Karl Bücher on the Origin of Money

Karl Bücher (1847–1930) was a member of the Younger German Historical School, an important 19th century and early 20th century alternative to the Classical and Neoclassical schools of economics.

The German Historical School had an interesting theory on the origin of money, rather similar to that of Karl Marx.

This is from Karl Bücher’s book Industrial Evolution (1901) (N.B. his language and some of his attitudes, as you’d expect, are of the 19th century, so please get over that):

“… it must be asserted positively that trade in the sense in which it is regarded by national economy—that is, in the sense of the systematic purchase of wares with the object of a profitable re-sale as an organized vocation—can nowhere be discovered among primitive peoples. Where we meet native traders in Africa, it is a question either of intermediary activity prompted by European and Arabian merchants, or of occurrences peculiar to the semi-civilization of the Soudan. Otherwise the only exchange known to the natives everywhere is exchange from tribe to tribe. This is due to the unequal distribution of the gifts of nature and to the varying development of industrial technique among the different tribes. As between the members of the same tribe, however, no regular exchange from one household establishment to another takes place. Nor can it arise, since that vocational division of the population is lacking which alone could give rise to an enduring interdependence of households.

One fancies the genesis of exchange to have been very easy because civilized man is accustomed to find all that he needs ready made at the market or store and to be able to obtain it for money. With primitive man, however, before he became acquainted with more highly developed peoples, value and price were by no means current conceptions. The first discoverers of Australia found invariably, both on the continent and on the neighbouring islands that the aborigines had no conception of exchange. The ornaments offered them had no power whatever to arouse their interest; gifts pressed upon them were found later on strewn about in the woods where they had been cast in neglect. Ehrenreich and K. v. der-Steinen had as late as 1887 the same experience among the Indian tribes of Brazil. Yet there was from tribe to tribe a brisk trade in pots, stone hatchets, hammocks, cotton threads, necklaces of mussel-shells, and many other products. How was this possible in the absence of barter and trade?

The solution of this riddle is simple enough, and has now been confirmed by direct observation on the spot, while previously it could only be assumed. The transfer ensues by way of presents, and also, according to circumstances, by way of robbery, spoils of war, tribute, fine, compensation, and winnings in gaming. As to sustenance, almost a community of goods prevails between members of the same tribes. It is looked upon as theft if a herd of cattle is slaughtered and not shared with one’s neighbour, or if one is eating and neglects to invite a passer-by. Anyone can enter a hut at will and demand food; and he is never refused. Whole communities, if a poor harvest befall, visit their neighbours and look to them for temporary support. For articles of use and implements there exists the universal custom of loaning which really assumes the character of a duty; and there is no private ownership of the soil. Thus within the tribe where all households produce similar commodities and, in case of need, assist each other, and where surplus stores can only be utilized for consumption, there is no occasion for direct barter from establishment to establishment. Exceptions occur when purchasing a wife and making presents to the medicine-man, the singer, the dancer, and the minstrel, who are the only persons carrying on a species of separate occupations.

From tribe to tribe there prevail rules of hospitality, which recur with tolerable similarity among all primitive peoples. The stranger on arriving receives a present, which after a certain interval he reciprocates; and at his departure still another present is handed him. On both sides wishes may be expressed with regard to these gifts. In this way it is possible to obtain things required or desired; and success is the more assured inasmuch as neither party is absolved from the obligations of hospitality until the other declares himself satisfied with the presents.

That this custom of reciprocal gifts of hospitality permits rare products of a land or artistic creations of a tribe to circulate from people to people, and to cover just as long distances from their place of origin as to-day does trade, will perhaps become more apparent to us when we consider how legends and myths have in the same way been enabled to spread over half the world. It is almost inconceivable that this could have been so long overlooked when even in Homer the custom of gifts of hospitality is attested by so many examples. Telemachos brings home from Sparta as present from Menelaos a bowl of silver which the latter had himself received in Sidon as a gift of hospitality from King Phaidimos, and his father Odysseus receives from the Phaiakes garments and linen and articles of gold as well as a whole collection of tripods and basins.” (Bücher 1901: 60–63).

