they believe that markets arise spontaneously out of our natural desire to exchange value, that is, to “truck barter and exchange” as Adam Smith put it in “An Inquiry into the Wealth of Nations.” They contend that such exchanges have taken place since people first began to specialize in various occupations in the Stone Age, and that the only purpose of governments is to “extort” money from the productive classes to feed a useless, feckless bureaucracy at our expense. It would be much better, they argue, if governments would just disappear entirely and leave markets alone to run themselves. This, they believe, would be the epitome of “freedom.”

One of the most potent refutations of this view was written by Karl Polanyi back in 1944, coincidentally the same year that Friedrich Hayek published The Road to Serfdom. Polanyi’s book, The Great Transformation, argues that the world we inhabit today, where everything is distributed by markets, and markets alone, was not a spontaneous or inevitable development; rather, it was a project of concerted government action from the very beginning. Moreover, this phenomenon is very recent. Only in the last two-hundred years or so have we become dependent upon impersonal, arm’s length transactions and vast, global trade networks to provide for nearly all our daily needs. Even our social relationships are increasingly defined by markets and our role in them—our job becomes our whole identity, and companionship is rented by the hour.

In contrast to the hypothetical economies of the past, such as those dominated by barter postulated by Classical and Austrian economists, Polanyi based his theories on the burgeoning anthropological literature from around the world, along with an extensive review of history and the recent archaeological discoveries that had been made in the Near East.

Polanyi was particularly influenced by the work of anthropologist Bronislav Malinowski in the Trobriand Islands, an archipelago off the coast of New Guinea, during the 1920’s. Malinowski’s book, Argonauts of the Western Pacific, documented a pattern of exchange among Trobriand Islanders he called the Kula Ring. Malinowski asked a salient question: “why would men risk life and limb to travel across huge expanses of dangerous ocean to give away what appear to be worthless trinkets?” Clearly, they were not doing so in order to fulfill fundamental needs or to seek personal gain.

What Malinowski found was that these exchanges were done in a highly ritualized fashion, with red shell-disc necklaces being traded in a clockwise direction, and white shell armbands traded in a counter-clockwise direction. The display of these items was a source of prestige for the village and its chief, and the giving away of these gifts was indicative of the status relationships between one village and another. Upon presentation of the gift, the chief’s duty was to pass the gifts along to the next recipient in the ring.

Malinowski’s conclusion was that such exchanges served as a way of maintaining and reinforcing social bonds throughout the various islands that constituted the Trobriand culture. That is, this exchange was a means of social integration, and not competition for profit or gain. This ran completely contrary to Adam Smith’s contention that all economic transactions stemmed from a “natural instinct” to “truck, barter, and exchange.” What anthropologists were increasingly finding all over the world was that this supposed “natural” instinct did not exist at all, but was in fact culturally created and socially reinforced.

This led to Polanyi’s crucial insight that in many cultures, exchange was not necessarily about profit or gain, but rather exchanges were intrinsically bound up in the social relations of the particular culture. Polanyi called this concept embeddedness, and argued that rather than monetary exchanges between isolated individuals typical of markets, most of what we call “economic” exchanges emerged out of organic human relationships. This had been the case in earlier cultures and throughout most of history prior to the Industrial Revolution. Market trading using a medium of exchange was reserved for arm’s-length transactions between unrelated groups; internally, different customs prevailed. Among related people, trading for gain, that is, “profiting” at the expense of another, would have been corrosive to the social fabric. Polanyi called these different relationships status and contractus—status relationships were based on social relations such as kinship and class, while contractus relationships were based on formal laws and rules, written or unwritten.

The outstanding discovery of recent historical and anthropological research is that man’s economy, as a rule, is submerged in his social relationships. He does not act so as to safeguard his individual interest in the possession of material goods; he acts so as to safeguard his social standing, his social claims, his social assets. He values material goods only in so far as they serve this end…

The explanation, in terms of survival, is simple. Take the case of a tribal society. The individual’s economic interest is rarely paramount, for the community keeps all its members from starving unless it is itself borne down by catastrophe, in which case interests are again threatened collectively, not individually. The maintenance of social ties, on the other hand, is crucial. First, because by disregarding the accepted code of honor, or generosity, the individual cuts himself off from the community and becomes an outcast; second, because, in the long run, all social obligations are reciprocal, and their fulfillment serves also the individual’s give-and-take interests best. Such a situation must exert a continuous pressure on the individual to eliminate economic self-interest from his consciousness to the point of making him unable, in many cases (but by no means in all), even to comprehend the implications of his own actions in terms of such an interest. [TGT: 46]

Polanyi combed through the historical and anthropological literature and determined three primary methods through which goods and services were exchanged in traditional societies – reciprocity, redistribution, and householding.

Reciprocity is when one gift is exchanged for another of roughly equal value, as determined by the participants themselves. Often, such “dyadic” exchanges are separated in time and space; one person may give to another “open-handedly” without an immediate return in the expectation that he or she will be repaid at some future point. Sometimes this is described as a “gift economy.” Marxists called this “primitive communism.” The Burning Man festival is a modern-day example of this.

We can get some idea of what reciprocal exchanges are like by thinking about the way we exchange goods and services with our close friends or relatives. Brothers, for example, are not supposed to calculate the precise dollar value of everything they do for each other. They should feel free to borrow each other’s shirts or phonograph albums and ought not to hesitate to ask for favors. In brotherhood and friendship both parties accept the principle that if one has to give more than he takes, it will not affect the solidary relationship between them. If one friend invites another to dinner, there should be no hesitation in giving or accepting a second or a third invitation even if the first dinner still remains unreciprocated.

Yet there is a limit to that sort of thing—because after a while unreciprocated gift-giving begins to feel suspiciously like exploitation. In other words, everybody likes to be thought generous, but nobody wants to be taken for a sucker. This is precisely the quandary we get ourselves into at Christmas when we attempt to revert to the principle of reciprocity in drawing up our shopping lists. The gift can neither be too cheap nor too expensive; and yet our calculations must appear entirely casual, so we remove the price tag. [1]

The concept of reciprocity was later refined by anthropologists into Generalized reciprocity– a free exchange of goods without keeping track of their exact value and who owes what to whom, and Balanced or Symmetrical reciprocity, where a tangible return of an equivalent value is expected at a specified time and place. We may call this credit.

Redistribution is where some sort of centralized agent collects and redistributes goods throughout the members of the supporting group. This could anything from a headman distributing meat from a successful hunt to members of the tribe, to redistributive chiefs, all the way up to the complex palace and temple bureaucracies of ancient Egypt, Mesopotamia, the Minoans, the Inca, and other ancient civilizations.

Redistribution also has its long and variegated history which leads up almost to modern times. The Bergdama returning from his hunting excursion, the woman coming back from her search for roots, fruit, or leaves are expected to offer the greater part of their spoil for the benefit of the community. In practice, this means that the produce of their activity is shared with the other persons who happen to be living with them. Up to this point the idea of reciprocity prevails: today’s giving will be recompensed by tomorrow’s taking. Among some tribes, however, there is an intermediary in the person of the headman or other prominent member of the group; it is he who receives and distributes the supplies, especially if they need to be stored. This is redistribution proper.

Obviously, the social consequences of such a method of distribution may be far-reaching, since not all societies are as democratic as the primitive hunters. Whether the redistributing is performed by an influential family or an outstanding individual, a ruling aristocracy or a group of bureaucrats, they will often attempt to increase their political power by the manner in which they redistribute the goods. In the potlatch of the Kwakiutl it is a point of honor with the chief to display his wealth of hides and to distribute them; but he does this also in order to place the recipients under an obligation, to make them his debtors, and ultimately, his retainers.

All large-scale economies in kind were run with the help of the principle of redistribution. The kingdom of Hammurabi in Babylonia and, in particular, the New Kingdom of Egypt were centralized despotisms of a bureaucratic type founded on such an economy. The household of the patriarchal family was reproduced here on an enormously enlarged scale, while its “communistic” distribution was graded, involving sharply differentiated rations. A vast number of storehouses was ready to receive the produce of the peasant’s activity, whether he was cattle-breeder, hunter, baker, brewer, potter, weaver, or whatever else. The produce was minutely registered and, insofar as it was not consumed locally, transferred from smaller to larger storehouses until it reached the central administration situated at the court of the Pharaoh. There were separate treasure houses for cloth, works of art, ornamental objects, cosmetics, silverware, the royal wardrobe; there were huge grain stores, arsenals, and wine cellars. [TGT: 50-51]

Redistribution is further refined with the concepts of symmetry and centricity:

“Redistribution’s “supporting pattern” is centricity, movements of the products of land and labor into and out of a center…The central controlling power allocates the land, and recruits the labor, though a margin of freedom may be allowed for the “lesser” structures. Products of land and of the craft industries, move inward as tribute, taxes, rent, fines, dues, gifts, offerings, etc. and outward as retributions for services, rewards, also gifts, allocations of various sorts to the different sectors of the center and the periphery, that is, to the society as a whole, in terms of the status of the different sectors which compose the society.” [2]

Households were basically large estates of people related by real or “fictive” kinship under the control of a “pater familias,” or head of the household. The household, not the individual, owned considerable land and resources. Craft specialists were typically attached to households to provide for the needs of its members internally. It was the primary unit of economic production and consumption in most ancient societies. In fact, the very word “economy”’ derives from the Greek word for a household – oikos.

A household may be defined as a residential group that forms both a social and an economic unit of production and consumption. Members of the household consisted of both kin and clients providing voluntary labor. Status was defined by the ability of one member of the household to exploit the labor of another–gender and age being the variables allowing for exploitation. [3]

The emphasis of households was primarily on self-sufficiency, and exchange of goods and services was primarily done within the household. Occasionally exchanges would occur between households, and these might take the various forms listed above, along with market exchange.

The individualistic savage collecting food and hunting on his own or for his family has never existed. Indeed, the practice of catering for the needs of one’s household becomes a feature of economic life only on a more advanced level of agriculture; however, even then it has nothing in common either with the motive of gain or with the institution of markets. Its pattern is the closed group. Whether the very different entities of the family or the settlement or the manor formed the self-sufficient unit, the principle was invariably the same, namely, that of producing and storing for the satisfaction of the wants of the members of the group…It may be as despotic as the Roman familia or as democratic as the South Slav zadruga; as large as the great domains of the Carolingian magnates or as small as the average peasant holding of Western Europe. The need for trade or markets is no greater than in the case of reciprocity or redistribution. [TGT: 53]

All three of these arrangements provided the primary means of exchanging goods and services in ancient times, argued Polanyi, and not impersonal market exchanges with prices determined by forces of supply and demand. Because of their ideological bias, economists deliberately seek out and describe self-seeking market-oriented behaviors throughout history. If you look for evidence of market exchange hard enough, you are certain to find it. What they fail to describe is how essential—or non-essential—such markets were to the functioning of the societies in which they operated, or to the daily life of the average person.

Broadly, the proposition holds that all economic systems known to us up to the end of feudalism in Western Europe were organized either on the principle of reciprocity or redistribution, or householding, or some combination of the three. These principles were institutionalized with the help of a social organization which, inter alia, made use of the patterns of symmetry, centricity, and autarchy. In this framework, the orderly production and distribution of goods was secured through a great variety of individual motives disciplined by general principles of behavior. Among these motives gain was not prominent. Custom and law, magic and religion cooperated in inducing the individual to comply with rules of behavior which, eventually, ensured his functioning in the economic system. [TGT: 54-55]

Polanyi further argued that economic production and distribution in past societies was geared toward the support and maintenance of social relationships, and not on the constant increase and expansion of economic production; in other words, “habitation versus improvement.” The concept of embeddedness meant that economic behaviors were constrained by social forces. There was no concept of “an economy” set apart from the rest of society where one was expected to behave in a purely self-interested or “utility-maximizing” way until the writings of Classical economists, as Moses Finley writes:

[The ancients] in fact lacked the concept of an “economy”, a fortiori, they lacked the conceptual elements which together constitute what we call “the economy”. Of course they farmed, traded, manufactured, mined, taxed, coined, deposited and loaned money, made profits or failed in their enterprises. And they discussed these activities in their talk and their writing. What they did not do, however, was to combine these particular activities conceptually into a unit, in Parsonain terms into “a differentiated sub-system.” [4]

The final means of commodity exchange was via market exchange. Polanyi contends that markets, in fact, played only minor roles in most societies up until fairly recently, and that the above institutions were the primary means of economic production and distribution, not market exchange. The hypothetical markets emerging from bartering posited by Adam Smith and Austrian economics never existed. Neither were markets “free and open;” in fact they were heavily regulated and ritualized in order to keep them from having negative effects on social relations.

