My Posts on the Origin of Money

I have assembled a set of two lists of links and a bibliography below, as follows:

(1) my posts on the origin of money and the debate between David Graeber and Robert P. Murphy;
(2) some external links on the debate between David Graeber and Robert P. Murphy, and
(3) a bibliography on the origin of money.

First, however, I will give a quick summary of Graeber’s view on the origin of money in his recent book (Graeber 2011). It is curious that, in discussion of Graeber’s book, many people cannot even get his arguments right. 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. Graeber 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). What Graeber denies is that the Mengerian or the barter spot trade theory is a universal theory of the origin of money.

Money-less societies are frequently dominated by debt/credit transactions, or “gift exchange,” not by barter spot trades. 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).

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). 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.

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.

Graeber also notes how primitive monies (called non-commercial money or social currency) – 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). A commercial money can most probably arise through non-commercial money.

The story of money is thus rather more complex than neoclassical economists or Austrians imagine.

My list of posts on the origin of money and the other links are below:

“Debate on the Origin of Money,” August 25, 2012.

“The Origin of Money in the Digest of Justinian,” August 21, 2012.

“Alfred Mitchell Innes on the Credit Theory of Money,” March 24, 2012.

“A Note on Menger on the Nature and Origin of Money,” July 28, 2012.

“Philip Grierson on the Origin of Money,” March 21, 2012.

“Observations on Non-Commercial Money,” February 18, 2012.

“Money as a Unit of Account and its Origins,” February 11, 2012.

“Quiggin on the Origin of Money,” February 10, 2012.

“David Graeber on Debt and Money, Part 2,” February 9, 2012.

“David Graeber versus Robert Murphy: A Review,” January 24, 2012.

“David Graeber on the Origins of Money,” January 23, 2012.

“Bibliography on the Origins of Money,” January 19, 2012.

“Alla Semenova on the Origins of Money,” January 15, 2012.

“Mises on the Origin of Money,” January 12, 2012.

“The Origins of Money,” January 8, 2012.

“Menger on the Origin of Money,” January 5, 2012.

“Money as Debt,” December 26, 2011.

“David Graeber’s Response to Robert Murphy,” September 9, 2011.

“The Origin of Coinage in Ancient Greece,” April 29, 2011.


EXTERNAL RESOURCES

Graeber, David, 2009. “Debt: The First Five Thousand Years,” Eurozine.com, 20th August.
An early summary of Graeber’s work on debt.

“What is Debt? – An Interview with Economic Anthropologist David Graeber,” Nakedcapitalism.com, August 26, 2011.
The original interview with Graeber that sparked the debate.

Gene Callahan, “Fiat Currency,” Saturday, August 27, 2011.
A summary of Graeber’s interview that sparked off a debate between Gene Callahan and Robert Murphy.

Robert P. Murphy, “Have Anthropologists Overturned Menger?,” Mises Daily, September 1, 2011.
This is Robert P. Murphy’s response to Graeber’s interview at Nakedcapitalism.com.

Robert Murphy, “David Graeber’s Response to My Article,” Mises.org, September 8, 2011.
This is a summary of David Graeber’s comments on Robert P. Murphy’s article “Have Anthropologists Overturned Menger?.”

Robert Murphy, “Murphy Replies to David Graeber on Menger and Money,” Mises.org, September 8, 2011.
This is Murphy’s reply to David Graeber’s comments.

David Graeber, “On the Invention of Money – Notes on Sex, Adventure, Monomaniacal Sociopathy and the True Function of Economics. A Reply to Robert Murphy’s ‘Have Anthropologists Overturned Menger?,’” September 13, 2011.
David Graeber’s final response to Murphy, published on Nakedcapitalism.com.


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This Takes the Cake...

I asked Robert P. Murphy these three simple questions in a previous post:

(1) Do you dispute that Sweden implemented a stimulus, with expansionary fiscal policy in 2009 and 2010?

(2) Do you dispute that the Swedish recession ended about the middle of 2009 after this stimulus was implemented, and real output growth resumed? If “yes,” then what in your view caused the end of the recession and real output growth that Sweden has had subsequently? Magic?

(3) Do you dispute that the Swedish recovery led to rising tax revenues? That the budget deficit fell?

His response is here, and demonstrates the intellectual bankrupcy of his position:

“LK, do you really not see the problem in your argument? You might be right, but I could use your same approach to “demonstrate” that the Obama stimulus package caused the US economy to suddenly become much worse than people thought (a la Romer unemployment forecasts).

Look, do you dispute that there was a thunder storm in Sweden in 2008 and also in 2009? Do you dispute that there was an ensuing recovery? Surely you can’t deny, then, that the thunderstorms caused the recovery. Only someone versed in magic would deny this obvious causality.

The reason you think your argument is better than mine, is that you believe on antecedent grounds that stimulus spending causes economies to recover. Yet that is precisely what we are debating. If someone genuinely believed that thunderstorms caused economic growth (maybe by breaking windows?) then he’d find my own argument compelling.”
http://consultingbyrpm.com/blog/2012/05/lord-keynes-beautifully-illustrates-why-we-get-nowhere-in-the-stimulus-debate.html#comment-38326

I see that Murphy:

(1) refuses to answer the questions. This is very telling.