“Once originated exchange long retains the marks of its descent in the rules that are attached to it and which are taken directly from the customs connected with gifts. This is manifested, in the first place, in the custom of payment in advance which dominates trade among primitive peoples. The medicine-man does not stir his hand to help the sick until he has received from the sick man’s relatives his fee, which in this case closely resembles the present, and has openly announced his satisfaction. No purchase is complete until buyer and seller have before witnesses declared themselves satisfied with the objects received. Among many peoples a gift precedes or follows a deal; the ‘good measures’ of our village storekeepers, and ‘treating’ are survivals of this custom. To decline without grounds an exchange that has been offered passes among the negroes as an insult, just as the refusal of a gift among ourselves. The idea that services interchanged must be of equal value can hardly be made intelligible to primitive man. The boy who performs a bit of work expects the same pay as the man, and the one who has assisted for one hour just as much as the one who has laboured a whole day; and as the greed on both sides knows no bounds, every trading transaction is preceded by long negotiations. Similar negotiations, however, are also the rule in the discharge of gifts of hospitality if the recipient does not find the donation in keeping with his dignity.

As time passes exchange creates from tribe to tribe its own contrivances for facilitating matters. The most important of these are markets and money.

Markets are uniformly held among negroes, East Indians, and Polynesians in open places, often in the midst of the primeval forests, on the tribal borders. They form neutral districts within which all tribal hostilities must cease; whoever violates the market-peace exposes himself to the severest punishments. Each tribe brings to the market whatever is peculiar to it: one honey, another palm-wine, a third dried meat, still another earthenware or mats or woven stuffs. The object of the interchange is to obtain products that cannot be procured in one’s own tribe at all, or at least cannot be produced so well and so artistically as in neighbouring tribes. This must again lead each tribe to produce in greater quantities than it requires those products which are valued among the tribes not producing them, because in exchange for these it is easiest to obtain that which one does not possess one’s self, but which others manufacture in surplus quantities. In each tribe, however, every household produces the current market commodity of exchange that enjoys this preference. Hence it follows, when it is a question of a product of house industry, such as earthenware or wares made of bark, that whole villages and tribal areas appear to travellers to be great industrial districts, although there are no specialized artisans, and although each household produces everything that it requires with the exception of the few articles made only among other tribes which they have grown accustomed to and which exchange procures for them merely as supplements to household production.

Such is the simple mechanism of the market among primitive peoples. Now with regard to money. How much has been written and imagined about the many species of money among primitive peoples, and yet how simple the explanation of their origin! The money of each tribe is that trading commodity which it does not itself produce, but which it regularly acquires from other tribes by way of exchange. For such article naturally becomes for it the universal medium of exchange for which it surrenders its wares. It is its measure of value according to which it values its property, which could in no other way be made exchangeable. It is its wealth, for it cannot increase it at will. Fellow tribesmen soon come to employ it also in transferring values, for because of its scarcity it is equally welcome to all. Thus is explained what our travellers have frequently observed, that in each tribe, often indeed from village to village, a different money is current, and that a species of mussel-shells or pearls or cotton stuff for which everything can be purchased to-day, is in the locality of the following evening’s camp no longer accepted by anyone. The consequence is that they must first purchase the current commodities of exchange before they can supply their own needs in the market. In this way, also, is to be explained the further fact, which has come under observation, that exchangeable commodities naturally scarce, such as salt, cauri shells, and bars of copper, or products of rare skill, such as brass wire, iron spades, and earthen cups, are taken as money by many tribes not possessing them; and above all is to be mentioned the well-known circumstance of objects of foreign trade, such as European calicoes, guns, powder, knives, becoming general mediums of exchange.