It might seem natural to assume that, given individual acts of barter, these would in the course of time lead to the development of local markets, and that such markets, once in existence, would just as naturally lead to the establishment of internal or national markets. However, neither the one nor the other is the case. Individual acts of barter or exchange…do not, as a rule, lead to the establishment of markets in societies where other principles of economic behavior prevail. Such acts are common in almost all types of primitive society, but they are considered as incidental since they do not provide for the necessaries of life.

Indeed, on the evidence available it would be rash to assert that local markets ever developed from individual acts of barter…Obscure as the beginnings of local markets are, this much can be asserted: that from the start this institution was surrounded by a number of safeguards designed to protect the prevailing economic organization of society from interference on the part of market practices…Towns, insofar as they sprang from markets, were not only the protectors of those markets, but also the means of preventing them from expanding into the countryside and thus encroaching on the prevailing economic organization of society.

Polanyi distinguishes between markets and price-fixing markets. In price-fixing markets, prices are determined solely through the forces of supply and demand. In many “primitive” markets, prices were predetermined or set at fixed equivalencies with one other (e.g. 5 bushels of grain = 1 pig). These were not markets as we know them today. In order to be a true price-fixing market, certain features need to be present:

“a site, physically present or available goods, a supply crowd, a demand crowd, custom or law, and, equivalencies… Whenever the market elements combine to form a supply-demand-price mechanism we speak of price-making markets. Otherwise, the meeting of supply and demand crowds, carrying on exchange at fixed equivalencies, forms a non-price-making market. Short of this we should not speak of markets, but merely of the various combinations of the market elements the exchange situation happens to represent.” [5]

Markets, however, were tangential to the regular operation of society. Internal (or local) markets are things like bazaars and farmer’s markets where local people meet to exchange goods and services. Competition and profit maximization was usually not a major part of these exchanges; the point was merely the exchange of goods one could not produce oneself or in one’s household. Long-distance, or External markets were the places where distant commodities—often luxury commodities such as silk, tea, porcelain, tobacco, and spices (and even slaves!)—were routinely brought and sold. However, the presence or absence of markets does not affect the prevailing social relationships, contrary to what economists claim.

The presence or absence of markets or money does not necessarily affect the economic system of a primitive society—this refutes the nineteenth-century myth that money was an invention the appearance of which inevitably transformed a society by creating markets, forcing the pace of the division of labor, and releasing man’s natural propensity to barter, truck, and exchange. Orthodox economic history, in effect, was based on an immensely exaggerated view of the significance of markets as such. A “certain isolation,” or, perhaps, a “tendency to seclusion” is the only economic trait that can be correctly inferred from their absence; in respect to the internal organization of an economy, their presence or absence need make no difference.

The reasons are simple. Markets are not institutions functioning mainly within an economy, but without. They are meeting place of long-distance trade. Local markets proper are of little consequence. Moreover, neither long-distance nor local markets are essentially competitive, and consequently there is, in either case, but little pressure to create territorial trade, a so-called internal or national market. Every one of these assertions strikes at some axiomatically held assumption of the classical economists, yet they follow closely from the facts as they appear in the light of modern research. [TGT:58]

External markets were usually confined to what Polanyi calls “ports of trade” in order to prevent them from encroaching upon the prevailing social relationships of the countryside. Such markets were heavily regulated by authorities. For example, medieval fairs took place at specified dates and locations, and fair-dealing was strictly enforced by kings and princes. Market trading was also facilitated by coinage minted by municipalities. Towns, which were the centers of long distance trade, served to quarantine trade rather than expand it:

…from the economic point of view external markets are an entirely different matter from either local markets or internal markets. They differ not only in size; they are institutions of different function and origin. External trade is carrying; the point is the absence of some types of goods in the region; the exchange of English woollens against Portuguese wine was an instance… Local trade is limited to the goods of the region, which do not bear carrying because they are too heavy, bulky, or perishable. Thus both external trade and local trade are relative to geographical distance, the one being confined to the goods which cannot overcome it, the other to such only as can. Trade of this type is rightly described as complementary…

These three types of trade which differ sharply in their economic function are also distinct in their origin. We have dealt with the beginnings of external trade. Markets developed naturally out of it where the carriers had to halt as at fords, seaports, riverheads, or where the routes of two land expeditions met. “Ports” developed at the places of transshipment…Yet even where the towns were founded on the sites of external markets, the local markets often remained separate in respect not only to function but also to organization. Neither the port nor the fair nor the staple was the parent of internal or national markets.[TGT:59-60]

The typical local market on which housewives depend for some of their needs, and growers of grain or vegetables as well as local craftsmen offer their wares for sale…are not only fairly general in primitive societies, but remain almost unchanged right up to the middle of the eighteenth century in the most advanced countries of Western Europe…But what is true of the village is also true of the town. Local markets are, essentially, neighborhood markets, and, though important to the life of the community, they nowhere show any sign of reducing the prevailing economic system to their pattern. They are not starting points of internal or national trade.[TGT:62]

Such a permanent severance of local trade and long-distance trade within the organization of the town must come as another shock to the evolutionist, with whom things always seem so easily to grow into one another. And yet this peculiar fact forms the key to the social history of urban life in Western Europe. It strongly tends to support our assertion in respect to the origin of markets which we inferred from conditions in primitive economies. …neither long-distance trade nor local trade was the parent of the internal trade of modern times—thus apparently leaving no alternative but to turn for an explanation to the deus ex machina of state intervention…[TGT:63]

Polanyi argues that it was through the mechanism state of state intervention that competitive, price-fixing markets came to replace the older, embedded economies which preceded it, rather than any sort of naturally occurring process as commonly portrayed in economic textbooks. It was not a matter of “weak” governments getting out of the way, but of powerful governments determined to break up existing community bonds and social structures and replace them with impersonal market exchanges that created the market as we know it today. This “Great Transformation” entailed a profound rending of the social fabric, and the deliberate dislocation and impoverishment of the peasant class.

Craft guilds and feudal privileges were abolished in France only in 1790; in England the Statute of Artificers was repealed only in 1813-14, the Elizabethan Poor Law in 1834. Not before the last decade of the eighteenth century was, in either country, the establishment of a free labor market even discussed; and the idea of the self-regulation of economic life was utterly beyond the horizon of the age…just as the transition to a democratic system and representative politics involved a complete reversal of the trend of the age, the change from regulated to self-regulating markets at the end of the eighteenth century represented a complete transformation in the structure of society.

This process began in heartland of the Industrial Revolution, England, and was driven by the rise of factory production. Polanyi documents the various methods by which land and labor were transformed into commodities for sale. He describes several pieces of legislation that were crucial to this development, including the suppression of the guilds, the Enclosure Movement & Highland Clearances, Game Laws, and the replacement of the Speenhamland system of outdoor relief with the New Poor Law, with its attendant workhouses. These legal transformations were regularly backed up by state violence. The idea that competitive national and internal markets formed “naturally” without any sort of government intervention is historically ignorant:

There was nothing natural about laissez-faire; free markets could never have come into being merely by allowing things to take their course. Just as cotton manufactures–the leading free trade industry–were created by the help of protective tariffs, export bounties, and indirect wage subsidies, laissez-faire was enforced by the state. The thirties and forties saw not only an outburst of legislation repealing restrictive regulations, but also an enormous increase in the administrative functions of the state, which was now being endowed with a central bureaucracy able to fulfill the tasks set by the adherents of liberalism.

The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism. To make Adam Smith’s “simple and natural liberty” compatible with the needs of a human society was a most complicated affair. Witness the complexity of the provisions in the innumerable enclosure laws; the amount of bureaucratic control involved in the administration of the New Poor Laws which for the first time since Queen Elizabeth’s reign were effectively supervised by central authority; or the increase in governmental administration entailed in the meritorious task of municipal reform. And yet all these strongholds of governmental interference were erected with a view to the organizing of some simple freedom—such as that of land, labor, or municipal administration.

Just as, contrary to expectation, the invention of laborsaving machinery had not diminished but actually increased the uses of human labor, the introduction of free markets, far from doing away with the need for control, regulation, and intervention, enormously increased their range. Administrators had to be constantly on the watch to ensure the free working of the system. Thus even those who wished most ardently to free the state from all unnecessary duties, and whose whole philosophy demanded the restriction of state activities, could not but entrust the self-same state with the new powers, organs, and instruments required for the establishment of laissez faire. [TGT: 140-141]

Economists typically describe land, labor and capital as the crucial inputs of production. However, land and labor are emphatically NOT commodities produced for sale in markets; they are the very fabric of society itself! Polanyi calls such things “fictitious commodities,” and argues that subjecting these things to impersonal market forces alone would result in the “annihilation” of any given society. Also, without access to sufficient money and credit, markets cannot function adequately—they, too, are fictitious commodities, wholly dependent upon the mechanisms of state finance.

The crucial point is this: labor, land, and money are essential elements of industry; they also must be organized in markets; in fact, these markets form an absolutely vital part of the economic system. But labor, land, and money are obviously not commodities; the postulate that anything that is bought and sold must have been produced for sale is emphatically untrue in regard to them.

In other words, according to the empirical definition of a commodity they are not commodities. Labor is only another name for a human activity which goes with life itself, which in its turn is not produced for sale but for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for nature, which is not produced by man; actual money, finally, is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanism of banking or state finance. None of them is produced for sale. The commodity description of labor, land, and money is entirely fictitious.

Polanyi’s central thesis is that what makes modern capitalism unique and distinct from all past economic systems was this transformation of all aspects of life—especially land and labor—into commodities which could be bought and sold in markets with prices set theoretically only by supply and demand. In addition, all the basic necessities of life, not just luxuries, would be distributed through markets alone. Although markets have existed in various forms throughout history, no other society in history prior to Western Europe has decided that price-fixing markets alone should be the sole factor regulating all aspects of life. In the past, markets were confined exclusively to commodity exchange, and then only in limited circumstances. Shutting down the market would not result in irreparable harm or damage to society. However, the guiding idea of liberal economists was, in Fred Bloch’s words, “Instead of the historically normal pattern of subordinating the economy to society, their system of self-regulating markets required subordinating society to the logic of the market.”

Production is interaction of man and nature; if this process is to be organized through a self-regulating mechanism of barter and exchange, then man and nature must be brought into its orbit; they must be subject to supply and demand, that is, be dealt with as commodities, as goods produced for sale.

Such precisely was the arrangement under a market system. Man under the name of labor, nature under the name of land, were made available for sale; the use of labor power could be universally bought and sold at a price called wages, and the use of land could be negotiated for a price called rent. There was a market in labor as well as in land, and supply and demand in either was regulated by the height of wages and rents, respectively; the fiction that labor and land were produced for sale was consistently upheld. Capital invested in the various combinations of labor and land could thus flow from one branch of production to another, as was required for an automatic levelling of earnings in the various branches. [pp. 130-131]

Another fundamental difference is the belief that such markets could be “self-regulating,” free from all political “interference,” and moderated solely by impersonal forces of supply and demand which, according to the newly-developed “science” of economics, were as regular and unchanging as Newton’s Laws of Motion. Polanyi calls this the “liberal creed.”  This creed demanded the complete separation of the economic sphere from the socio-political sphere; something that was also unprecedented in history:

A self-regulating market demands nothing less than the institutional separation of society into an economic and a political sphere…True, no society can exist without a system of some kind which ensures order in the production and distribution of goods. But that does not imply the existence of separate economic institutions; normally, the economic order is merely a function of the social order. Neither under tribal nor under feudal nor under mercantile conditions was there, as we saw, a separate economic system in society…Such an institutional pattern could not have functioned unless society was somehow subordinated to its requirements.

