Introducing Money

Mark Peacock

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9780415539869
• eBook ISBN: 9781136686115
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book provides a theoretical and historical examination of the evolution of money. It is distinct from the majority of 'economic' approaches, for it does not see money as an outgrowth of market exchange via barter. Instead, the social, political, legal and religious origins of money are examined.

The methodological and theoretical underpinning of the work is that the study of money be historically informed, and that there exists a 'state theory of money' that provides an alternative framework to the 'orthodox' view of money's origins.

The contexts for analysing the introduction of money at various historical junctures include ancient Greece, British colonial dependencies in the nineteenth and early twentieth century, and local communities which introduce 'alternative' currencies. The book argues that, although money is not primarily an 'economic' phenomenon (associated with market exchange), it has profound implications (amongst others, economic implications) for societies and habits of human thought and action.

PART I

Theories

1

CARL MENGER AND THE EXCHANGE THEORY OF MONEY

In this chapter, I look in more detail at what, in the Introduction, I called the ‘orthodox economic view’, which has money originating from moneyless acts of exchange (‘barter’) and locates the origins of money in the context of the market. Following from this, it sees money’s most important function to be that of a medium of exchange. The theory dates back at least to Aristotle (Politics book I) who propounded a lapidary version of the theory in the fourth century BCE. Its provenance goes back over two centuries earlier if Aristotle’s contemporary, the Athenian orator Demosthenes, is to be believed, for he attributes a skeletal version of the theory to the late sixth-century Athenian statesman, Solon, although no written record of Solon’s thoughts on the origins of money survives (Demosthenes, ‘Against Timocrates’: 212).¹ The conjectural–historical model offered by Kevin Dowd, which I discussed in the Introduction, is a modern version of this theory but, in this chapter, I concentrate on the first systematic and, in my opinion, best account of the model, namely, that composed by Carl Menger (1840–1921), first in the late nineteenth century and, in revised form, in the early twentieth. Although it is unlikely that Menger thought his model to be merely conjectural (that is, avowedly untrue to the historical record), it is, given the lack of evidence to support it, best defended as a conjectural history of money. The sophistication and subtlety of Menger’s model have gone unsurpassed in the course of the nearly 150 years since its first statement, and for that reason Menger warrants discussion. After expounding Menger’s ideas on money in section I of this chapter, I outline criticisms of it in section II. Section III explores and elucidates the concept ‘barter’. I argue that the concept is more difficult to delineate than many believe, and I present reflections on the distinction between barter and monetary exchange.

I Carl Menger’s theory of the origins of money

According to Menger, money emerges from barter. If I am to obtain an object of consumption via barter, Menger asserts, two conditions must hold:

1 that I possess a product, P1, which, for me, has a lower use-value than another product, P2, which is in the possession of another person, who wishes to acquire P1 and for whom P2 is of lower use-value than P1;

2 that I and the other person meet to conclude an exchange.

(Menger 1968/1871: 251; 1892: 242)

The satisfaction of these conditions is not a likely eventuality, avers Menger, and hence many traders will be unable to reap the potential gains of trade in a barter economy (recall Smith’s ‘clogged and embarrassed’ operation of barter from the Introduction (section I)). To overcome the difficulties of barter, traders begin to exchange the products they own, not for others they wish to consume directly, but for those that have proven to be more ‘saleable’ (absatzfähiger) than those they currently possess.² The more absatzfähig a product, the greater the ease with which a trader can exchange it for other products. Hence, if an armourer (Menger’s example) has no wish to consume corn, he would nonetheless be advised to exchange the armour he makes for corn if he can exchange corn for objects he does wish to consume with greater facility than he could exchange his armour for these products. In this manner, the armourer might approach his final consumption goods via a series of intermediate exchanges in which he divests himself successively of less saleable products for ones with greater saleability until he acquires products not for their exchangeability but because he wishes to consume them. Upon beholding the success of the armourer in obtaining his final goods of consumption with a facility and alacrity previously unknown, other traders will do likewise. Through this process of emulation, one product – the most saleable – comes to be desired for its saleability or exchange-value rather than for its qualities as an object of consumption; this good becomes money. Money, Menger impresses, is neither the product of explicit agreement between economic subjects, nor of legislation, but is the result of decentralized actions undertaken by individuals who are concerned to further their own economic interest (Menger 1968/1871: 254–61; 1970/1909: 9).