(2) Murphy asserts that the relationship of cause and effect running from fiscal expansion to real output growth is in doubt, yet refuses to explain how Sweden had real output growth after its stimulus.

(3) Murphy resorts to a absurd example. No one has ever argued that thunderstorms cause economic recovery. But the empirical evidence that expansionary fiscal policy, whether through tax cuts and/or increases in government spending, causes rises in private investment and consumption is overwhelming.

For example, if the government held its level of current spending stable, and implemented a large tax cut (making up for the shortfall by borrowing), would Murphy deny that this would stimulate the private sector?

(4) In fact, the very logic of the Austrian business cycle theory requires that monetary expansion (and presumably when accompanied by fiscal stimulus) causes booms that drive demand for capital goods over and above the scarce resources available for this investment. Murphy has now taken a position that destroys even the logic of his own Austrian business cycle theory, for, if both monetary and fiscal stimulus do not cause increases in private sector investment and consumption, how could an Austrian business cycle even occur?

Not even Hayek was so stupid as to deny that higher government expenditure can increase employment:

“… a ‘secondary depression’ caused by an induced deflation should of course be prevented by appropriate monetary counter-measures. .... I no longer think ... [sc. deflation] is a politically possible method and we shall have to find other means to restore the flexibility of the wage structure than the present method of raising all wages except those which must fall relatively to all others. Nor did I ever doubt that in most situations employment could be temporarily increased by increasing money expenditure. There was one classical occasion when I even admitted that this might be politically necessary, whatever the long run economic harm it did.” (Hayek 1978: 210–211).

(5) Finally, if we turn to a recent example, Steve Keen provides a careful sectoral breakdown of Australian national accounts showing exactly how Australia’s economic growth after 2008 was the result of the federal government stimulus:

Steve Keen, “Giving the Bird to the Stimulus?,” DebtWatch, August 18th, 2010.

BIBLIOGRAPHY
Hayek, F. A. von. 1978. New Studies in Philosophy, Politics, Economics, and the History of Ideas, Routledge & Kegan Paul, London.

David Graeber versus Robert Murphy: A Review

Since I have been dealing with David Graeber’s work in the last post, I will also review the debate he had with the Austrian economist Robert P. Murphy.

Let’s review the debate:

(1) This interview with Graeber (“What is Debt? – An Interview with Economic Anthropologist David Graeber,” August 26, 2011) sparked off the debate.

(2) Robert P. Murphy’s attention was drawn to Graeber’s interview by an inaccurate summary of it by Gene Callahan. Murphy admitted he didn’t even read Graeber’s book.

(3) From the very beginning, Murphy appears to have misunderstood Graeber’s position. Graeber does not deny that money in some historical circumstances can emerge from barter between strangers, especially in long distance trade. On p. 75 of Debt: The First 5,000 Years (2011), Graber cites the cacao money of Mesoamerica and the salt money of Ethiopia as instances of money emerging through barter. It is the view that money can only ever emerge from barter spot transactions that must be rejected. Murphy in his original criticism of Graeber also appeared to charge Graeber with denying that moneyless spot trade (barter) had historical existence. That was a completely false charge.

(4) What Graeber attacks is the idea that money-less communities come to have economies dominated by barter spot trades. He also notes that in reality money-less societies tend to be dominated by debt/credit transactions, and that this can largely avoid the immediate, notorious problem of the “double coincidence of wants” that allegedly leads to money’s origin. Robert Murphy eventually made a rather important concession here:

“This is an excellent point, and Graeber is right: In the standard exposition of a barter economy, economists typically think in terms of spot transactions. But in principle, there’s no reason to restrict ourselves in this way. If we can imagine a farmer trading a pig for an axe, we can also imagine a farmer trading a pig for a promise to deliver an axe in two weeks.

Graeber is also right that the possibility of credit transactions expands the scope of a moneyless economy, and mitigates the problem of finding a double coincidence of wants.”

Robert Murphy, “Murphy Replies to David Graeber on Menger and Money,” Mises.org, September 8, 2011.

(5) Murphy cites the work of R. A. Radford (“The Economic Organization of a POW Camp,” Economica 12.48 [1945]: 189–201) that demonstrates the emergence of a cigarette money in a POW camp. But this evidence does not show what Murphy thinks it does. Situations in which barter is observed in groups of human beings in modern times where some good emerges as a medium of exchange 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 and a price system (Graeber 2011: 37; see also Ingham 2006: 264–265).

Murphy’s citation of Jeff Tucker’s account of “micro-size Three Musketeers bars” emerging as a medium of exchange amongst children bartering with Halloween candies is also invalid and does not prove anything: older and even young children are perfectly familiar with the concept of money and prices.

In any case, Graeber did not deny that money can emerge this way in the distant past: what he denies is that money can only arise this way. As Graeber remarks:

“The idea that there is a single ‘origin’ of money is rather dubious in itself – if money is simply a mathematical system whereby one can compare proportional values, then something of that sort must have emerged in innumerable different occasions in human history for different reasons. The standard version of how it emerged, however, that goes back to Adam Smith, is repeated by Jevons, Menger, etc, is one of the least likely, in fact, which is strongly counter-indicated by all existing evidence.”