A market economy can exist only in a market society…A market economy must comprise all elements of industry, including labor, land, and money…But labor and land are no other than the human beings themselves of which every society consists and the natural surroundings in which it exists. To include them in the market mechanism means to subordinate the substance of society itself to the laws of the market.

The crucial point is this: labor, land, and money are essential elements of industry; they also must be organized in markets; in fact, these markets form an absolutely vital part of the economic system…The extension of the market mechanism to the elements of industry labor, land, and money— was the inevitable consequence of the introduction of the factory system in a commercial society. The elements of industry had to be on sale…But labor, land, and money are obviously not commodities; the postulate that anything that is bought and sold must have been produced for sale is emphatically untrue in regard to them…But the fiction of their being so produced became the organizing principle of society. [TGT:71-72]

Furthermore, market liberals envisioned uniting the entire world in a vast, global trade network; what Polanyi calls the “One Big Market.” In order for a self-regulating global market to function, an automatic money creation mechanism needed to be established—the gold standard. While the use of gold is often portrayed as the only “real” money since the beginning of history, in realty the gold standard is a nineteenth century invention designed to facilitate international trade. By keeping various international currencies pegged to a specified quantity of precious metal, it was thought, the money earned in one country would hold its value in another, that is, it would be “as good as gold.” Currencies would automatically adjust against each other; if a country had a trade deficit vis-a-vis another country, gold would flow out of the first country’s coffers and into those of the latter. This would reduce the rate of money creation in the deficit country and cause a devaluation of its currency, lowering its domestic consumption and making its goods cheaper in the One Big Market. This would theoretically ensure that trade imbalances would be “self-correcting.”

All Western countries followed the same trend, irrespective of national mentality and history. With the international gold standard, the most ambitious market scheme of all was put into effect, implying absolute independence of markets from national authorities. World trade now meant the organizing of life on the planet under a self-regulating market, comprising labor, land, and money, with the gold standard as the guardian of this gargantuan automaton. Nations and peoples were mere puppets in a show utterly beyond their control. They shielded themselves from unemployment and instability with the help of central banks and customs tariffs, supplemented by migration laws. These devices were designed to counteract the destructive effects of free trade plus fixed currencies, and to the degree in which they achieved this purpose they interfered with the play of those mechanisms. [TGT: 217]

Polanyi tells us that this liberal creed went from “academic interest” to “boundless activism” after 1830:

…Only by the 1820s did [the liberal creed] stand for the three classical tenets: that labor should find its price on the market; that the creation of money should be subject to an automatic mechanism; that goods should be free to flow from country to country without hindrance or preference; in short, for a labor market, the gold standard, and free trade [TGT: 135]…Not until the 1830s did economic liberalism burst forth as a crusading passion and laissez-faire become a militant creed. [TGT: 137]

Polanyi calls the idea of a society driven purely by markets a “stark utopia” and says such a thing is practically impossible to achieve. The “commodity fiction” of land, labor and capital can only be upheld through the constant actions of central governments. Absent these laws and rules the society would quickly fall apart. A “free” market depends on a healthy society in order to function, but the constant booms, busts, manias, panics, crashes, oversupply, undersupply, etc. of markets undermines the very stability of the society in which it operates. Libertarian ideas of markets being somehow “natural” phenomena, and that markets left alone, free from any collective oversight, can organize a whole complex society is a hopeless fantasy so long as land, labor and capital are necessary inputs. As Fred Bloch and Margaret Somers write:

Polanyi’s central argument is that a self-regulating economic system is a completely imaginary construction; as such, it is completely impossible to achieve or maintain. Just as Marx and Engels had talked of the “withering away of the state,” so market liberals and libertarians imagine a world in which the realm of politics would diminish dramatically. At the same time, Polanyi recognizes why this vision of stateless autonomous market governance is so seductive. Because politics is tainted by a history of coercion, the idea that most of the important questions would be resolved through the allegedly impartial and objective mechanism of choice-driven, free-market competition has great appeal.

Polanyi’s critique is that the appeal has no basis in reality. Government action is not some kind of “interference” in the autonomous sphere of economic activity; there simply is no economy without government. It is not just that society depends on roads, schools, a justice system, and other public goods that only government can provide. It is that all of the key inputs into the economy—land, labor, and money—are only created and sustained through continuous government action. The employment system, the arrangements for buying and selling real estate, and the supplies of money and credit are socially constructed and sustained through the exercise of government’s coercive power.

In this sense, free-market rhetoric is a giant smokescreen designed to hide the dependence of business profits on conditions secured by government. So, for example, our giant financial institutions insist that they should be free of meddlesome regulations while they depend on continuing access to cheap credit—in good times and bad—from the Federal Reserve. Our pharmaceutical firms have successfully resisted any government limits on their price-setting ability at the same time that they rely on government grants of monopolies through the patent system. And, of course, the compliance of employees with the demands of their managers is maintained by police, judges, and an elaborate structure of legal rules. [6]

The push to subordinate all of society’s basic constituents to impersonal market forces in the Nineteenth century gave rise to what he called the “double movement.” The more market liberals and governments pushed for a “pure” self-regulating market, the more the citizens, workers, and even businesspeople clamored for protection from the chaos and unpredictability this engendered.

To allow the market mechanism to be sole director of the fate of human beings and their natural environment indeed, even of the amount and use of purchasing power, would result in the demolition of society…While on the one hand markets spread all over the face of the globe and the amount of goods involved grew to unbelievable dimensions, on the other hand a network of measures and policies was integrated into powerful institutions designed to check the action of the market relative to labor, land, and money…Society protected itself against the perils inherent in a self-regulating market system—this was the one comprehensive feature in the history of the age.

While the movement to establish competitive internal markets was a top-down government affair, the resistance to it was spontaneous and unplanned, with no links between the various opposition movements in different countries. This gave rise to one of Polanyi’s most oft-quoted phrases, “Laissez-faire was planned; planning was not.” (p. 141). The people whose lives and livelihoods were ruined increasingly demanded protection from the constant dislocations of the One Big Market. This took many forms: The Luddite Revolts, the Revolutions of 1848, The Chartist Movement, the establishment of trade unions, the Owenite Movement, the establishment of welfare provisions such as the Liberal Reforms in England and the welfare state under Bismarck, and numerous Communist and Socialist movements. Resistance to the One Big Market did not break down simply along class lines; many merchants and small businessmen too sought protection from the chaos and unpredictability of the market as they saw their livelihoods threatened. As Polanyi tells us, “Paradoxically enough, not human beings and natural resources only but also the organization of capitalistic production itself had to be sheltered from the devastating effects of a self-regulating market.” (p. 132)

What this “double movement” meant was that no market economy is ever “pure,” nor can it be! It’s easy to see why—the market cannot simply be “left alone” to correct itself when it fails, because we are now all utterly dependent upon it for literally everything; it would literally entail the destruction of society! People need to sell their labor to survive, and they need land on which to live. If they do not have access to these things via the market, they will not simply lie down and die. People excluded from the market for whatever reason will fight back. To this end, citizens in various countries around the world fought for the establishment of democratic institutions to suborn the workings of the market to the needs of the people. However, market liberals consistently blamed such “interference” (i.e. “crony capitalism”) for the problems with the market, and insisted that everything would work out for the best if only government would simply “get out of the way,” a trend which continues unabated today.

This, indeed, is the last remaining argument of economic liberalism today. Its apologists are repeating in endless variations that but for the policies advocated by its critics, liberalism would have delivered the goods; that not the competitive system and the self-regulating market, but interference with that system and interventions with that market are responsible for our ills. [150]

The mechanisms of haute finance gave rise to what Polanyi calls “the Hundred Years’ Peace” in Europe, from 1815 to 1914. Market mechanisms relied on peace and political stability (along with British naval power) in order to function properly. However, by pegging a currency to gold, it prevented any increase in a nation’s internal money supply during times of economic expansion. This resulted in a series of “ruinous” deflations which caused cascading business failures and as series of regular financial crises throughout the course of the Nineteenth century.

The reaction to these circumstances took two forms. One, it caused the creation of central banking systems to extend credit in order to cope with the regular deflation cycles and spread risk throughout the economy. Central banking allowed the money supply to expand during periods of growth through the extension of credit. Eventually these banks were nationalized in order to spread the risk around to the greatest extent possible. That is, central banking is a result of free trade and the gold standard, not a distortion of it. And second, countries moved to expand their internal markets and ensure the regular supply of raw materials for industry by engaging in colonial ventures. Colonialism was a direct result of the need to supply national markets, and as a source to dump domestic overproduction. The world became cordoned off into competing “spheres of trade,” often enforced by tariffs and trade barriers. The need to create larger internal markets spurred a period of national consolidation (e.g. Italy, Germany, Russia, the United States).

Whether protection was justified or not, a debility of the world market system was brought to light by the effects of interventions. The import tariffs of one country hampered the exports of another and forced it to seek for markets in politically unprotected regions. Economic imperialism was mainly a struggle between the Powers for the privilege of extending their trade into politically unprotected markets. Export pressure was reinforced by a scramble for raw material supplies caused by the manufacturing fever. Governments lent support to their nationals engaged in business in backward countries. Trade and flag were racing in one another’s wake. Imperialism and half-conscious preparation for autarchy were the bent of Powers which found themselves more and more dependent upon an increasingly unreliable system of world economy. And yet rigid maintenance of the integrity of the international gold standard was imperative. This was one institutional source of disruption. [TGT: 217]

As Western powers acquired colonies abroad, they undermined the self-sufficiency of the local people and reoriented their economies to center around commodity production for Western export markets (rubber, coffee, cocoa, sugar, tea, bananas, palm oil, etc.). Instead of the self-sufficient village economies of the type described above where all community members are provided for, people in these societies would now be dependent upon the market to obtain everything they needed, including food and shelter, and upon earning sufficient wages to procure them. This, too, was not a “natural” development; Polanyi points out that the “Starving Indian and African” caricature is not a natural feature of history, but a creation of the global market economy. The imposition of market mechanisms and the destruction of traditional peasant subsistence economies by Britain in its colonies of Ireland and India (and elsewhere) caused the deaths or emigration of millions of people, as detailed in Mike Davis’ book Late Victorian Holocausts. While the death and suffering caused by the establishment of Communist regimes is common knowledge, these millions of deaths, along with many of the conflicts which occurred in Western Europe during Industrialization, have literally been erased from history.

This effect of the establishment of a labor market is conspicuously apparent in colonial regions today. The natives are to be forced to make a living by selling their labor. To this end their traditional institutions must be destroyed, and prevented from reforming, since, as a rule, the individual in primitive society is not threatened by starvation unless the community as a whole is in a like predicament. Under the kraal-land system of the Kaffirs, for instance, “destitution is impossible: whosoever needs assistance receives it unquestioningly.” No Kwakiutl “ever ran the least risk of going hungry.” “There is no starvation in societies living on the subsistence margin.” The principle of freedom from want was equally acknowledged in the Indian village community and, we might add, under almost every and any type of social organization up to about the beginning of sixteenth-century Europe, when the modern ideas on the poor put forth by the humanist Vives were argued before the Sorbonne.