One problem that Menger avoids with his analysis is the logical problem of accounting for the origins of money in a non-circular way, a problem to which I drew attention at the close of the first section of the Introduction. By exchanging his armour for corn, which is more ‘saleable’ than the armour he produces, Menger’s armourer does not take the monetary leap of faith that Frank Hahn associates with the adoption of money. Hahn seems to have in mind the problem of an individual accepting a monetary token like a coin or a bill of exchange that is not widely used in a particular society and has little or no intrinsic value: the ‘first person to accept a goldsmith’s IOU took considerable risks’ (Hahn 1987: 29). Hahn’s point is that the person who accepts a goldsmith’s IOU will expose herself to the risk that few or no other people will accept it in exchange or in payment. This would leave Hahn’s ‘first person’ to accept such an IOU holding a highly illiquid asset. The origin of money, as Hahn wishes to conceive it, has no obvious ‘first mover’; in fact, a first mover has every reason not to accept monetary tokens by virtue of her being the first mover. Menger’s armourer, who sells his armour for the intermediate product, corn, does not expose himself to such risks, for corn, unlike an IOU or a banknote, will be accepted by others in barter transactions as an object of use; my acceptance of corn, for instance, does not presuppose that other individuals be willing to accept corn if I wish to avail myself of corn’s use of last resort, namely, being eaten. The first person to accept corn for its saleability was not taking great risks because he temporarily holds his wealth in the form of a good that, unlike an IOU, is intrinsically useful; corn’s value (and therefore its acceptability) in exchange, unlike that of an IOU, derives from its use-value, not from the mere fact that other people are willing to recognize it as money. To anchor the earliest monetary media in useful objects, such as corn, is a way to circumvent the paradox raised by Hahn. It is also a characteristic of ‘metallist’ theories of money (Goodhart 1998). When we consider different introductions of money, ‘history’ may be said to confirm metallism, for early monies tend to be precious objects, often metals (hence the name ‘metallism’); but, as I argue in Chapter 2, ‘theory’ does not support metallism if, by the latter, one means that money must originally be tied to an intrinsically useful and hence valuable object, like a precious metal.

To return to Menger’s armourer, we may note that the risks to which he exposes himself when he acquires corn in exchange for armour as an intermediate good are considerably smaller than those that confront Hahn’s ‘first person’ to accept a goldsmith’s IOU. But the armourer as Menger depicts him is nevertheless exposed to risk. To grasp this, we must explore Menger’s concept of saleability in greater depth and enquire into the sorts of ‘prices’, or rates of exchange on the markets in which he holds people to barter.

What characterizes a good’s high degree of saleability is a widespread and constant demand for it (Menger 1970/1909: 8). Not only are more saleable goods easier to dispose of in exchange; they are easier to dispose of at ‘economic prices’. To understand what Menger means by ‘economic prices’, consider barter. A particular seller may encounter a multitude of potential buyers for whom the product the seller wishes to barter is a use-value. Yet the need to satisfy the first of Menger’s two conditions for the cementation of a barter transaction, described above, narrows the seller’s options considerably. If, however, there exists a generally recognized medium of exchange (for Menger, ‘money’) for which the seller can exchange her product, she can sell her product for money with any other person who is willing to part with this medium of exchange, and not just with those people who happen to be in possession of a product that she wishes to consume. Whereas a barterer encounters, at best, a sparse collection of potential exchange partners, a trader who can avail herself of money stands before myriad buyers with whom she can exchange without the necessity of having to find one who disposes over an object that she covets for its use-value. Similarly, each buyer who possesses money faces a greatly increased number of sellers, each of whom is willing to accept this medium in exchange. Buyers will thus be able to choose amongst sellers and sellers amongst buyers. Although competition may not be coterminous with the development of money, notes Menger, ‘money’ (qua generally accepted medium of exchange) increases the intensity of competition. The prices that arise under conditions of such increased competition are ‘economic’ rather than ‘coincidental’. That is, they are the result of the activity of all those participants in a market who buy and sell a particular item, not merely of two individuals who happen to stumble upon each other, happen to have products that the other desires, and negotiate a more or less ad hoc rate of exchange on the spur of the moment (Menger 1970/1909: 20–1; 1892: 244–5).³