Certain varieties of money thus secure a more extensive area of circulation. They can even make their way into the internal trade of the tribal members through employment as mediums of payment in the purchase of a bride, for compensations, taxes, and the like; certain kinds of contracts are concluded in them. But there is no instance of a primitive people, in the absence of European influence, attaining to a currency or legal medium of payment for obligations of every kind and extent. It is rather the rule that various species of money remain in concurrent circulation; and very often certain obligations can be paid only in certain kinds. Changes in the variety of money are not infrequent; but on the other hand we sometimes find that a species will long survive the trade of the tribes from which it has gone forth, and will continue to serve in the inner transactions of a tribe, playing a singular, almost demoniacal, role, although, as regards their means of sustenance, the members of the tribe have nothing to buy and sell to one another.” (Bücher 1901: 65–69).

“Markets and money are intimately related so far as money in its character as a medium of exchange comes under consideration. But not every individual species of money that is met with among a primitive people has necessarily arisen from market trade. In its full development money is such an involved social phenomenon that it is natural to suppose that various influences associated with its past have been united in it. Thus, for instance, the origin of cattle-money seems to be bound up with the fact that, among the peoples referred to, the domestic animals represented the wealth and the means of gathering wealth. That for the purchase of a bride and for similar ends many tribes do not receive the current money, but for such purposes prescribe certain other objects of worth, appears to point to the admissibility of the assumption that in the complete development of money, along with the main current, various subsidiary streams may have played a part.” (Bücher 1901: 70).

At the end of the last sentence, Bücher even cites Karl Marx:

“^81. Perhaps Karl Marx rightly expresses it when he tersely remarks: ‘The money-form attaches itself either to the most important articles of exchange from outside, and these in fact are primitive and natural forms in which the-exchange-value of home products finds expression; or else it attaches itself to the object of utility that forms, like cattle, the chief portion of indigenous alienable wealth.’—Capital (London, 1891), p. 61.” (Bücher 1901: 70 n. 81).

However, it seems that Bücher came to his conclusions largely from surveying the anthropological literature of his day.

Now modern anthropology has not vindicated everything Bücher argued or reported here, but there are some very interesting insights that are true:

(1) gift exchange is very important in pre-modern societies, both within and between communities, as are debt–credit exchanges. As Bücher says (with some exaggeration) “between the members of the same tribe, however, no regular exchange from one household establishment to another takes place”;

(2) for many pre-modern communities exchange of goods with other tribes is often conducted by gift exchange or reciprocal gifts, without the need for money.

(3) within tribes there is often a developed system of distribution of communal wealth or of those goods collected or obtained by group effort, and private ownership rights are limited;

(4) given (1), (2), (3), the need for direct barter and the problem of the double coincidence of wants as imagined by Adam Smith or Menger are largely avoided;

(5) instead of universal money, ceremonial or prestige goods are used mainly for social customs like bride-price, dowry, wergeld, or payments to special people like medicine-men, etc.

(6) commodity exchange by barter, when it did develop, may well have been more important historically between communities than within them;

(7) there will arise within communities a complex jumble of goods that are used more commonly as a means of payment, even if none of them ever becomes a general medium of exchange (that is, true money);

(8) finally, Bücher had this crucial insight:

“But not every individual species of money that is met with among a primitive people has necessarily arisen from market trade. In its full development money is such an involved social phenomenon that it is natural to suppose that various influences associated with its past have been united in it. Thus, for instance, the origin of cattle-money seems to be bound up with the fact that, among the peoples referred to, the domestic animals represented the wealth and the means of gathering wealth. That for the purchase of a bride and for similar ends many tribes do not receive the current money, but for such purposes prescribe certain other objects of worth, appears to point to the admissibility of the assumption that in the complete development of money, along with the main current, various subsidiary streams may have played a part.” (Bücher 1901: 70).

Modern anthropology strongly supports this.

Bücher’s idea that the “money of each tribe is that trading commodity which it does not itself produce, but which it regularly acquires from other tribes by way of exchange” has less evidence in its favour, but is interesting nonetheless.