It is the absence of the threat of individual starvation which makes primitive society, in a sense, more humane than market economy, and at the same time less economic. Ironically, the white man’s initial contribution to the black man’s world mainly consisted in introducing him to the uses of the scourge of hunger. Thus the colonists may decide to cut the breadfruit trees down in order to create an artificial food scarcity or may impose a hut tax on the native to force him to barter away his labor. In either case the effect is similar to that of Tudor enclosures with their wake of vagrant hordes. A League of Nations report mentioned with due horror the recent appearance of that ominous figure of the sixteenth-century European scene, the “masterless man,” in the African bush. During the late Middle Ages he had been found only in the “interstices” of society.” Yet he was the forerunner of the nomadic laborer of the nineteenth century [TGT: 163-164]

In former times small local stores had been held against harvest failure, but these had been now discontinued or swept away into the big market. Famine prevention for this reason now usually took the form of public works to enable the population to buy at enhanced prices. The three or four large famines that decimated India under British rule since the Rebellion were thus neither a consequence of the elements, nor of exploitation, but simply of the new market organization of labor and land which broke up the old village without actually resolving its problems. While under the regime of feudalism and of the village community, noblesse oblige, clan solidarity, and regulation of the corn market checked famines, under the rule of the market the people could not be prevented from starving according to the rules of the game. [TGT: 160]

These tensions eventually came to a head in the First World War. During the War, all nations went off the gold standard in order to pay for military operations. Immediately after the war, the industrial powers made the tragic mistake of going back onto the gold standard in order to try and return to the status quo ante. The result was the biggest market failure of them all: The Great Depression. In Germany, the need to pay extortionate reparations while remaining on the gold standard resulted in hyperinflation which destroyed the German economy and caused the impoverishment of the whole country. In every case, the collapse of the global market mechanism gave rise to grass-roots reactions around the world. In the United States, this took the form of drastic government interventions into the market economy via the New Deal, while preserving the democratic political structure. In Europe, this gave rise to Fascist movements which replaced the chaos and unpredictability of the market with the certainty and reliability of a unified central state under a strong leader. Instead of isolated individuals bound together only through tenuous market relations, Fascism offered a way to reestablish collective solidarity and to give people something to believe in that was greater than themselves through militant nationalism. Dictators like Mussolini in Italy and Hitler in Germany went off the gold standard and engaged in economic and military expansion.

Polanyi published The Great Transformation in 1944 as the Second World War was raging around the globe. He hoped that the wanton destruction of this conflict had taught us a lesson, and that urgent social needs would no longer be sacrificed to the exigencies of something as abstract and ephemeral as “the market.” He hoped that economic relations would once again start to become re-embedded in the political and social spheres, as indeed they had been prior to Great Transformation. He hoped the “stark utopia” advocated by market liberals had been discredited once and for all by the Great Depression and the Second World War.

For a time, it looked like this was the case. After the war, a strong state managed the cycles of the market economy via the economic ideas of Keynesianism, and strong labor unions protected the interests of workers. Roosevelt planned the “Four Freedoms” as the next phase of his New Deal (which went unimplemented after his death). Highly regulated corporations were tasked with protecting the interests of workers and communities. Western Europe established generous welfare states, to some extent disembedding housing and employment from the vagaries of the market. Taxes on wealth were high. The wealth of the middle classes grew as the fortunes of the very rich were curtailed.

However, we all know what happened next. Stagflation and the 1970’s Oil Crisis destroyed the Keynesian consensus, and the concepts of Neoliberalism- which advocates for the commodification of all things and the supremacy of markets —took charge in the industrialized nations after 1980. The New Deal was systematically dismantled brick-by-brick. Public welfare provisions were curtailed or made more stringent. Common-pool resources were sold off and privatized. Taxes on the wealthy were drastically reduced, and government budgets shrank. Labor unions were gutted, and workers were “disciplined.” Wealth disparities returned to Gilded-Age levels. This counter-reaction was described by political economist Mark Blyth in his book Great Transformations, which picks up where Polanyi left off, as well as Naomi Klein’s The Shock Doctrine: The Rise of Disaster Capitalism. The latter book argues that Neoliberalism was imposed on societies in crisis periods through top-down central planning and violence; The Great Transformation shows us that this has always been the case for markets since the very beginning.


For many people today, the world feels like it’s spinning of control. It feels like our institutions are impotent and our politicians can do nothing in the face of growing homelessness and poverty, unemployment, declining wages, mass incarceration, and increasingly unaffordable health care, housing, and education. People switch their vote from Democrats to Republicans; from Labor to Conservatives, and back, to no avail. The economy seems to follow its own inexorable logic about which nothing can be done besides fiddling with an interest rate here and there, or tweaking the tax rates. Capital and jobs flow around the world, seemingly out of any single nation’s control, leaving hollowed out communities in their wake. Wealth becomes ever-more concentrated. Economists tell us that things like globalization, outsourcing, and automation are simply forces of nature that cannot be stopped or curtailed, only forever mitigated. Libertarians, Austrian economists, and so-called “conservatives” tell us that the problem is simply too much government interference, and that by crippling government’s ability to intervene in the market economy and rolling back public welfare provisions we will all be made better off.

So long as the economy is considered to be something separate and apart from the wider society, and politicians are dedicated to prioritizing its needs at the expense of society, it is hard to see a solution to any the above problems. But once again we are reaching a crisis point. Polanyi would not be surprised at all by the double movement indicated by the vote of Great Britain to leave the European Union, the election of Donald Trump in the United States, or the various populist political parties that have sprung up across Europe, both on the far-right and far-left. After 1980, the establishment of a “pure” market economy, free from government “interference” once again became the guiding principle for politicians across the entire political spectrum, backed up and supported by economists and their theories, and we are now seeing the results. Last time, this reaction ended up with a world engulfed in war. Today, the danger is that it may do so again, only this time with far more deadly weapons and a much larger population. Are we destined to repeat the same mistakes?

Polanyi effectively brings the role of government and politics into the center of the analysis of market economies. And in doing so, he opens up possibilities that are often obscured in other currents of left thought. If regulations are always necessary to create markets, we must not discuss regulation versus deregulation but rather what kinds of regulations we prefer: those designed to benefit wealth and capital, or those that benefit the public and common good? Similarly, since the rights or lack of rights that employees have at the workplace are always defined by the legal system, we must not ask whether the law should organize the labor market but rather what kind of rules and rights should be entailed in these laws—those that recognize that it is the skills and talents of employees that make firms productive, or those that rig the game in favor of employers and private profits? [6]

Ever since the emergence of mass democracy after World War II, an inherent tension has existed between capitalism and democratic politics; capitalism allocates resources through markets, whereas democracy allocates power through votes. Economists, in particular, have been slow to accept that this tension exists. Instead, they have tended to view markets as a realm beyond the political sphere and to see politics as something that gets in the way of an otherwise self-adjusting system. Yet how democratic politics and capitalism fit together determines today’s world. Politics is not a mistake that gets in the way of markets. [7]


[1] Marvin Harris, Cows, Pigs, Wars and Witches. p. 123.


[3] C.C. Lamberg-Karlovsky, Households, Land Tenure, and Communication Systems in the 6th-4th Millennia of Greater Mesopotamia. In Urbanization and Land Use in the Ancient Near East.

[4] Moses Finley, The Ancient Economy (1992), London: Penguin Books, p. 21

[5] Polanyi, K. The Livelihood of Man (1977) New York, Academic Press. p. 125.

[6] Margaret Somers and Fred Bloch. The Return of Karl Polanyi. Dissent Magazine, Spring 2014.


Further Reading

Wikipedia has a number of articles on related concepts:
Economic Anthropology
The formalist vs substantivist debate
Summary of the Great Transformation by Polanyi (WEA Pedagogy Blog)
Karl Polanyi Explains It All (The American Prospect)
Karl Polanyi for President (Dissent Magazine)
Populist Backlash and Political Economy (Brad DeLong)
Polanyi on the market (Understanding Society)
The free market is an impossible utopia (Washington Post)
The free market? There’s no such thing (New Statesman)

The Philosophy of Debt

I thought I’d take the time to transcribe some of one of the more interesting podcasts I listened to last year, Tom O’Brien’s interview with Alexander Douglas, the author of The Philosophy of Debt. It covers a lot of things from a perspective you don’t hear anywhere else:


“I suppose I was interested philosophically when I read an article in the Economist…on heterodox economics. And it was talking about how the [2008 financial] crisis had revived heterodox economics to a certain extent. And it mentioned this guy called Warren Mosler. It painted quite a complimentary picture, but left open the possibility that he was just a crank.”

“I was intrigued, so I thought I would check it out. I watched him on FOX News, because…the first thing that came up was a video of him being interviewed on FOX News. And he started off to me sounding like a crank until he said something like, “Well, remember that government bonds are just saving accounts at the Fed.” And that made me jump out of my seat. I had just never thought of it like that. And it was this very simple philosophical point that, even as somebody who likes to think about these things philosophically…it had just never occurred to me to think, ‘Well, what is the difference between a bond issued by the treasury and a savings account which is just the liability of the central bank’…That’s probably when I started thinking about the concepts like debt and what and like what an asset is and what it means to hold an asset…”

“Following on from this point about bonds, I guess the question that I asked myself was, why does that seem plausible, and why does it seem weird at the same time?”


“If you’re educated in the mainstream of economics, or even in a lot of heterodox traditions…a bond is a debt marker. It’s a certificate of a debt from the government to you. It is something completely different from the thing that’s actually owed. It specifies that you’re owed a certain amount of currency, but it isn’t the currency…

We think about debt intuitively…we think of simple cases like I borrow your lawnmower, and there’s no debt marker at all there, but maybe I could write out a debt marker for you. I could say ‘I owe you a lawnmower.’ And it’s very obvious there that there’s one object in the world that I owe you. And then you have this debt marker that is just your claim on that one object. That’s nice and simple.”

“You have to build up a very long way before you get to a government bond…Suppose your lawnmower is destroyed somehow in an accident. You might say, now I owe you *a* lawnmower. But the, what I call using a bit of medieval logic, the suppisitio of the term, …it has now changed. The thing that I owe you used to refer to one particular object; now it is a distributive term. There’s some lawnmower out there that I owe you. It’s got to be one of a class of certain lawnmowers which are equivalent in value or something like that. But that is now looking like a very different sort of relationship…

What if the class of objects you could present to extinguish the liability [included] the debt marker itself? That seems to be what’s happening with the government bond. So a government bond says you have a claim on any risk-free financial asset worth this amount. But of course that bond itself is a risk free financial asset worth that amount. Both are liquid financial assets that serve the same purpose. And that’s when I realized that was Mosler was doing was not just economics, he was making this interesting philosophical intervention.”

Tom O’Brien (TO’B): “That’s quite a tricky concept…a government bond is not a debt, it represents something that’s equivalent to a debt.”

Alexander Douglas (AD): “Well, the weird thing about it is, it’s a debt and also something that extinguishes a debt…In principle, with a fiat currency, the only thing that the state can use to extinguish any of its debts is other liabilities. You can use Bank of England notes to repay the debt that’s supposedly embodied in the government bond. The Bank of England notes are liabilities of the Bank of England, which are in turn backed by government debt, at least nominally. So the government seems to be extinguishing the debt with its own debt. That’s why we have so much trouble making sense out of it.”

“And there are two dimensions to that. One is the financial accounting which you can just learn. The other is how we should morally think about this. The morals of the lawnmower case seem so benignly intelligible by comparison…It’s pretty clear that if I just walk away with the lawnmower and never return it to you, I’m doing something wrong; I’m harming you. But when we get to these cases where the relation between the thing owed and the marker of the debt, and the two agents involved, is just so completely loopy, it’s no longer possible to apply our moral intuitions in a straightforward way.”

TO’B: “The way I personally like to think about the government debt or the government currency…is [that] it’s the same thing…one is like an interest-bearing currency and one is like a bog-standard currency….”