Menger proceeds to argue that a commodity owner will, with greater certainty, be able to divest himself of his products at economic prices the more saleable those products are. In other words, the price of more saleable items is less susceptible to incidental vagaries (‘coincidences’) that do not reflect the ‘market situation’ but reflect either the idiosyncratic situation or preferences of the particular person with whom one is transacting or the local conditions of a particular market that do not pertain in other markets. Consider, to give him his ‘last stand’, Menger’s armourer once again. By exchanging his armour for corn, neither of which he desires for their use-values, the armourer divests himself of a less, and acquires a more, saleable good. The corn will not only allow him more easily to acquire final goods of consumption; it will, on account of its greater saleability, afford him prices that are less coincidental than those of his armour because the number of people who seek the former is greater than those who seek the latter. This lessens the risk of having to accept unfavourable rates of exchange. An implication of this is that more saleable items are a better store of wealth than less saleable products because they offer individuals protection against deleterious price movements that cannot be foreseen (Menger 1892: 245, 251). Menger writes of an ‘inner connection’ between a medium of exchange and a store of value (Thesaurierungsmittel);⁴ the former serves as the most convenient form of the latter for the reason that no costs arise in transferring one medium (in which wealth is stored) into another (the exchange medium) should the individual need to liquidify her stored wealth in order to finance current purchases (Menger 1970/1909: 56). Furthermore, the existence of one medium for both purposes eliminates the uncertainty surrounding the rate of exchange between the means of storing wealth and the medium of exchange. Menger’s account of the development of money thus contains the seed of what was to become the characteristic ‘Austrian’ topos of uncertainty (see, e.g., Moss 1978: 19–21; O’Driscoll 1986: 609, 614–15).

A good’s store of value function is, then, parasitic on its medium of exchange function and, in Menger’s account of money, to call something ‘money’, it is sufficient that this ‘something’ serve as a generally accepted medium of exchange. Money, qua medium of exchange, comes, in Menger’s analysis, to assume other functions but, as we shall now see, not just that of a store of wealth; it also serves as a unit of account and a means of payment.

Regarding means of payment, Menger (1970/1909: 47) acknowledges the existence of ‘one-sided payments’ that pre-date market exchange. Examples he cites are gifts, compulsory tribute payments, fines and wergeld.⁵ Such payments were originally discharged in kind, but this was, Menger holds, a burden to the payer if she did not possess the good, e.g. silver, in which the payment was to be made. Consequently, alternative means of payment were specified by the payee to ease the making of the payment. With the development of monetary exchange conducted by a single medium, payment is further eased: the payee prefers to receive payment in money (for it gives him the greatest command over a range of commodities on the market); the payer, too, prefers to pay in money because she will already hold her wealth in money and hence be able to use money to pay her obligations without first having to convert it into a different means of payment. So as soon as a universal medium of exchange exists, it will be the most practicable means for making one-sided payments. Consequently, it becomes superfluous to ascribe to money the function of a means of payment in addition to its function as a medium of exchange; the latter function subsumes the former. It is, Menger writes, a ‘pleonasm’ to attribute a means of payment function to money independent of its medium of exchange function (Menger 1970/1909: 47–9, 52–3).

Consider, now, money’s unit of account function that is related to the means of payment function just outlined. Menger’s starting point for analysing this function is, again, the one-sided (non-exchange) payments mentioned in the previous paragraph. Prior to the universality of money prices, Menger argues, certain goods were valued in terms of others so that people who were required to make obligatory payments in kind could choose between certain means of payment. If, for example, a payment was specified as 100 pounds of grain, but the payer did not have grain to discharge the payment, she could pay with a different means of payment, e.g. wax, and ascertain the wax equivalent of 100 pounds of grain by consulting the given value relation between the two. Menger does not ask how such value relations arise but avers that they exist only for a very narrow range of goods and hence have little significance for the development of money. Menger holds that the development of monetary market exchange changes the situation with regard to the unit of account function of money: once money prices exist, valuation becomes a simple matter, for all commodities that are regularly bought and sold can be valued according to their respective money prices. Thus, the universal medium of exchange comes to serve as the basis of the unit of account (Menger 1970/1909: 67–9); if silver becomes the medium of exchange, for instance, ounces (or some other unit of weight) of silver will be the unit of account.