Robert Murphy, “David Graeber’s Response to My Article,” Mises.org, September 8, 2011.

(6) Graeber accepts the idea of long distance or regular trade between strangers generating a money unit of account:

“If you have regular exchange between strangers, it’s because there are specific goods that each side knows they want or need. One has to bear in mind that under ancient conditions, long-distance trade was extremely dangerous. …. You show up because you know there are people who have always wanted woolens and who have always had lapis lazuli. Logically, what such a situation would lead to is a series of conventional equivalences – so many woolens for so many pieces of lapis lazuli – which are maintained despite contingencies of supply and demand, because all parties need to reduce risk or the trade would simply stop. And once again, what logic would predict is precisely what we find. Even in periods of human history where money and markets did already exist, high-risk long distance trade has often continued to be carried out through a system of conventional equivalents, administered prices, between specific commodities that merchants already know will be available, or in demand, at certain pre-established locations.

Now, could such a system generate something like money of account – that is, the use of one or two relatively desirable commodities to measure the value of other ones, once more items were added to the mix (say, you’re making several stops)? Sure. It is likely that in certain circumstances, something like this did happen – but it would have meant that money, in such cases, was created first as a means to avoid market mechanisms, and that it was not used mainly as a medium of transactions, but rather, primarily as a means of account. One could even make up an imaginary scenario whereby once you start using one divisible/portable/etc commodity as a means of establishing fixed equivalents between other ones, you could start using for minor occasional transactions, to measure negotiated prices for spot trade swaps on the side, in a more market-driven way. All that is possible and likely as not did happen here and there. However there is no reason to assume that such a system would produce a concrete medium of exchange actually used in making these transactions – in fact, given the dangers of ancient trade, insisting that some medium like silver actually be used in all transactions, rather than a credit system, would be completely irrational, since the need to carry around such a money-stuff would make one a far, far, more attractive target to potential thieves. …. The other problem is there is no reason to believe that such mechanism – which would presumably only be used by that tiny proportion of the population who engaged in long distance trade, and who tended to treat such matters as specialized knowledge to be guarded from outsiders – could possibly create a money system used in everyday transactions within a society or any evidence that it might have done so.

Robert Murphy, “David Graeber’s Response to My Article,” Mises.org, September 8, 2011.

(7) In trying to reconcile Menger’s barter view of the origin of money with the evidence from ancient Mesopotamia, Murphy contends that temples picked silver as an unit of account because silver was what was used to facilitate trades with foreigners. Yet there is a misunderstanding here: the temples used their own produced goods to obtain silver from foreigners, in long distance trade. Silver was a weight unit (Hudson 2003: 42), a high prestige object, and used in temples for objects associated with the gods. As late as the Old Babylonian period (c. 2000–1600 BC), silver was largely confined to temples and palaces (Nemet-Nejat 2002: 267). It did not circulate much as an actual medium of exchange within Mesopotamia in the third millennium BC. It is highly unlikely that silver emerged as the most saleable commodity in barter spot trades and then indirect trades within Mesopotamia to attain the status of money. Rather, a silver unit of account was developed by temples from its use as a weight unit in those temples.

RESOURCES

Graeber, David, 2009. “Debt: The First Five Thousand Years,” Eurozine.com, 20th August.
An early summary of Graeber’s work on debt.

“What is Debt? – An Interview with Economic Anthropologist David Graeber,” Nakedcapitalism.com, August 26, 2011.
The original interview with Graeber that sparked the debate.

Gene Callahan, “Fiat Currency,” Saturday, August 27, 2011.
A summary of Graeber’s interview that sparked off a debate between Gene Callahan and Robert Murphy.

Robert P. Murphy, “Have Anthropologists Overturned Menger?,” Mises Daily, September 1, 2011.
This is Robert P. Murphy’s response to Graeber’s interview at Nakedcapitalism.com.

Robert Murphy, “David Graeber’s Response to My Article,” Mises.org, September 8, 2011.
This is a summary of David Graeber’s comments on Robert P. Murphy’s article “Have Anthropologists Overturned Menger?.”

Robert Murphy, “Murphy Replies to David Graeber on Menger and Money,” Mises.org, September 8, 2011.
This is Murphy’s reply to David Graeber’s comments.

David Graeber, “On the Invention of Money – Notes on Sex, Adventure, Monomaniacal Sociopathy and the True Function of Economics. A Reply to Robert Murphy’s ‘Have Anthropologists Overturned Menger?,’” September 13, 2011.
David Graeber’s final response to Murphy, published on Nakedcapitalism.com.


BIBLIOGRAPHY

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

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.

Ingham, G. 2006. “Further Reflections on the Ontology of Money: Responses to Lapavitsas and Dodd,” Economy and Society 35.2: 259–278.

Nemet-Nejat, K. R. 2002. Daily Life in Ancient Mesopotamia, Hendrickson, Peabody, Mass.

Radford, R. A. 1945. “The Economic Organization of a POW Camp,” Economica 12. 48: 189–201.