The Origins of Money

Adam Smith wrote an influential account of the origin of money, as follows:

“When the division of labour has been once thoroughly established, it is but a very small part of a man’s wants, which the produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for. Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.

But when the division of labour first began to take place, this power of exchanging must frequently have been very much clogged and embarrassed in its operations. One man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less. The former consequently would be glad to dispose of, and the latter to purchase, a part of this superfluity. But if this latter should chance to have nothing that the former stands in need of, no exchange can be made between them. The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing to purchase a part of it. But they have nothing to offer in exchange, except the different productions of their respective trades, and the butcher is already provided with all the bread and beer which he has immediate occasion for. No exchange can, in this case, be made between them. He cannot be their merchant, nor they his customers; and they are all of them thus mutually less serviceable to one another. In order to avoid the inconveniency of such situations, very prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.

Many different commodities, it is probable, were successively both thought of and employed for this purpose. In the rude ages of society, cattle are said to have been the common instrument of commerce; and though they must have been a most inconvenient one, yet in old times we find things were frequently valued according to the number of cattle which had been given in exchange for them. The armour of [Diomedes] ..., says Homer, cost only nine oxen; but that of Glaucus, cost an hundred oxen. Salt is said to be the common instrument of commerce and exchanges in Abyssinia; a species of shells in some parts of the coast of India; dried cod at Newfoundland; tobacco in Virginia; sugar in some of our West India colonies; hides or dressed leather in some other countries; and there is at this day a village in Scotland where it is not uncommon, I am told, for a workman to carry nails instead of money to the baker’s shop or the ale-house.

In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity. Metals can not only be kept with as little loss as any other commodity, scarce any thing being less perishable than they are; but they can likewise, without any loss, be divided into any number of parts, as by fusion those parts can easily be re-united again; a quality which no other equally durable commodities possess, and which more than any other quality renders them fit to be the instruments of commerce and circulation. The man who wanted to buy salt, for example, and had nothing but cattle to give in exchange for it, must have been obliged to buy salt to the value of a whole ox, or a whole sheep, at a time. He could seldom buy less than this, because what he was to give for it could seldom be divided without loss; and if he had a mind to buy more, he must, for the same reasons, have been obliged to buy double or triple the quantity, the value, to wit, of two or three oxen, or of two or three sheep. If, on the contrary, instead of sheep or oxen, he had metals to give in exchange for it, he could easily proportion the quantity of the metal to the precise quantity of the commodity which he had immediate occasion for.” (Smith 1811: 16–17).

This thesis – that money emerged as a commodity from barter spot transactions – was taken up and developed by many Classical and Neoclassical economists.

Carl Menger (1892) developed a similar theory in the late 19th century (Menger 1892 and 2002 [1909]; cf. Goodhart 2004), which I have criticised here. Money emerges as a medium of exchange from the most saleable commodity in direct barter trades: usually (though not always) it must have the properties of being portable, homogeneous, easily divisible, and not subject to depreciation.

In the most extreme forms, it holds that money can only ever emerge from barter spot transactions as the most saleable commodity becomes the common medium of exchange. It has been known for a long time that there are severe problems with this latter view of the origin of money.

From the 16th century onwards, Europeans came into contact with numerous communities in various parts of the world. The empirical evidence from serious, scholarly study of money-less communities, especially since the 18th century onwards, demonstrates that the economies of communities which are (1) money-less or (2) have a marginal role for money take many forms, and the pure barter economy imagined by economists is a myth (Humphrey 1984: 48). More alarming still is that surveys show that societies where barter was a predominant form of transaction in certain sectors of the economy are astonishingly small: just three “primitive” economies where barter was predominant have been found (Crump 1981: 34, who mentions pre-Colonial Mexico, the Congo basin, and the northern coast of New Guinea and its adjacent islands, but in all of these barter was essentially an activity in long distance trade transactions). Barter does exist frequently of course, but often as a marginal activity or “in a corner of the economy,” and is often despised by people as being somewhat disreputable (Humphrey 1984: 49). It is often confined to foreigners or long distance trade. The notion that human beings have some natural propensity to “truck” or “barter” is itself questionable (Humphrey 1984: 50).

The gapping hole in the imagined origin of money by Adam Smith, Carl Menger, Ludwig von Mises and many modern neoclassical economists is that barter spot transactions can be mostly unnecessary in a money-less human society.

The sequence of historical development imagined by most economists is as follows:

barter > money > credit.

In reality, other sequences are more plausible:

Debt/credit relations (gift economies) > minimal/peripheral barter > moneyless society with debt/credit transactions and minimal barter.

Debt/credit relations (gift economies) > minimal/peripheral barter > wergild social practices > emergence of a unit of account through reckoning of relative values for compensation by legal codes > money.

