The Evolution of Money

David Orrell, Roman Chlupatý

• Publisher: Columbia University Press
• Year: 2016
• ISBN:
  9780231541671
• Topic: Economia
• Subtopic: Storia economica

The sharing economy's unique customer-to-company exchange is possible because of the way in which money has evolved. These transactions have not always been as fluid as they are today, and they are likely to become even more fluid. It is therefore critical that we learn to appreciate money's elastic nature as deeply as do Uber, Airbnb, Kickstarter, and other innovators, and that we understand money's transition from hard currencies to cryptocurrencies like Bitcoin if we are to access their cooperative potential.

The Evolution of Money illuminates this fascinating reality, focusing on the tension between currency's real and abstract properties and advancing a vital theory of money rooted in this dual exchange. It begins with the debt tablets of Mesopotamia and follows with the development of coin money in ancient Greece and Rome, gold-backed currencies in medieval Europe, and monetary economics in Victorian England. The book ends in the digital era, with the cryptocurrencies and service providers that are making the most of money's virtual side and that suggest a tectonic shift in what we call money. By building this organic time line, The Evolution of Money helps us anticipate money's next, transformative role.

1

Origins

Money plays the largest part in determining the course of history.

KARL MARX, THE COMMUNIST MANIFESTO

As a rule political economists do not take the trouble to study the history of money; it is much easier to imagine it and to deduce the principles of this imaginary knowledge.

ALEXANDER DEL MAR, HISTORY OF MONETARY SYSTEMS

In economics, money has traditionally been defined to be anything that is generally accepted as a medium of exchange. Money also acts as a store of value and as a unit of account. But where did it come from in the first place? Since Aristotle, economists have said that coin money emerged as a replacement for barter. This chapter tracks the development of money from credit systems in ancient Mesopotamia, to early coins in ancient Greece and Rome. As we’ll see, its genesis was somewhat more interesting than is usually presented in standard economics—and so will be its future.

Money has been one of mankind’s most successful inventions (it is no coincidence that to “coin” means to “invent”). Indeed, it is one of the things that best expresses our humanity. Other animals don’t exchange labor for tokens or carry wallets or set up elaborate banking systems. Money has aided and encouraged the human delight in trade and has shaped our social and economic development. It also has a shadow side—money may not be the root of all evil, but it can certainly play a supporting role. The quest for money drives enterprise and innovation, but also leads to social ills varying from lack of free time to environmental destruction. It may be a sign of humanity, but sometimes it is also a cause of behavior that we would call inhuman.

Money today is perhaps more powerful and pervasive than at any time in history, but—ushered into existence seemingly from nothing at the command of banks—also seems little more than a kind of accounting trick. It is fitting that the creator of double-entry bookkeeping, Luca Pacioli, was a magician. What is its secret? Why does specie, as coinage used to be known, continue to have such a hold over the human species?

One of the most fundamental characteristics of money is that it acts as an easily transportable store of value. The fruits of our labor can be held in a crystallized form—instead of exchanging work directly for goods, we exchange it for cash, which can then be spent at our convenience. Money therefore holds value the same way a battery holds energy, and makes it movable both in time and space (unlike some other stores of value, such as land). A paycheck in one’s pocket can be spent whenever and wherever one wants—providing, of course, that someone is willing to accept it. To be of use, money must be not just portable but also easily exchangeable.

In the United States during the Great Depression, a popular form of money, especially in remote logging or mining camps, was company scrip. A portion of wages was paid in scrip that could be redeemed only at the camp’s store, rather like a modern gift certificate. Since the store was owned by the company, this increased the company’s control over its workers and made it easy to mark up prices. Scrip could be exchanged for cash, but only at a discount, which reflected its limited range of use.