To summarize Menger’s (1970/1909: 94) account of money: money’s ‘original’ and ‘primary’ function is that of a medium of exchange; its other functions are parasitic on this one. The development of money is ‘organic’ in the sense that money arises as a result of decentralized decisions on the part of economic subjects, but not as a result of a predetermined, centrally imposed plan; nobody foresaw the creation of money, yet money nevertheless emerged through the self-regarding actions of economic actors. Menger’s account thus has money develop through an ‘invisible hand’ process, the ‘result of human action but not of human design’ (Hayek 1967). Money is not an institution of the state; the state ‘consummates’ (vervollkommnet) the development of money by issuing and guaranteeing the validity of coinage, but this step is logically and temporally posterior to the development of money qua generally recognized medium of exchange (Menger 1970/1909: §V).⁶ With his theory, Menger posits the orthodox view of the origin and development of money in a sophisticated and nuanced form. As I noted in the Introduction, economists still adhere to this view, as Dowd’s recent offering shows.

II Critique of Menger

There is little historical evidence in favour of Menger’s account of the origins of money. Caroline Humphrey (1985: 48) writes: ‘No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there has never been such a thing.’ Similarly, George Dalton (1982: 182) bemoans the ‘conjectural history’ or ‘spurious evolutionary guessing about what may have plausibly preceded the use of cash (coinage) for market transactions’. In such ‘histories’, Dalton continues: ‘It is assumed (without evidence) that in the beginning there were ordinary and familiar market transactions without money (barter).’ In fact, Dalton (1982: 185) observes, ‘[b]arter, in the strict sense of money-less market exchange, has never been a quantitatively important or dominant model of transaction in any past or present economic system about which we have hard information.’ Dalton is questioning the sociology, as it were, that underlies accounts such as Menger’s; for, in conceiving a pre-monetary economy, Menger seems to envisage something like a modern capitalist economy and abstracts money therefrom. That is, apart from a phase characterized by one-sided payments, about which Menger is none too informative, Menger conceives a barter economy to be something like the economic ‘condition of nature’. Such an economy is analogous to its modern capitalist counterpart in the following sense: individuals are free and independent agents who are bound only by the contractual barter agreements they themselves make. His individuals are, to a large extent, dependent on market exchange to provide for themselves, and they are bent on their own gain (cf. Gerloff 1947: 24). The only thing missing is money. But, as Dalton observes, there is no historical society that unites the features of Menger’s imaginary world in which market exchange is highly developed, individuals free of social bonds and dependency (such as feudal ties or slavery) but money not yet developed. Had Menger incorporated the social relations in which individuals stand to one another into his model, he would have found that individuals in pre-monetary societies were neither free contractors to barter transactions, nor were they heavily dependent on the market for the acquisition of goods and services. When I examine societies in which the market was not the dominant economic form in the coming chapters, I attend to the social relations in which economic activity takes place. Let us turn now, though, to a different criticism of Menger, one that pertains to the unit of account function of money.

It has been noted that the derivation of an abstract unit of account, or ‘numéraire’, from barter transactions is the Achilles’ heel of accounts of money that begin with barter (Tymoigne and Wray 2006: 2). Let us consider Menger’s explanation of how a unit of account comes into existence. To prepare the ground for this discussion, we must address an all too seldom posed question, namely, ‘What is barter?’. I postpone a more detailed answer to the end of this chapter, but what follows is a neces...

Table of contents

• Cover Page
• Half Title page
• Series Page
• Title Page
• Copyright Page
• Contents
• Preface
• Acknowledgements
• Introduction: economics and history
• Part I Theories
• Part II Ancient monies
• Part III Modern monies
• Notes
• Reference
• Index