“The question that we need to start with is, what is it that makes something money? Warren [Mosler] says that we should just avoid the term money because it’s so vexed and so complicated.

I find it very interesting that in economics textbooks you’ll sometimes just introduce this concept [of] money which is given these various roles: it’s a medium of exchange, etc. None of them seem necessary or sufficient to define something as money.

Joan Robinson pointed out a long time ago, in a barter society, if someone barters one object for another object which they don’t actually want but they just keep—so I might be a blacksmith; I’ll barter you a hammer to you for some corn. I just hold onto the corn not because I want to eat it, but because I know that somebody else will probably give up something that I do want for it. That shouldn’t be sufficient to make corn into money, because people do that with objects all the time. In a barter society you might be constantly swapping for things you just want to hang onto. So you need something else. And all these other conditions—store of value, etc.—they don’t seem to work either because the same argument can just be applied.”

“So in economics textbooks you’re then given this sort of pyramid. Well, there are these different “money things” which variously approximate to the condition of money. So cash, that’s definitely money. And then you have these different sorts of financial assets-you’ve got corporate paper, and government bonds fit somewhere in there. This strikes me as just a useless way of trying to throw any light on the important issues…Of course what we’re interested in is the sorts of social relations you can create, the sort of relations of power that you can create. Surely that’s got to be the relevant feature of defining something as money.”


TO’B: “That’s a very deep point; that the nature of money is intrinsically tied to the social relations of society…It sounds a bit too Marxist to be in an economics textbook.”

AD: “Well, I guess that’s right. It’s interesting if you look at the history of discussion of money, to most of the medieval tradition, this was just an obvious point. That of course money is a sort of political contract as some level. Because otherwise it’s impossible to see what could distinguish it from mere commodity…it’s…the point that almost anyone will arrive at if they think of money in any degree of philosophical depth rather than just wanting to have something to stick in as the value of a viable in an economic model.”

“The MMT way of thinking about money…is that anyone can create money, the problem is getting it accepted. So [economist Randall Wray’s] point is, I can issue IOU’s, I could issue my own bonds and see if I can get them to circulate; see if I can purchase things by issuing debt certificates, and if people circulate them around, then why aren’t they money? The tricky philosophical point there [is]…is it ‘the thing is money and then you have to get it accepted,’ or does it become money when you have the power to get it accepted? I think that’s the crucial point here…”

“But with government money, with currency, the story is quite simple. You impose a tax liability first, and then you can choose what that tax liability is denominated in, and then people will have to give up things, at least to you, to get the thing that extinguishes that tax liability, otherwise you’ll subject them to punishments. So in that case it’s obvious what makes something money. So if that’s what we mean by money, if we’re taking currency as the paradigm of money, then the only question you have to ask is…‘how much coercive power backs the asset that you’re circulating?‘ The answer to that question will determine how much we should classify that asset as money.”

TO’B: “It seems that power and money and debt seem to be inextricably linked. Would you go so far as to say that power is the root [of money]?”

AD: “I’m not sure there’s a coherent account of what a commodity is either…The idea of a commodity is something that’s desired for…what [Adam] Smith would call its ‘value in use.’ And so the idea of a commodity money is, in addition to the value in use, it has to develop some value in exchange which isn’t just reducible to somebody else’s desire to use it; to just extract utility from it. And I can’t see what that could be except for power. So if I start telling everybody that they have to turn over green flowers to me or I’ll subject them to punishments, well then green flowers will start to circulate and they’ll stop being commodities. The problem with that distinction is that the whole exchange economy is infected with these relations of power. There is no hard line between a voluntary exchange and a coerced exchange, so that’s where the issue becomes tricky. Maybe that’s why Marxists don’t distinguish between commodities and money in the way MMT would.”


“…It all stems from the question of what a currency is. The mainstream view is that currency is just this medium of exchange. It reduces transaction costs and the government supplies the currency, or the central bank supplies the currency just kind of as a public service, and people now have this medium of exchange.”

“The thing that weird about that is, if we need a media of exchange, why can’t we just create them ourselves? There’s a tension here…which is also what mainstream economists say when they do tell the historical story—that we just sort of developed this medium of exchange. Okay, well then, why do we need the government to come and issue them?”

“The MMT story is, the creation of a state currency doesn’t begin with the printing…and circulating of an asset; it begins with the creation of a liability that wasn’t there before. So what you do is, you just impose this tax liability, and for MMT that’s the source of unemployment.”

“Their model is the hut tax…The idea there is you go from a village that has zero unemployment. Whether or not you want to call it ‘fully employed’…is tricky because you might want to say that unemployment is very specifically not just deprivation. A person who is starving on a desert island, it would be weird to call that person unemployed. Unemployment is a power relation. It’s a situation in which people need to offer their labor in order to acquire a particular sort of asset—in order to acquire currency.

So you go into a village where it’s perfectly self-sufficient. And then you impose a tax liability on all the huts which can only be paid in something that only you have, which is shillings. It goes from zero unemployment to max unemployment overnight. As soon as you’ve done that you’ve created a currency. You don’t even need to print the shillings. You have unemployment there because you have people who are offering their labor because they have no choice [but] to try and earn these shillings to keep themselves out of prison. You already have the currency there. Whether or not you print the shillings just depends on how sadistic you want to be.”

“And so the job guarantee is just a way of saying, ‘since you’ve created all this unemployment, the least you could do is now provide a means of extinguishing it’…people should at least have the chance to earn the shillings that you created the demand for simply by imposing this tax.”

“The difference between full employment as recommended by mainstream economists, and full employment as recommended by MMT, is that mainstream economists tend to think that unemployment is this naturally occurring phenomenon, and the government can try and do something about this naturally occurring phenomenon. Whereas the MMT view is [that] the government created all the unemployment, so the job guarantee is simply reversing the imposition that it’s placed upon society.”

TO’B: “Its a very counterintuitive way of looking at it–that unemployment is created by the government.”

AD: “Yeah it is. There’s a talk that [Warren] Mosler gives where he starts off by saying ‘what’s the purpose of taxation?’ And of course everybody gets is wrong; they think it’s to bring in revenue for government. He deals with that easily, he says, ‘the government is the only issuer of the currency so how could it possibly need revenue paid in that currency?’ And the answer that he ends up with is [that] the purpose of taxation is to create unemployment. That’s the primary purpose; that’s what taxation is for.”


TO’B: “So taxation, in effect, forces people into work that’s deemed meaningful socially…It’s coercive when you think about its root nature.”

AD: “Its fundamentally coercive, yeah. And its not just about coercing labor, its about creating a certain structure of labor…The problem is, you don’t want to compare our society with its coercive apparatus to some idealized version of our society where you just take the coercive apparatus away. That’s where the myth of barter comes from. Just take a society like ours and take the money away. Well then, you’re taking away the entire coercive apparatus of our society. Whether you’re left with anything that would even be logically conceivable shouldn’t be something you can assume.

But imagine some other sort of society where you don’t have money; where you don’t have a state currency like this. People will still work to produce what they need. They’ll still work for each other, maybe, but it won’t all have to be channeled through this single medium.”

“What I mean is, if I’m hungry and I go down to Sainsbury’s, I can only give them money. I can’t give them anything else. I can’t use my labor in any other way to procure what I need from Sainsbury’s. So first of all, I have to find somebody who will exchange my labor for currency. So there’s a whole structuring of labor relations that occurs.”

“People say that currency is a way of overcoming the inconveniences of barter. But in a way you could say it adds all these inconveniences. It might be the case that otherwise I would have been able to go to Sainsbury’s and say, ‘Look, I’ll stack your shelves for an hour, and let me take home a couple of burgers,’ or something. But I can’t do that because…currency’s is in the way.”


“You’re looking directly at the coercive element of unemployment; that unemployment has to be something you impose on a society by coercion. Then you can recognize the thing that Michał Kalecki was trying to talk about in his 1943 article, The Political Aspects of Full Employment. What happens is, you have socialized the power to coerce labor. That’s effectively what you’ve done.”

“The easiest way to think about it is to go back to the hut tax. If you go [back] to the hut tax, and every hut has this tax liability, and then I give the shillings to maybe three or four guys—okay, now I’ve outsourced my power to coerce labor. I’ve deputized it. Now these guys get to decide how they want to use all the labor that there is. Whereas if I have a standing offer that anybody who doesn’t like the terms that those three guys offer can come directly to me—now I’m the government in this example—then you’ve got a socialized system of labor. So [the Job Guarantee] is very significant.”


TO’B: “It seems to me that the people in power—say politicians, and probably the central bankers—I think they know all of this stuff personally, because If you go back to something like, say, World War Two and you look at what America or Britain did; they didn’t say, ‘Oh, Germany’s attacking me, we don’t have enough money to build planes,’ or whatever. They just expanded the monetary base up until everybody was employed to defend the nation and create all the tanks and planes and everything that they needed. They didn’t give a damn about the debt.”

AD: “Insiders are cagey about admitting how much they actually do or don’t agree with this understanding of the issue. I’m sure you know there’s a famous interview with [Paul] Samuelson where, what he says about the deficit is, well, it’s just a ‘noble lie,’ basically. That you want to act as if the government overspend[ing] is some sort of borrowing operation, because otherwise it’s completely unconstrained in what it can spend from year to year. Once people realize that issuing bonds is really just the same as issuing currency, the government can just do whatever it likes. And so somehow this false perception serves some important political purpose by reining in the government. But as you say, does it?”

“You’ve given the clear example there. Britain is running a deficit in 1941. Germany’s on the verge of invading. Does Churchill surrender because he can’t afford to pay for the soldiers? This ‘noble lie’ seems to come and go as it pleases the governing authorities to be subject to it. So who is it constraining? It clearly doesn’t seem to be constraining the decision makers, since they can give up on it whenever they like. It only constrains the population. But why do we need to constrain the population? I mean, we already have the legal system and the police to do that.”


TO’B: “So this seems to really tie into a thing of class and power. What are the problems that [Kalecki] envisions with trying to introduce this guarantee of full employment?”

AD: “Kalecki’s idea is that capitalism has evolved into a system where unemployment is a crucial disciplinary measure in the relation between labor and capital. You can sort of speculate on what would happen if that were no longer there the same way you can speculate about what would happen if prison sentences were abolished. We just don’t know. To not be able to implicitly threaten workers at the bottom–the workers who are as really close as you can get to the threat of unemployment– would change the whole nature of the factory. It’s just unclear that it would be able to be run in anything like way it’s currently run. That was his main concern.”

“He said [that] said the reason why fascism had no problem implementing full employment in Germany is because it did just completely change the nature of the power structure of society. It didn’t have to worry about how things would play out now that these power imbalances had been completely reversed because it sought to do that in the first place; that was the point.”

TO’B: “…The Nazis essentially introduced MMT to get them out of the Great Depression. I think it was called Chartalism back in the day. But they used it to guarantee full employment. They brought their unemployment rates down from like thirty percent down to two percent in a matter of 5 or 6 years.”

AD: “Mind you, any nation that goes to war brings its unemployment rate down to basically full employment levels. So yeah, it’s certainly possible.”


“…the full employment policies that were pursued in the Sixties and Seventies were aggregate demand management polices. So you would just pump as much money into the economy as you could, in the hope that at some point the economic opportunity cost of not hiring any available labor would fall so low as to make it irrational for a capitalist not to do that.”

“Kalecki’s point is that, ‘well, that’s assuming that they’re motivated by purely pecuniary concerns.’ But of course what the capitalist realizes is that unemployment is a useful disciplinary possibility. So the capitalist might be willing to pay for it. In other words, it doesn’t matter how low the opportunity costs, no matter how low their opportunity cost goes, there’s just a certain amount that they’re allocating to pay, or to not maximize their profits, in order to maintain that power which might be vital to the function of, at least at that point, industrial capitalism.”

