Monday, January 23, 2012

David Graeber on the Origins of Money

I have just finished reading David Graeber’s Debt: The First 5,000 Years (Brooklyn, N.Y., 2011). While I will not review the whole book, a review of some of the chapters on the origins of money is worthwhile, with reference to some of the specialist literature cited by Graeber.

We won’t get very far without defining what money is, however. Money’s functions are usually divided into the following:
(1) money of account or a unit of account,
(2) a means of payment and medium of exchange and
(3) a store of value.
Graeber (2011: 21) notes that historically economists have been obsessed with the medium of exchange role, and treat the latter as the primary role.

But a crucial division can be made between (a) money conceived as what Keynes called an abstract money of account (that is, money as an abstract unit of account) and (b) things which function as an actual means of payment and medium of exchange, which act as money in an abstract or physical way.

The money of account is the unit of account in which prices and debts are measured. It is abstract. But it is clear you can have an abstract money of account without a large role for an actual physical medium of exchange. For example, in practice, many exchanges in an economy might be done by credit transactions.

Graeber notes that the mainstream view of money as emerging from barter spot trades goes back to Adam Smith (Graeber 2011: 24). The modern neoclassical economics profession is obsessed with barter because they regard money as a neutral veil and their “real” analysis of economies is essentially that of a barter system (Graeber 2011: 44–45).

It is important to note that Graeber does not deny that money in some historical circumstances can emerge from barter between strangers, especially in long distance trade. Graber cites the cacao money of Mesoamerica and the salt money of Ethiopia as instances of money emerging through barter (Graeber 2011: 75; on Ethiopian salt money, see Einzig 1949: 123–126). Graeber also cites the views of Max Weber (1978: 673–674) and Karl Bücher (1901), who argued that money emerged from barter between different societies, not within societies (Karl Polanyi may also have held a position close to this).

The points that can be made against the standard barter theory of money are as follows:
(1) the view that money can only ever emerge from barter spot transactions must be rejected.

(2) even the assumption lying behind standard neoclassical theory that money-less communities come to have economies dominated by barter spot trades is contradicted by the evidence of anthropology.
Money-less societies are frequently dominated by debt/credit transactions, or “gift exchange,” not by barter spot trades (on barter, see Chapman 1980; Heady 2005; Humphrey 1984). Even in cases where goods exchange for goods in spot trades, social relations can complicate matters considerably, and historically barter seems to have been prevalent between one community and another, or, that is to say, between people who were strangers and where relationships were implicitly or explicitly hostile (Graeber 2011: 29–30; cf. Heady 2005: 267). In small human communities, gift exchange and credit transactions in goods, services or social relations can largely overcome the immediate double coincidence of wants problem encountered in barter spot trades, and in such communities there may exist a ranked list of various things according to their value, in which certain things are also deemed roughly equivalent (Graeber 2011: 36; Graeber 2011: 395, n. 24 notes that Ralph Hawtrey was one of the few economists to consider the role of deferred payments).

Situations in which barter is observed in groups of human beings in modern times where some good emerges as a medium of exchange (as in cigarettes in POW camps, for example) can hardly be regarded as confirming the barter origin of money theory, because the people concerned in these cases were already perfectly familiar with money (Graeber 2011: 37).

In ancient Mesopotamia, money as a unit of account seems to have been the invention of temple and palace institutions. These were state institutions with large internal centrally planned economies, with complex weights and measurements for internal accounting of the products produced, received and distributed, and rent and interest owed. The units of account were (1) the shekel of silver (which was equal to the monthly grain ration) and (2) barley. One gur of barley was equal to the shekel. The shekel of silver was set by temple/palace planners to equal to the monthly grain ration (i.e., a gur of wages in barley) doled out to their workers. Thus they seem to have designed a unit of account from the major weight units: many prices were probably even set and administered in the money of account which developed from weight units (Graeber 2011: 39; Hudson 2003; 2004a; 2004b). Payment could be made in silver but in fact was probably not done so in reality very often. The economy operated on credit/debt transactions and payment could be made in real goods.

While a non-enumerated system of debts/credits or gift exchange might not give rise to money, there is clearly a role for debt in the history of money (Graeber 2011: 40), and Graeber draws attention to the work of Alfred Mitchell Innes (1864–1950), who published two important papers on money and the debt/credit origins of money (see Mitchell Innes 1913 and 1914). As a matter of interest, Alfred Mitchell Innes was influenced by the Scottish economist Henry Dunning Macleod’s (1821–1902) credit theory of money (see MacLeod 1902).

In many periods of history when coined money did exist, such as the European Middle Ages, it was actually very scarce, and societies continued to operate on debt/credit transactions: in reality the following conceptual development is wrong:
barter > money > credit.
In the real world, gift exchange and debt/credit arrangements existed long before money, and societies could develop an abstract unit of account in which debt/credit transactions were still the predominant system (Graeber 2011: 40). The use of coinage, when it was developed, could remain uneven and coins scarce. Instances when barter has become a predominate system (as after the collapse of the Soviet Union or Argentina after 2001) are usually when currency collapses (Graeber 2011: 40).