A similar arrangement known as the “truck system” was used during the Industrial Revolution in Britain (the word “truck” in this context is from the French troquer, which means “to trade or swap”). Again, a monetary drought during this period meant that factory workers were often paid with vouchers that were exchangeable in local stores, which were again often owned or controlled by the factory owner. However, such arrangements were eventually outlawed by a sequence of laws known as the Truck Acts. In the United States, President Franklin Delano Roosevelt banned scrips in 1933, as he struggled to get the faltering monetary system under control.

An important advantage of cash compared with such schemes, then, is its range—it is accepted not just by one employer-controlled retail outlet but also by the store down the road and a whole range of institutions. Money therefore stimulates trade, at least over the region in which it is accepted, by making transactions convenient. And it represents a kind of freedom, since a person with money in his or her pocket is someone with the freedom to choose. As Fyodor Dostoyevsky put it: “Money is coined liberty.” Or at least liberty to select from among an available selection of suppliers.

Money therefore acts as a store of value (though this does raise the question, what is value?) and a medium of exchange. Finally, its units—dollar, shekel, and other currencies—act as units of account. To compare the economic value of different items, we just need to compare their market prices. And unlike most physical objects, money can be easily divided into fractional amounts, which is useful—we don’t need to say that a chicken egg is worth one-tenth of a chicken. As discussed later, the spread of the use of money—and the need for accounting techniques—helped to inspire the development of mathematics in ancient Greece. Today, financial wizards with degrees in particle physics are employed to keep track of money’s incessant, turbulent flow around the globe.

Indeed, the adoption of money was part of a generalized shift toward the dominance of calculation in our lives. The main difference between monetary transactions and other social transactions such as gift exchange is that the former involve an exact amount—you can put a number on them. They therefore emphasize the left-brain functions of logic and quantification. As we’ll see, money has a tendency to colonize and take over everything it comes into contact with, because like mathematics it is based on reducing the world to a common, self-contained system of thought. Like pure numbers, money has shed any physical attributes—luster, texture, weight—and now exists only on the higher plane of abstraction and mathematics.

This cold rationality and exactness introduces a note of finality to transactions, because once an exchange is complete, there is nothing left over—the numbers on either side of the ledger cancel out to zero. Money builds commercial relationships, but it can terminate them in a flash. By acting as a kind of prosthetic for trust, it also removes some of our need for creating and maintaining real trust with human beings. We trust in money more than we trust in one another. Our bond is with the bank.

The multiple properties of money, which can both complement and contradict one another, mean that it often arouses conflicting and paradoxical responses. For example, we want money to be attractive as a good store of value—but if it is too attractive relative to other options, it will be hoarded rather than allowed to circulate. We want money to be available in adequate quantities—but not so easily available that it causes inflation (for a period, tobacco served as legal tender in the state of Virginia, and when tobacco production surged to over twice its normal level in 1639, it was ordered that half the crop be destroyed). People without money want to borrow it, but bankers want to loan only to those who already have it. We think money will make us happy, but studies have shown that happiness levels of lottery winners are remarkably unchanged by their wins.¹ Money is “how our culture defines value,” according to author Tim Kreider, but increasingly we expect to get our culture (or “content”) from artists and authors for free, in what amounts to a modern version of a gift economy.² Attempts to reduce financial risk often have the effect of increasing it. Economic policies have surprising and counterintuitive effects. And so on.

As discussed later, mainstream economists have traditionally sidestepped some of these issues by focusing on money’s role as what economist F. A. Harper called a “lubricant in exchange” so that money has no special or interesting powers of its own.³ We defer our own definition until chapter 2, but as a start, an obvious question is where money came from in the first place. Just as philosophers have long speculated on the origins of the universe, so economists and others have wondered about the origins of money. It didn’t just fall from the sky, so who invented it? As with other creation stories, the proposed answers are interesting not just for what they say about reality but for what they say about their authors; and for insights into not just the past but also the future.