“So in the U.K. there are bad associations with full employment policy because many people—to some extent rightly—blame it for all the industrial conflict that emerged after that period. You basically had this attempt to subvert an existing power balance that didn’t quite work out. You end up with these pitched battles between representatives of different industrial interests.”

“The job guarantee idea is, well, okay fine, so don’t work within the market. You just circumvent the market entirely. Instead of trying to incentivize capitalists to hire all the available labor, we the government would…just hire them ourselves. Of course that’s even more radical.”

“There are two possibilities One way is to kind of smuggle it in as not that great a departure from the current way of operating, which is how a lot of MMT activists are presenting it: ‘Look this is just the logical extension of Keynesian demand management.’ The other is to show it for what it really is, in which case it takes on a pretty revolutionary character, I think.”

“As a person who only has your labor power to offer, you’re a mendicant, and who are you a mendicant to? The job guarantee just means you no longer possibly can be a mendicant to private interests, because if you don’t like the terms any of them offer you, you can always get these guaranteed fixed terms – a fixed living wage by working for the state. I mean, this is a philosophical question. Its not obvious that that’s better. There’s all the debates about state socialism that need to be had to promote the policy in that way, which is why people are trying to say, ‘look, it really just more expansionary sort of fiscal policy; it’s really just a way of extending things we already have’…but I think it’s not, it inevitably has to be more radical.”


“So you have to go back to the point that the state sets the price of its currency. It sets the price of its currency by determining how much of the currency you need which ultimately comes down to the tax liabilities, and what you have to do to get the currency. During the Seventies, arguably, you had labor governments who were willing to accommodate the increasing wage bargains of unionized labor. So in that sense they were just looking after their interests.”

“And the idea is that in the 1980s you had this move toward ‘free markets.’ But in what sense? I mean, a bank is just a deputized issuer of state currency. And when the Bank of England places certain loans to buy certain sorts of assets on it eligible collateral list, it’s guaranteeing the prices of those assets. And so it does that with housing. And so you get this increase in house prices which is completely state engineered in no less a sense than the increase in wages of unionized labor was state engineered. You just have a different government looking after the interests of a different class, but the technique is exactly the same.”

TO’B: “This idea of the ‘free market’ is very far from what people think. People think that a rise in house prices is just some strange occurrence, but it’s a planned class relation, they re trying to redistribute a certain percentage of the social production to certain classes.”

AD: “Yeah. And it goes directly through the financial system which is a public institution. It might not look that way but it is. Because the Sterling framework is a government instituted framework. ‘Unelected central bankers,’ but it’s still a state institution. And the Sterling framework just determines which assets are going to move where. It puts some on its collateral list and it doesn’t put others on. There are very few people in the UK who are thinking of politics like that. Anybody’s starting assumption is that, of course the 80s were the ‘free market’ years, and before that was the ‘state socialist’ years. To get any traction on this debate you have to first disabuse people of that.”


“It depends on how we’re measuring profit. If you take a Neoclassical view–forget about money, I mean, money if anything is a useful numéraire, but that’s not what we’re reckoning any of our quantities in terms of. Then you might be able to argue that there’s an inevitable tendency for the rate of profit to fall if the government pursues at least a consistent policy. But if you’re doing something like [Andrew] Kliman does, and you’re actually measuring the rate of profit in terms of currency, well he himself says that, look, the rate of profit–the decline can be obscured by financial leverage–buying companies [and] gett[ing] these temporary record profits based on valuations based on loans which are never going to be paid off, impossible loans. Of course the government can just make this impossible loan to itself indefinitely. It can roll over forever. So you can’t say that there’s some tendency of the rate of profit measured in money terms to fall when you’ve got a state that has complete control over its fiscal policy.”

The Origin of Cities – Part 4

The Urban Revolution

We’ve seen that cities grew out of sacred ritual/cultural sites, many of them connected with feasting, built by chiefs/shamans. These centers formed the nucleus of cities even before population growth caused by irrigation and agrarian (plow) agriculture. These forms of agriculture caused not only rapid population growth, but also great differences in wealth, and the emergence of hereditary status.

There are a number of theories or “models” which have been proposed for the emergence of cities in southern Mesopotamia over the years.

Some theories argue that rapid immigration to urban centers was brought about by the transformation of marshland into productive farm fields. People would have fled to the temple complexes seeking work, and this drove the rise of cities. Farmers fleeing adverse environmental conditions like erosion and salinization would have also contributed to this.

Others focus on the emergence of social classes, in particular the priest class which gained a monopoly on intercession between men and the gods, and their managerial role centered in “temple cities.” Occupational specialization (such as potters, carpenters, jewelers, smiths, weavers, merchants, etc.) is also thought to have led to the emergence of class structures.

These managerial elites are often depicted as the world’s first “governments” supported by taxes collected from food producers in the surrounding agricultural villages. Specialized producers of luxury goods would have settled down in cities to be close to their customers and the critical trade routes, the thinking goes. The canal system, and later the invention of oxcarts (probably emerging from chariot technology) made the transport of goods easier, and as trade grew, so too would cities in certain favorable locations. This view sees classes and professions emerging at about the same time, and intimately entwined with the emergence of cities and, later, the state.

At least that’s how the standard story goes. But as we’ve seen, early temple complexes were nothing like states in the modern sense. They did not have the power to tax, nor the power to make binding laws over the whole society. They undertook various pro-social activities for the benefit of the community, but did not control them in a governmental sense. Craft specialists were attached to various households; they were not “separate” professions, as we have today. This is a projection of our modern times onto the past. And there is actually no indication of a “separate” class of managers emerging – there is no distinction made between an office and the person who occupies it. Even the form of buildings in the cities does not differ from that of households on the land, unlike what we would expect to see in the emergence of totally new social structures.

Rather than some new concept called social classes, it makes sense that these transformations would grow out of earlier ones. Early cities were most likely ordered by kinship and householding, not the emergence of separate classes or professions in any modern sense. This is the view of Jason Ur of Harvard University, who sees the urban “revolution” as less of a revolution than initially thought.

Households and the Emergence of Cities in Ancient Mesopotamia (PDF)

In his view, rather than “economic rationality,” or “a radical transition to a bureaucratic organizational structure, in the Weberian sense of the term,” he argues that such changes were “the result of cumulative changes in existing kinship structures.” He writes,

“Far from the adaptive outcome of problem-solving deliberations, the enormous urban agglomerations at Uruk and Tell Brak were the unintended outcome of a relatively simple transformation of a social structure. It is only ‘revolutionary’ to outside observers of the longue durée; to the actors themselves, this transformation fit neatly within existing understandings of the social order.”

In his view, kinship was not supplanted at all, but continued to be the principle organizing factor in social relationships, and not just at the village level. The ruling class was simply one among many influential households, and were still dependent upon maintaining social relationships for their authority.

For example, it’s true that the inhabitants of cities far exceeded Dunbar’s number of 150. This is thought to engender the necessity of a separate “managerial” overclass to coordinate all the activities of the society.

But in a society organized around households, households rarely exceeded 150 people, usually close kin. In addition, households were usually managed by a single “head” of the household. These heads typically managed the activities of, and represented their respective households politically, so it would have not been been difficult for 150 heads to coordinate activities among themselves. In addition, not only would people within the households be ranked by age, seniority, skills and gender (as indeed they still are in modern-day families), but the households themselves would have been ranked against one another by various criteria, such as seniority, lineage, household size, and craft specialization. Temples were also organized on this basis, and would have been just another household in this mix; albeit one that was granted special provisions due to its character as a “public utility” and religious institution. Many of these temple activities have been misconstrued by later historians as the first “governments” or as a proper “state.”

So it’s far more likely in my opinion that this “natural” hierarchy most likely led to the inequality that we see in early cultures than the emergence of some sort of wholly new parasitic ruling class. Indeed, we see similar hierarchical structures even in non-state people who lack any sort of professional bureaucratic organizations. As I’ve alluded to earlier, the “state” was really more of a proto-state; essentially the ruler’s personal household writ large. The impersonal bureaucratic “Westphalian” state model that we associate with the term was a much later invention:

Despite the emphasis on administration and bureaucracy in early state models, the concept of an office, which exists independently of the person occupying it, is…not present in Sumerian or Akkadian. No general term for “office” or “officer” may exist, but administrative roles with various “official” or religious (and often both) duties certainly did exist…individuals (“officials”) who filled these roles attained their positions by virtue of kinship proximity to elites, and retained them through continual maintenance of those relationships

If bureaucracy was an unknown concept, what then was the structural basis for urban solidarity?…Often it is suggested that kinship remained important mostly in rural areas. To the contrary, kinship, in the metaphorical but meaningful form of the household, remained a durable organizing principle long after the first cities.

This observation was first made by Max Weber, who recognized that polities in the Near East and Egypt were run as royal households, headed by a patrimonial ruler who treated it as his own personal property. These oikoi (singular oikos), as Weber called them, were not capitalistic in motivation; rather, they were entirely focused around the want satisfaction of the patrimonial ruler and were essentially self-sufficient. Weber’s patrimonial state is the opposite of the rational bureaucracy assumed by many earlier models. “In the patrimonial state the most fundamental obligation of the subjects is the material maintenance of the ruler, just as is the case in a patrimonial household; again the difference is only one of degree”. In a patrimonial state, “offices” are flexible and without fixed boundaries. “Powers are defined by a concrete purpose and whose selection is based on personal trust, not on technical qualification… In contrast to bureaucracy, therefore, the position of the patrimonial official derives from his purely personal submission to the ruler, and his position vis-à-vis the subjects is merely the external aspect of this relation”.

Weber wrote at a time when knowledge of ancient Near Eastern languages was still rudimentary, but nonetheless his understanding has proven to be remarkably accurate. The standard study of social structure (Gelb 1979) shows the predominance of household organization at multiple scales. The Sumerian term e2 could designate a building, ranging in size from a single room to a palace or a temple, but it could also designate a family or a household; with regard to the latter, “the term ‘household’ extends in meaning to cover social groupings ranging from a small family household living under one roof to a large socio-economic unit, which may consist of owners and/or managers, labor force, domestic animals, residential buildings, shelter for the labor force, storage bins, animal pens, as well as fields, orchards, pastures, and forests”. The Akkadian word for house, bitum, had exactly the same semantic range. For Gelb, this Weberian oikos organization pertained only to large-scale “public” households, most typically those of the palace and temples; alongside of them, and presumably subsumed within them, were “familial households” which were much smaller and kinship-based. Nonetheless, this distinction is absent in the native terminology, which used e2 or bitum for both. Despite its firm grounding in the textual record, Gelb’s oikos model has been largely overlooked by archaeologists, with a few notable exceptions…

In fact, the household was an almost universal structuring metaphor in the pre-Iron Age Near East. .. Societies were structured as a series of interrelated and nested households that varied in scale from nuclear families to institutional households (many of them with a religious component, i.e., “temples”) to the entire polity, which was either the household of the king or of the main god of the its capital city. In Schloen’s “Patrimonial Household Model,” these vertical and horizontal connections between households are not disembedded, as in a bureaucracy. Political organization depended entirely upon the maintenance of personal relations between the king (the “father” or “master” in both Sumerian and Akkadian) and the heads of sub-households (“sons” or “servants”).

As a result, here were real limits to centralized authority. The effective power of the ruler is diluted by his need to exercise authority through subordinates (and their subordinates), whose ‘household’ domains are smaller in scale but similar in structure to his own. As a result, all kinds of private economic activity and jockeying for political and social advantage can take place beyond the ruler’s direct supervision. What looks at first glance like an all-encompassing royal household reveals itself, when viewed from another angle, to be a complex and decentralized hierarchy of households nested within one another and held together by dyadic ‘vertical’ ties between the many different masters and servants who are found at each level of the hierarchy. Such an arrangement was inherently dynamic…

Households and the Emergence of Cities in Ancient Mesopotamia (PDF)

Similar social structures existed in ancient Egypt, where the running of Egypt as the household of the Pharaoh was more obvious:

Pharaonic Egypt was organized around a system of phyles (as called by the Greek invaders). These social units were based on the clan structure of previous tribal society which continued to form the foundation of class society in the post-3000 BC period.