In a society where debt/credits are the major transaction, IOUs/debts can be transferable and used as a means of payment or medium of exchange. Graeber thinks of an example:
“Say, for example, that Joshua were to give his shoes to Henry, and, rather than Henry owing him a favour, Henry promises him something of equivalent value. Henry gives Joshua an IOU. Joshua could wait for Henry to have something useful, and then redeem it. In that case Henry would rip up the IOU and the story would be over. But say Joshua were to pass the IOU on to a third party—Sheila—to whom he owes something else. He could tick it off against his debt to a fourth party, Lola—now Henry will owe that amount to her. Hence money is born.” (Graeber 2011: 46).
A type of medium of exchange could emerge in theory in this way in small communities, or communities of specific people like merchants where IOUs can be verified. The empirical evidence demonstrates that this is precisely how promissory notes and bills of exchange become a medium of exchange. A kind of debt money can emerge in communities where there exist people willing to accept it or cancel the debt IOUs (Graeber 2011: 74). Graeber notes how for centuries English shops issued their own wood, lead or leather token money as debt money redeemable at the particular merchant’s store (Graeber 2011: 74). Graeber’s eclectic view on the origins of money is expressed in this way:
“Throughout most of history, even where we do find elaborate markets, we also find a complex jumble of different sorts of currency. Some of these may have originally emerged from barter between foreigners: the cacao money of Mesoamerica and the salt money of Ethiopia are frequently cited examples. Other arose from credit systems, or from arguments over what sort of goods should be acceptable to pay taxes or other debts. Such questions were often matters of endless contestation.” (Graeber 2011: 75)
Graeber, however, doubts that local or community debt/IOU money systems can “create a full-blown currency system, and there’s no evidence that they ever have” (Graeber 2011: 47). But this is where Georg Friedrich Knapp’s (1842–1926) chartalist theory of money comes in (see Knapp 1905; Knapp 1973 [1924]). When the state issues IOUs it can do so on a large scale, and then demand the same IOU tokens back as payment of taxes. Graeber notes the use of tally sticks in the Middle Ages: the British exchequer could issue them, and they would circulate as tokens of debt owed to the government (Graeber 2011: 48–49), but also circulate as a medium of exchange within England accepted for payment of taxes (Davies 2002: 146–151).

Graeber (2011: 59–62) also refers to the thesis of Grierson on how wergeld-like customs could create a system of measurement of relative values (Grierson 1978: 11; Grierson 1977).

The origins of money, then, lie in different sources, and not simply in a barter origin of money theory.

I end with a curious but important fact: Graeber notes how primitive monies – like shell money in the Americas or Papua New Guinea, cattle money in Africa, bead money, feather money, and so on – are often rarely used to buy everyday items in the societies that use them. Instead, they are employed in social relations like marriages and to settle disputes (Graeber 2011: 60). The story of money is rather more complex than neoclassical economists imagine.


Bücher, K. 1901. Industrial Evolution (trans. S. Morley Wickett), H. Holt and Co., New York.

Chapman, A. 1980. “Barter as a Universal Mode of Exchange,” L’Homme 20.3: 33–83.

Davies, Glyn. 2002. A History of Money: From Ancient Times to the Present Day (3rd edn.), University of Wales Press, Cardiff.

Einzig, Paul. 1949. Primitive Money: In Its Ethnological, Historical, and Economic Aspects, Eyre & Spottiswoode, London.

Fayazmanesh, S. 2006. Money and Exchange: Folktales and Reality, Routledge, New York.

Graeber, David. 2011. Debt: The First 5,000 Years, Melville House, Brooklyn, N.Y.

Grierson, P. 1977. The Origins of Money, Athlone Press and University of London, London.

Grierson, P. 1978. “The Origins of Money,” Research in Economic Anthropology 1: 1–35.

Hart, K. 1986. “Heads or Tails? Two Sides of the Coin,” Man n.s. 21.4: 637-656.

Heady, P. 2005. “Barter,” in J. Carrier (ed.), A Handbook of Economic Anthropology, Edward Elgar Publishing Limited, Cheltenham. 262–274.

Hudson, M. 2003. “The Creditary/Monetarist Debate in Historical Perspective,” in S. A. Bell and E. J. Nell (eds), The State, the Market, and the Euro: Chartalism versus Metallism in the Theory of Money, Edward Elgar, Cheltenham. 39–76.

Hudson, M. 2004a. “The Archaeology of Money: Debt Versus Barter Theories of Money’s Origins,” in L. R. Wray (ed.), Credit and State Theories of Money: the Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham. 99–127.

Hudson, M. 2004b. “The Development of Money-of-Account in Sumer’s Temples,” in M. Hudson and C. Wunsch (eds.), Creating Economic Order: Record-Keeping, Standardization, and the Development of Accounting in the Ancient Near East, CDL Press, Bethesda, MD. 303–329.

Humphrey, C. 1984. “Barter and Economic Disintegration,” Man 20.1: 48–72.

Knapp, G. F. 1905. Staatliche Theorie des Geldes, Duncker & Humblot, Leipzig.

Knapp, G. F. 1973 [1924]. The State Theory of Money (trans. H. M. Lucas and J. Bonar), Augustus M. Kelley, Clifton, NY.

MacLeod, H. D. 1902. Theory and Practice of Banking (6th edn), Longmans, Green, Reader, & Dyer, London.

Mitchell Innes, A. 1913. “What is Money?,” Banking Law Journal 30.5 (May): 377–408.

Mitchell Innes, A. 1914. “The Credit Theory of Money,” Banking Law Journal 31.2 (January–December): 151-168.

Weber, M. 1978. Economy and Society: An Outline of Interpretive Sociology (eds. G. Roth and C. Wittich; trans. E. Fischoff et al.), University of California Press, Berkeley and London.

1 comment:

  1. why did you carry this salt? why does it matter?

    why the problem in saying the obvious: there are several paths to "money."

    why to you omit negotiable credit, which had to be one of the earliest forms of money. A buys wheat from Joe on credit. Joe assigns (gives, sells, dies and its is inherited, etc. whatever) evidence of A's debt to C. Debt, once negotiable, is money, isn't it?