Creation Myth

One of the first philosophers to write about the invention of money was Aristotle, who deduced that it must have replaced a barter system in response to increasingly complicated trade. As he wrote in Politics, the “more complex form of exchange [money] grew, as might have been inferred, out of the simpler [barter]. … For the various necessaries of life are not easily carried about, and hence men agreed to employ in their dealings with each other something which was intrinsically useful and easily applicable to the purposes of life, for example, iron, silver, and the like. Of this the value was at first measured simply by size and weight, but in process of time they put a stamp upon it, to save the trouble of weighing and to mark the value.”⁴

Aristotle’s argument that money replaced barter in this way appears to have been based more on speculation than detailed evidence or anthropological footwork on his part, but his opinions influenced much further thinking on the subject. In a book whose title translates to A Guide to the Merits of Commerce and to Recognition of Both Fine and Defective Merchandise and the Swindles of Those Who Deal Dishonestly, the Damascus merchant and writer Abu Ja‘far al-Dimashqi noted the difficulties inherent in barter:

[T]he time of need of a person does not often coincide with the time of need of another person, as in the case of a carpenter who may be in need of an ironsmith but could not find one (at that particular time). It may also happen that there is no equivalence between the respective quantities of what each need[s] from the other, and there is no way of knowing the value of each item of each kind of goods, and of knowing the rate of exchange between one item and another item of a part of the merchandise among all the parts of the rest of the merchandise, nor the relative value of each of the different crafts.⁵

As a result, “The ancients searched for something by which to price all things” and settled on coins of gold and silver, which were preferred “due to their being readily suited for casting, forging, combining, separating and shaping into any form required.”

The story was picked up by the schoolmen who repeated Aristotle’s teaching to a medieval audience in the first universities, and later by economists such as Adam Smith. In The Wealth of Nations, he agreed with Aristotle that money—and indeed the entire market economy—must have emerged naturally from barter. A “prudent man” would build up a stockpile of some commodity that “few people would be likely to refuse in exchange for the produce of their industry.”⁶ Again, the ideal material was gold or silver; originally these were used in the form of “rude bars” that constantly needed to be weighed and measured, but eventually the government would have stepped in to issue standardized coins. Mints, according to Smith, had exactly the same role in this process as “stamp-masters of woollen and linen cloth.” He fleshed out the picture with the addition of vignettes of hunters and shepherds, with “bows and arrows” being exchanged “for cattle or for venison,” which appear to be drawn from what was known at the time about peoples such as the Native Americans of North America.

Double Coincidence

In the late nineteenth century, neoclassical economists such as William Stanley Jevons attempted to reinvent economics as a mathematical discipline; part of that project was framing the emergence of money as a kind of logical necessity. “The earliest form of exchange,” he wrote in his book Money and the Mechanism of Exchange, “must have consisted in giving what was not wanted directly for that which was wanted. This simple traffic we call barter or truck.”⁷ Echoing Al-Dimashqi, Jevons noted that barter relies on what he called a double coincidence of wants, since each person has to want what the other has: “A hunter having returned from a successful chase has plenty of game, and may want arms and ammunition to renew the chase. But those who have arms may happen to be well supplied with game, so that no direct exchange is possible.”

The first money, according to Jevons, took the form of commodities: “In the traffic of the Hudson’s Bay Company with the North American Indians, furs, in spite of their differences of quality and size, long formed the medium of exchange.” Indeed, companies even used a unit of account called the Made Beaver to keep track. “In the next higher stage of civilization,” Jevons went on, “the pastoral state, sheep and cattle naturally form the most valuable and negotiable kind of property. They are easily transferable, convey themselves about, and can be kept for many years, so that they readily perform some of the functions of money. … In countries where slaves form one of the most common and valuable possessions, it is quite natural that they should serve as the medium of exchange like cattle.”

But of course you can’t put furs, cattle, or slaves in your pocket; so again the best material, and the inevitable end result of this process, is coins made of precious metal:

[I]n order that money may perform some of its functions efficiently, especially those of a medium of exchange and a store of value, to...