Initially, the administrators of the economy were all related (kin) to the king. As the bureaucracy grew more extensive, non-clan individuals who had demonstrated competence in such activities were drawn upon to serve in the administration of the economic and political arrangements of the kingdom. …Strong evidence exists for an ongoing rotation of work in the service of the king by clan membership, including rotation through the various religious cults and royal mortuary temples. This rotation appears to have been organized around the principle in which a regular portion of the available (male?) labour would have been sent for yearly duties in the king’s service. …the construction of the pyramids was undertaken precisely on this basis …the limited redistribution that existed in the Egyptian economy was organized on the basis of clan membership).

As the economy of the Nile Valley grew more extensive and increasingly interconnected, the organization of society by phyle ‘ . . . allowed the king to maintain a central authority by preventing the growth of rival institutions independent of royal control’. Essentially, the continued dependence on the original tribal structure permitted the continuation of the form of that structure even as the king and priesthood usurped the social control previously exercised by the various clans. In short:

“The phyle system as an institution…played an important role in the development and success of Egyptian kingship in the Old Kingdom. The concept of a centralized government and its attendant bureaucracy . . . developed from the clans and village societies of predynastic Egypt. The evolution of the phyle as an institution parallels the development of the state. Emerging from its original character as a totemic system of clans that served to identify and regulate the personal and family loyalties that form the basis of a primitive society, it developed into a bureaucratic mechanism that organized a large number of people for tasks as varied as building pyramids and washing and dressing the statue of a dead king.”

Wray, Credit and State Theory of Money pp. 87-88

So the emergence of an “impersonal professional bureaucracy” managing society on behalf of a single absolute ruler has little basis in fact. Neither does the emergence of separate classes or professional associations until much later. It is yet another Flintstonization of history.

On Oriental Depotism

Religious and military specialists are invariably depicted in the standard history books as a non-productive overclass that extorted tax contributions by the threat of violence from a hapless peasantry in order to fund their lavish lifestyles, or so we’re told. The rise of this overclass—”macroparasites” in William McNeill’s terminology—far wealthier than the peasants, spawned a demand for luxury goods, hence the establishment of monumental “palatial” architecture, specialized luxury goods, fine art, and long-distance trade. The bureaucrats used writing and mathematics to push around a cowering underclass, which is why we see the development of writing and mathematics at this time.

Here’s a textbook example of the narrative from the book By The Sweat of thy Brow (emphasis mine):

Whatever the details of the “Neolithic Revolution, Gordon Childe’s famous phrase, it had by 3000 B.C. transformed the egalitarian communities of the earlier Stone Age, in the advanced food-producing regions, to totally different social structures. In these the masses of the people were reduced to servile status and kept economically at subsistence level by the systematic expropriation of their surplus production for the benefit of a small class of kings, noble warriors, and priests, and to support the army and the bureaucracy (whose chief function was tax collecting, in other words, expropriating the surpluses). Class division, representing a division of labor, thus became the foundation of the social structure. As the elite groups at the top continued to concentrate wealth in their own hands they inspired still more specialists to come into existence to serve their increasingly sophisticated needs. Besides potters, weavers, armorers, and metalworkers, there now appeared clerks or scribes, possessing the mysterious arts of writing and mathematics. In the irrigation civilizations the large agricultural surpluses called into being a class of merchants, in whose train lawyers and other auxiliaries of commerce followed.

Such “despotism” is usually contrasted to the classical civilizations of Greece and Rome, with it’s lack of centralized governments and class divisions, which were based on private ownership and individuals striving in markets, eventually leading to Western capitalism. Yet we now know that chattel slavery only played a very minor role in Asian economies, mostly in domestic work. Most prisoners of war were maimed or killed, not enslaved, as the technology to hold large ethnic groups in permanent subjugation simply did not exist in the Bronze Age. In fact, the first societies where slavery was critical to the functioning of the overall economy were the “freedom-loving” Western economies of Greece and Rome! Certainly “free market” capitalism before 1860 had far more slaves (including “indentured servant” debt slaves) than the “despotic” systems of the ancient Near East. Most unfree labor was due to debt servitude, rather than systematic oppression from elites. The Sumerian word for slavery made no distinction between these various forms of unfree labor.

The emergence of of priests and bureaucrats is depicted in most history books as the emergence of a new class practically overnight, bullying the productive classes, stealing all their money, and forcing them into permanent servitude to build the temples and monuments which served little purpose besides aggrandizing themselves.

This inevitably leads to an obvious question when modern-day people read this: why would ancient people have allowed this to happen? What were they thinking? It’s depicted as some sort of great mystery and endless speculation has been devoted to the emergence of the “state” which is depicted as a useless development serving no purpose whatsoever.

This “mystery” comes from an ignorance of how such people saw their own culture. It’s also heavily corrupted by the ideas promulgated by the modern-day religion of economics. For example, the economist Robert Allen writes: “it is difficult to discern any productive contribution that the Pharaoh, the priesthood, or the aristocracy made. The main function of the Pharaonic state was to transfer a considerable fraction of the income produced by Egypt’s farmers to an unproductive aristocracy.”

But there is no evidence whatsoever that the people themselves saw their societies this way.

Is it so hard to see the bureaucratic and managerial activities performed by priests and scribes as having a pro-social purpose, or at the very least, the perception on the part of society that that their activities served a pro-social purpose? The idea that leaders kept the majority of people at the permanent edge of starvation while seizing nearly every last morsel for themselves is hard to square with the historical evidence.

In fact, we saw that the activities performed by centralized chiefs did allow for economic expansion that would not be possible at village-level societies. We’ve already seen the need for specialization and allocation of goods was enabled by such redistribution-fishing villages gave donations of excess fish, farming villages excess grain, and each received the fish and grain that they could not produce themselves. We also saw how such networks wold have provided a safety net–some villages may have had a bumper crop, others a bad harvest, while redistribution networks would have made sure no one went without. For example, the Inka redistribution system of storehouses was so efficient and abundant that even its detractors acknowledge that poverty was unknown in the empire (per Charles Mann’s 1491). Skilled craftsmen engaged by chieftains engaged in specialized labor such as pottery, metalsmithing and weaving, often as a form of public welfare provision. Long-distance trade has been managed by elites from the very beginning using their social connections as a way to acquire and maintain social standing.

As for the monuments, there is no evidence whatsoever that they were built through coercion. This was most likely a misconception caused by depictions of the enslavement of Jews in the Bible coupled with the staggering size of such monuments. “Only slaves could have built such things,” went the logic, “and we know there were plenty of slaves back then because the Bible tells us there were!”

The modern-day economic priesthood sees any and all work as a “disutility” needing either the threat of force or the reward of money to coax people to lift a finger, since all people are inherently “lazy” by nature (very similar to Judeo-Christian concepts seeing mankind as “fallen” and “sinful”). Since there were apparently no labor markets as we know them, the thinking went, all such work must have been coerced, leading to “Oriental Despotism.” After all, where else would all those ancient monuments and irrigation works come from? But are people truly as inherently “lazy” as economists depict them?

It’s hard to square this with the evidence. Would lazy people have built Göbekli Tepe, with its massive T-shaped carved stone pillars of several tons apiece? Would lazy people have transported the stones of Stonehenge 160 miles? Would they have erected standing stones in the Orkney islands? Would lazy people have erected hundreds of Moai on remote Easter Island?

In fact, all the evidence shows that the people who built these ancient monuments did so voluntarily as a way to define and assert their cultural identity. Besides, ancient “despots” would not have had access to the necessary force to compel people to do these things if they didn’t want to. Nor they could they have “paid” people when the means of subsistence were freely available to all. Metals were very rare in this time period. Are we expected to believe that massive amounts of labor were coerced by aggrandizing elites wielding nothing more than stone spears and flint knives? The amount of metal used by ancients at this time probably could not forge even a single chain, much less enough chains to enslave an entire population as depicted in the Cecil B. DeMille movie The Ten Commandments. Michael Hudson writes:

No doubt maintaining Neolithic practice, corvee activities had to attract and hold their participants. For Babylonia, Richardson cites rulers emphasizing their efforts to promote “public joy” in corvee projects by “invest[ing] such occasions with an atmosphere of feasting and plenty. This made the tasks “something closer to a prebend, an opportunity; a festival” with the benefit of group membership and identity. Indeed, he asks:

“Would it even be possible to create a corps of ‘forced,’ , to semi-free’ laborers to toil under adverse conditions-for no more than one week a year? Would workers who had toiled for 150 days of the year in the dirt and mud to grow barley for state and bare survival choose to resent a few days of collective labor, in the company of neighbors and with the prospect of feasting and song? Should we really imagine teams of tens of thousands groaning under the weight of massive building blocks under the stern eyes of whip-wielding overseers, when the average work .. account text deals with teams of workers numbering fewer than two hundred?

Richardson estimates that institutional building work in Babylonia “only comes to something like 40% of the farming work'” needed for families on the land to produce their own sustenance- ‘not more than a week of’ work compared to six months of farming.”And most corvee labor was seasonal so as not to interfere with the crop cycle. In Egypt, the workers’ town housing the specialized labor force that “worked hard on the pyramids (such as moving megaliths)” was, in Lehner’s description, “a rather elite place of high-status royal service and possibly higher-quality” recompense than recruits might have known in their home districts.

Labor in the Ancient World, pp. 652-653

This was also exacerbated by the unfortunate choice of the term “rations” to initially transcribe the cuneiform texts. This choice has been lamented by Orientalists ever since. It implies a bare minimum of food from a severely limited supply, as if workers were the inhabitants of a particularly nasty concentration camp or gulag. But these “rations” were often quite generous and far beyond bare subsistence. Modern Assyriologists prefer to describe these as “salaries” or “wages” instead. Professor Piotr Steinkeller writes of ancient Larsa: “National building projects were an extremely important tool of political and cultural integration,” a “nation-building” effort instilling an idea of protonational solidarity as workers came to think of themselves as “fellow members of a united Babylonia.” Similarly, Sir Leonard Wooley writes of Egypt, “The building of the colossal tombs of the Egyptian kings was as much an ac of faith as was the building of the great cathedrals of mediaeval [sic] Europe, and its object was not simply to minister to the vainglory of the ruler but to take out, as it were, an insurance policy for the country.” (The Beginnings of Civilization, p. 324)

As for taxes, were these really “extorted” from an unwilling population by the constant threat of violence as we’ve been led to believe by the history books? Again, there is really no evidence of this.

First, it should be noted that taxes were paid by villages and households, not by individuals. Rather than taking all the surplus, taxes were actually assessed based on the harvests. Egyptians used a device called a Nilometer to measure Nile flooding, and assessed taxes accordingly–A poor harvest meant lower taxes. In this, they may be more generous than modern states—thanks to concepts like “national debt,” taxes often become more onerous in times of economic hardship, not less. In addition, since households on the land usually produced what they needed internally for direct use, there was little individual surplus to tax in any case. These were not market-based consumer economies like our own.

Additionally, the payment of taxes was couched not only as a social, but also as a religious duty. Even today, churches promote tithing (as described in the Bible), and many people gladly hand over a tenth of their income with no coercion whatsoever. And it’s likely they get much less benefit to this arrangement than people get from official duties to nation-states.