Debt/credit relations (gift economies) > minimal/peripheral barter > emergence of a unit of account through reckoning of relative values in planning by influential socio-economic agents in society (e.g., priests, temples, kings) > money.

If an economy is dominated by debt/credit relations, where the debts are vague and non-enumerated, then there is no significant double coincidence of wants dilemma: and no need to invent money. There were presumably numerous human societies that never invented what we would call money, because they never needed to.

Economists have ignored the unit of account function of money. Grierson (1978: 11) emphasised how in many societies an abstract or concrete unit of account can be a measure of value, while payment is made in goods. If money is conceived as an abstract thing which is used to measure the value of one thing against another, an abstract unit of account can emerge before some commodity becomes a physical medium of exchange: it can be created by conscious design by deriving an abstract unit of account from weights or from high-prestige commodities. Alternatively, societies can develop wergild-like social practices in which a kind of “price system” is developed by legal experts to reckon the values of compensation and damage payments, but where the payments system must have a common unit of account to calculate what kinds of payment in kind are equivalent for damages paid.

We do in fact observe historical instances where money has emerged in just the ways described: in Mesopotamia (one of the earliest literate civilisations), Egypt and medieval tribal societies. In ancient Egypt, money appears as the most important unit of account called the deben (or uten), which was a unit of weight, originally equated to 92 (or 91) grams (Henry 2004: 92; there was also the unit called the khar for measuring wheat or barley, and 1 khar was equivalent to 2 deben of bronze). This unit of account appears to have been developed by complex palace, government and temple institutions for internal accounting. While goods came to be denominated in terms of deben, there were no physical deben changing hands, there were administered price lists for some goods, and coins were unknown in Egypt until the Ptolemaic era (323–31 BC; Henry 2004: 92). That is to say, the deben did not function as a physical means of payment, and did not emerge by barter spot transactions as the most saleable medium of exchange. Even though goods and services were measured in a deben unit of account, payment was made in goods.

An important element in this process was the institution (or institutions) where surplus products were stored from taxation, tribute and gifts. These institutions dealt with complex flows, in and out, of goods: they were palace and temple complexes. Accounting systems, weight measures and writing are connected with just such institutions, and, importantly, some abstract unit of account arose by which to measure relative values of goods. Since loans were also no doubt made from surplus products stored, repayment of loans in kind was facilitated by a unit of account. The preceding account applies to both ancient Egypt and Mesopotamia.

In ancient Greece, the Homeric epics the Iliad and the Odyssey were written c. 750–700 BC, and reflect social practices in the late Dark/Geometric Age (c. 1200–800 BC) and early Archaic period (800–480 BC). In Homer’s epics, cattle or oxen are the unit of account, but the means of payment are variable goods, not just cattle (Peacock 2011: 49–54).

The emergence of money in Greece appears to be related to religion and cult offerings. The ox was an important sacrificial animal and offering to the gods. The Greeks appear to have developed a cattle or ox unit of account derived from the value these animals had in sacrifice (Seaford 2004: 61). Priests needed to be paid in cattle for religious services, but it was also necessary to calculate the ox-value of other commodities offered for payment to temples or for sacrifice in lieu of oxen (Semenova 2011: 385): hence people came to develop “prices” of other goods in terms of oxen, and an ox unit of account emerged (Schaps 2004: 9–10; Heidel 1926; I cite the English review of Heidel in Economica 14 [1925]: 218–222; Heidel’s thesis is modified by Peacock 2011: 54–63; Peacock 2003–2004). But oxen were not generally used as a medium of exchange. Instead, other goods like metals or items associated with sacrifice of oxen like tripods, cauldrons, double-axes, and spits (Schaps 2004: 10) were used as a means of payment and medium of exchange, whose value was measured in a cattle unit of account. Some fines appear to have been payable in tripods and cauldrons, for example. Coins were introduced by states from 600–500 BC (Peacock 2011: 54–63). With the emergence of iron spits (oboloi), the beginnings of precious metal money can be seen, although gold and silver had been previously used as a means of payment as measured in the cattle unit of account. The first electrum coins appear at Ephesus in late 7th century (700–600 BC), and spread to mainland Greece from 575–550 BC (von Reden 2002: 152, n. 30).

In the Indo-European and, above all, medieval Germanic societies, we have the institution of wergild: a system of fines and compensations payments for killing a human being and also for a wide range of other injuries, infractions or insults, and for theft of objects and commodities (Grierson 1978: 11; Grierson 1977). Compensation payments are made in various goods, such as cattle, bondmaids, and precious metal, but it is likely a common unit of account was developed to simplify calculation of payments, which later spread to the wider community in economic transactions.

By using induction, we can postulate that it is likely that these various phenomena and social processes may well have occurred in pre-historic societies too, and that money, if and when it was invented in some forms in pre-literate, primitive societies, emerged just as often by the ways described above, as by barter.



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