Saturday, August 25, 2012

Debate on the Origin of Money

This article in the Economist has provoked a debate on the origin of money:
“On the Origin of Specie,” The Economist, 18 August, 2012.
For debate on this, see these posts:
David Glasner, “Where Does Money Come From?,” Uneasy Money, August 19, 2012.

George Selgin, “The Economist on Money and the State,” Free Banking, August 21st, 2012.
Some comments:
(1) It is a mistake to think that only one of the theories – barter origin or chartalism – must be true and the other false. It isn’t all or nothing. What is required is an eclectic theory: money has multiple origins. Even David Graeber in his recent book on debt concedes that the long distance barter trade in some instances led to the emergence of money (Graeber 2011: 75). But it isn’t the whole story by any means. In ancient Mesopotamia, we have temple institutions – collectivist, planning institutions – involved in the economy and probably playing a major role in the emergence of money. In other cultures, so-called social currency or non-commercial money seems to have preceded commercial money, and P. Grierson has drawn attention to how wergeld-like customs could create a system of measurement of relative values and play an important role in the development of money (Grierson 1978; Grierson 1977).

(2) It is strange that Menger is faulted for failing to note the role of the state in coining money, for he recognised the “important functions of state administration” in creating coinage and creating public confidence in the “genuineness, weight, and fineness” of coined money (Menger 1892: 255). Menger held that the government reduces the uncertainty associated with “several commodities serving as currency” by official legal recognition of some commodities as money, or where more than one commodity money exists by fixing a definite exchange ratio between them (Menger 1892: 255). In this way, governments perfected precious metals in their function as money (Menger 1892: 255).

(3) Selgin questions whether the earliest coins from Lydia were really minted by the state, and thinks they may have been minted by private agent(s), citing other scholars. Glasner (1989: 30) contends that since these earliest coins had no names of Lydian kings “we can safely conclude that they were privately minted.” Yet that is a highly dubious argument. For a long time, coins did not carry writing at all, and there is no reason why the kings would have bothered to write their names on the coins when people at the time knew perfectly well that they had been minted by the state. Nor did early coins carry images of the living king: they mostly depicted gods, seals or other symbols. In Western civilization, one of the first kings to be depicted on coins was Alexander the Great in the 4th century BC, but centuries after coins had been invented.

Furthermore, no scholar has really explained what private agent(s) would have minted such coins in Lydia and why. Moreover, the evidence suggests that the Lydian kings either controlled the mines in their kingdom (Briant 2002: 400) or levied taxes on mining or extraction of metals (indeed a certain Lydian called Pythius under the later Persian empire, who owned a number of mines in Lydia, may have been a descendant of the Lydian royal family who had inherited these mines as private family property [Briant 2002: 401]), and it follows that, if they extracted and owned much of the silver, gold and electrum (panned from the rivers), it is most probable that the kings also minted the first electrum coins too.

The standard view is that the Lydian state minted the first coins, and did so to pay soldiers and mercenaries (Cook 1958; Kraay 1964; Peacock 2006; on early Greek silver coinage, see Kim 2001 and Kagan 2006).
In general, see my posts here:
“David Graeber’s Response to Robert Murphy,” September 9, 2011.

“Money as Debt,” December 26, 2011.

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

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

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

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

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

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

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

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

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

Briant, Pierre. 2002. From Cyrus to Alexander: A History of the Persian Empire (trans. Peter T. Daniels). Eisenbraun, Winona Lake, In.

Cook, R.M. 1958. “Speculation on the Origins of Coinage,” Historia 7: 257–262.

Glasner, David. 1989. Free Banking and Monetary Reform. Cambridge University Press, Cambridge.

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.

Kagan, J. H. 2006. “Small Change and the Beginning of Coinage at Abdera,” in Peter van Alfen (ed.), Agoranomia: Studies in Money and Exchange Presented to John H. Kroll. The American Numismatic Society. New York. 49–60.

Kim, H. S. 2001. “Archaic Coinage as Evidence for the Use of Money,” in Andrew Meadows and Kirsty Shipton (eds.). Money and its Uses in the Ancient Greek World. Oxford University Press, Oxford. 7-21.

Kraay, C. M. 1964. “Hoards, Small Change and the Origin of Coinage,” Journal of Hellenic Studies 84: 76–91.

Le Rider, Georges. 2001. La naissance de la monnaie: Pratiques monétaires de l’Orient ancien. Presses Universitaires de France, Paris.

Menger, C. 1892. “On the Origin of Money” (trans. C. A. Foley), Economic Journal 2: 238–255.

Peacock, M. S. 2006. “The Origins of Money in Ancient Greece: The Political Economy of Coinage and Exchange,” Cambridge Journal of Economics 30: 637–650.

Picard, O. 1978. “Les origines du monnayage en Grèce,” L’Histoire 6 (November): 13-20.

von Reden, S. 2002. “Money in the Ancient Economy: A Survey of Recent Research,” Klio 84.1: 141–174.

Wallace, R. W. 1987. “The Origin of Electrum Coinage,” American Journal of Archaeology 91: 385-397.


  1. Just one note: The question of where money comes from is not the same as the the question of what modern money is. Understanding the monetary systems we have now is paramount. It doesn't matter much how they got to be this way.

    1. You are undoubtedly correct: the historical origins of money is a different issue from what money is now.

  2. I think it's crucial to realize that "moneyness" is a composite of at least three separate qualities, possibly more:
    - unit of account
    - medium of exchange
    - store of value...
    And each of those qualities is on a *scale* -- some things are better stores of value than others, some are good media for some exchanges and not others ("do you take checks?"), and some are even better units of account than others --

    So any given instrument can have different amounts of "moneyness" -- and "moneyness" can come and go as people's psychology, perception, willingness to accept things, changes.

    This is why quantity-of-money theories suffer definitional problems. However, thinking about quantity of money is still useful because of the following. It is clear that the immediate cause of the current Depression was a *loss of moneyness* -- demonetization -- of various things like "AAA mortgage-backed securities". This caused a cascade effect as different companies suddenly had less "money" than they thought they had. This triggered their accounting requirements (unit of account...) which triggered legal requirements... and so on, and Lehman Brothers is declaring bankruptcy, and all the other megabanks are demanding free money, while refusing to give ordinary people any money (in loans).