This is the so-called Managerial Model of state formation. Many Egyptolgists see the establishment of the Egyptian “state” emerging out of these activities. Peter Turchin, in this blog post, describes the managerial (or functional) model (while at the same time dismissing it):

The theories underlying (explicitly or implicitly) the discussions of the Egyptian state by Egyptologists that I have read so far are resolutely functionalist. ..I am going to base my discussion on an article by Fekri Hassan, “The Predynastic of Egypt,” published in 1988 in Journal of World Prehistory, because Hassan makes very explicit the conceptual underpinnings of his model. …Here’s what Hassan says:

” the process leading to the state was set in motion by factors inherent in the socioecology of agricultural production. Attempts to dampen the effects of agricultural fluctuations by pooling the resources of neighboring communities led ultimately to the emergence of the chiefs. Further enlargement of the economic unit led to a hierarchy of chiefs and the emergence of regional political units. Legitimation of power led to an emphasis on funerary offerings and status goods. This political technology stimulated trade. Skirmishes with “Libyan” and “Asiatic” raiders provided a raison d’etre for “military” power and added to the image of chiefs as keepers of world order.”

Note that warfare (“skirmishes with raiders”) plays decisively secondary, if not tertiary role in the process of state formation.

There are two problems with the Hassan hypothesis. The first one is that it goes against everything we know about people living in small-scale egalitarian societies (here I follow Chris Boehm, e.g. his Hierarchy in the Forest). Hassan says

“In its initial stages, the people were able to see the material benefits of representatives and cooperation. The chiefs also had to work harder than others to maintain their position.”

And a couple of pages later:

“The representative may have thus acquired by group consent and support a political power—the ability to act upon the actions of others. … The increase in the power of chiefs probably resulted from the continued benefits to the community resulting from their managerial activities. The extension of the group interaction over larger territories is likely to have led to the rise of a hierarchy of chiefs.”

The problem with functionalist explanations like this one is that it proposes an end point of an evolutionary process in which a new structure arises that fulfills a certain function—in this case, dampening the effects of agricultural fluctuations by integrating many villages within a large-scale society with managerial elites that can take surpluses from one area and direct them to where shortages are. But this explanation does not propose a plausible mechanism of how we get to this end point.

In fact, egalitarian societies are very resistant to the idea of creating permanent chiefs and endowing them with structural power to order everybody else around. Furthermore, the chiefs themselves would be less than eager to submit to the power of a paramount chief above them. Even today, and in dire straits, people coming from egalitarian societies find it extremely difficult to constitute and uphold hierarchies….why should we expect that ancient Egyptians would willingly give up autonomy and submit to the rule of chiefs? This is not just a theoretical argument. By Naqada IIIC (Dynasty I) the rulers of Egypt practiced massive human sacrifices. That’s what happens when you submit to chiefs and kings. It’s almost better to starve during a periodic famine than become a powerless peasant in a despotic archaic state.

Evolution of the Egyptian State – The Managerial Model (Cliodynamica)

Turchin’s favored models focus exclusively on martial explanations for state formation. But as we’ve extensively seen in the past few posts, such societies went through a long transegalitarian period before the emergence of hierarchical societies. The road to hereditary managerial aristocracies would have been paved by the long transegalitarian phase preceding it. The feasting theory does, in fact, provide a plausible model of how we get to such a point. Redistributive chiefdoms have been extensively documented all over the world, complete with monumental architecture, craft specialization, trade networks, and pyramidal levels of hierarchy (paramount chiefs, subchiefs, clan elders, etc.). It’s hard to account for this by warfare alone.

It’s far more simple to explain the emergence of proto-states by seeing them as a mutual social contract rather than the establishment of blatantly exploitative relationships by a parasitic minority as depicted in most history books. Over time this social contact became more and more lopsided, to be sure, but it makes it far easier to understand the emergence of such social structures in the first place by seeing them as 1) perceived at least in the beginning as being pro-social, and 2.) emerging out of existing organic relationships rather than being the result of entirely new ones.

Part of this distorted perception comes from the discipline of economics, which is inherently hostile to the very idea of a social contract. Instead, it sees society as nothing more than countless transactions between isolated individuals. But ancient people did see themselves so much as individuals but as members of various groups.

Besides, is the lopsided relationship between primary producers and managerial elites really so hard to understand?

For example, consider the banking and investor classes of modern-day capitalism. They justify their outsized rewards and staggering wealth by claiming that only they can “allocate capital” appropriately, and through such activities, each and every single one of us is made better off! They claim that if capital was allocated by, say, democratic consensus instead of private individuals, it would inevitably be “wasted” and “misallocated.” “Only we,” the bankers proclaim, “and we alone, have the talent and skills to accomplish this task!!” In this, they are perennially backed up and reinforced by the religion of economics, which argues that institutions of collective governance are always rife with “cronysim,” and that “central planning” is always a recipe for disaster (if not dictatorship, c.f. Hayek).

In fact, we clearly see that more and more of this capital is being “allocated” to support their own lavish lifestyles-exotic vacations, exclusive mansions, private jets and helicopters, palatial condos, rare artwork, luxury goods like sportscars, jewelry, watches and handbags, expensive suits, cocktail parties, and lavish weddings and graduation parties for their offspring that cost more than the average person’s yearly salary.

And yet, in spite of all of this, the bankers and executives still claim that their activities are not only necessary, but pro-social! Take away our ‘incentives’ they say, and society will fall back to a more primitive level. “Only we have the ‘special skills’ to do this work,” they claim, just as the ancient rulers claimed to have “special powers” to intercede with the gods and maintain the social order. In fact, during our latest financial crisis, one CEO banker famously claimed to be doing “God’s work”–most likely word-for word the exact same phrase uttered by the pharaohs, kings, princes and potentates of past eras. Has anything really changed?

Yet do we “rise up” and correct this? Why, then, would we expect ancient people to so? Are we really so radically different than the peasants of past eras?

Just like as the temple scribes and priests used their insider knowledge of writing and mathematics to maintain their privileged position vis-a-vis the rest of society in the ancient world, so too do modern bankers use their knowledge of the complex and opaque banking system to bamboozle the public and claim that only they have the “highly specialized knowledge” to manage the economy. In both instances, specialists make recourse to esoteric knowledge unavailable to the common people.This would have made even more sense in ancient times, when only the scribes and priests could manipulate the symbols of mathematics and writing required to maintain the activities of the government bureaucracy, unlike today where literacy and numeracy are commonplace.

After all, were not the households of redistributive chieftains not also “allocating capital”? Would they, too, not justify a earning premium on such “pro-social” activities, exactly as do today’s banking and investor elites? Is not the control and management of labor and resources the key factor in both? Today’s bankers constantly make reference to their brilliance and their “talent.” The average person could not possibly do these things, they argue. “Just trust us,” they say, “our activities are absolutely indispensable to the smooth running of the economy.” By performing this role, they say, we “deserve” to earn these outsized rewards. After all, we are doing “God’s Work!” Furthermore, they claim that without them and their managerial prowess, society would descend into chaos; “misrule” as the ancient Egyptian leaders called it.

Over time, more and more capital would be kept and less and less redistributed as the wealth of society grew. This wealth would have been increasingly diverted into the coffers of the managerial elites in order to maintain their lavish living standards. But again, this is no different than modern-day society. Eventually those who kept the least and redistributed the most became those who kept the most and redistributed the least. But that is long way from describing elites as merely “parasites” who played no role whatsoever in the emergent social order besides collecting taxes and whipping slaves in order to build stone monuments for purely egotistical purposes.

To be clear, I’m not arguing that ancient proto-states were always benign and never despotic. Or even that they were “necessary” in an objective sense. However, it doesn’t seem as though the people of these societies felt as though they were being “oppressed” any more than most people do under modern-day capitalism (which is to say, somewhat). Most routine activates took place at the village and household levels, and must have gone on relatively unchanged for thousands of years. Nor does it seem like the leaders coerced most behaviors from their citizens, acted in cruel and arbitrary ways towards them, or “enslaved” them in any way. Respect seems to have been mostly given voluntarily, as it is  towards today’s heads of state.

Collective festivals and rituals must have reinforced this spirit. No doubt threats to the “stability” of the social order were dealt with swiftly and harshly, but again, that is no different than modern states. I can find few tales of widespread and arbitrary cruelty or coercion on that part of these “despotic” leaders in any account. Rather, harshness and cruelty was reserved towards members of various “out groups.” There are many stomach-churning accounts of the horrible and shocking things victorious armies would do to the vanquished in many ancient accounts; all one has to do is read the Bible for examples of that. But internally, if one was member of the “in-group,” it appears that the “Oriental Despotism” of ancient rulers may have been greatly exaggerated, again often to discredit the idea collective governance. In any case, it would have been far easier to “run away” during this time period if one had wished to than it is in modern-day capitalist societies where all empty lands are filled and widespread private ownership greatly limits the ability for self-sufficiency.

In fact, often times governments acted a curb on the rapacious behavior of “private” elites. Debt slavery was a major driver of inequality in ancient societies-conflicts between creditor and debtor classes became endemic throughout the ancient world. “Populist” leaders appear often in history, claiming to restore the balance between the first “one-percent” and everyone else. In fact, we see “oppression” more often as the result of the activities of “private” individuals rather than governments! A prominent example is given by one of the first law codes in history, that of the Sumerian ruler Ur-Nammu. He writes of the corruption and abusive practices he put an end to and decrees “equity in the land”:

“…After An and Enlil had turned over the Kingship of Ur to Nanna, at that time did Ur-Nammu, son born of Ninsun, for his beloved mother who bore him, in accordance with his principles of equity and truth… Then did Ur-Nammu the mighty warrior, king of Ur, king of Sumer and Akkad, by the might of Nanna, lord of the city, and in accordance with the true word of Utu, establish equity in the land; he banished malediction, violence and strife, and set the monthly Temple expenses at 90 gur of barley, 30 sheep, and 30 sila of butter. He fashioned the bronze sila-measure, standardized the one-mina weight, and standardized the stone weight of a shekel of silver in relation to one mina… The orphan was not delivered up to the rich man; the widow was not delivered up to the mighty man; the man of one shekel was not delivered up to the man of one mina.”

Very commonly, new rulers would declare a “clean slate” upon their ascension to leadership, annulling previous debts. The famous law-giving king Hammurabi did so, for example. He declared amdurarum (debt annulment) upon taking the throne. This hardly seems like “oppressive” behavior to me.

The key, then, to understanding past structures is to look at today’s. We are fundamentally the same creatures, with the same brains and social instincts, despite our increased technological capabilities. Our technological ability compounds over time, building on previous discoveries, but our social structure is largely limited by how our brains work. Over the past few centuries, our technological evolution has far outstripped our social evolution, as noted by many commentators including Edward O. Wilson:

“Humanity today is like a waking dreamer, caught between the fantasies of sleep and the chaos of the real world. The mind seeks but cannot find the precise place and hour. We have created a Star Wars civilization, with Stone Age emotions, medieval institutions, and godlike technology. We thrash about. We are terribly confused by the mere fact of our existence, and a danger to ourselves and to the rest of life.”
― Edward O. Wilson, The Social Conquest of Earth

In fact, the difference in lifestyles between our executive and banking classes is likely far greater than that between the peasants and the rulers of past eras. For example, the bonus of bankers in one year in the United States–just the bonuses , mind you, not the actual salaries–was greater than the combined income of all of every single minimum wage worker in the country-our modern-day equivalent of serfs. Its doubtful that Egyptian royalty could claim the same. Forty million children in the U.S go to bed hungry every night, yet one single hedge fund manager will “earn” over a billion–1000 million-dollars in a single year, even while sleeping and going to the toilet. Would early “despots” have gotten away with such disparities in wealth? And yet we tell ourselves that we are somehow more “advanced” than these ancient societies. Really???

So it’s not hard to figure this out – it’s just the same old manipulation of the social logic, and we are just as susceptible as people thousands of years ago, despite us telling ourselves that we are all much too “smart” and “rational” to fall for any of that that stuff in our high-tech modern era of “science” and “reason.”

Is it so hard to understand why ancient peoples put up with the lavish lifestyles and sybaritic excesses of their ruling elites? Why did they? It is more appropriate to ask, rather, why do we? Answer that question and we have definitively solved the “mystery” of state formation once and for all.