Point (8) above is especially important and shows us how the German Historical School was well ahead of its time. It is a scandal their insights have been forgotten, and modern neoclassical economics focuses instead on Adam Smith and Carl Menger when talking about the origins of money.

BIBLIOGRAPHY
Bücher, Karl. 1901. Industrial Evolution (trans. S. Morley Wickett from 3rd German edn.). H. Holt and Company, New York.

Bücher, Karl. 1901. Die Entstehung der Volkswirtschaft: Vorträge und Versuche (3rd edn.). H. Laupp, Tübingen.

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.



BIBLIOGRAPHY

Angell, N. 1929. The Story of Money, Frederick A. Stokes Company, New York.

Ashley, W. M. 1925. “Heiliges Geld: Eine Historiche Untersuchung über den Sakralen Ursprung des Geldes by Bernhard Laum” (Review), The Economic Journal 35.138: 288–289.

Crump, T. 1981. The Phenomenon of Money, Routledge & Kegan Paul, London.

Desmonde, W. H. 1962. Magic, Myth, and Money: The Origin of Money in Religious Ritual, Free Press of Glencoe, Inc. New York.

Goodhart, C. A. E. 1998. “The Two Concepts of Money: Implications for the Analysis of Optimal Currency Areas,” European Journal of Political Economy 14.3: 407–432.

Goodhart, C. A. E. 2004. “Carl Menger and the Evolution of Payments Systems: From Barter to Electronic Money (Review),” History of Political Economy 36.1: 210-212.

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.

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

Heidel, W. A. 1926. “Heiliges Geld, eine historische Untersuchung über den sakralen Ursprung des Geldes by Bernhard Laum” (Review), Classical Philology 21.2: 191–192.

Henry, J. F. 2004. “The Social Origins of Money: The Case of Egypt,” in L. R. Wray (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham, UK. 79–98.

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

Ingham, G. 2006. “Further Reflections on the Ontology of Money,” Economy and Society 36.2: 264–265.

Janssen, Jac. J. 1975a. “Prolegomena to the Study of Egypt’s Economic History during the New Kingdom,” Studien zur Altägyptischen Kultur 3: 127-185.

Janssen, Jac. J. 1975b. Commodity Prices from the Ramessid Period: An Economic Study of the Village of Necropolis Workmen at Thebes, Brill, Leiden.

Laum, B. 1924. Heiliges Geld: eine historische Untersuchung über den sakralen Ursprung des Geldes, Mohr, Tübingen.

Menger, C. 1892. “On the Origin of Money,” Economic Journal 2: 238–255.

Menger, C. 1909. “Geld,” in J. Conrad et al. (eds.), Handwörterbuch der Staatswissenschaften (vol. 4; 3rd edn.), Fischer, Jena. 555–610.

Menger, C. 2002 [1909]. “Money” (trans. L. B. Yeager and M. Streissler), in M. Latzer and S. W. Schmitz (eds.), Carl Menger and the Evolution of Payments Systems, Edward Elgar, Cheltenham, UK. 25–108. [N.B. this is a translation of Menger 1909.]

Peacock, M. S. 2003–2004. “State, Money, Catallaxy: Underlaboring for a Chartalist Theory of Money,” Journal of Post Keynesian Economics 26.2: 205–225.

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.

Peacock, M. S. 2011. “The Political Economy of Homeric Society and the Origins of Money,”Contributions to Political Economy 30: 47–65.

Schaps, D. M. 2004. The Invention of Coinage and the Monetization of Ancient Greece, University of Michigan Press, Ann Arbor

Seaford, R. 2004. Money and the Early Greek Mind: Homer, Philosophy, Tragedy, Cambridge University Press, Cambridge.

Semenova, A. 2011. “Would You Barter With God? Why Holy Debts and not Profane Markets Created Money,” American Journal of Economics and Sociology 70.2: 376-400.

Smith, A. 1811. An Inquiry into the Nature and Causes of the Wealth of Nations (11 edn; vol. 1), Oliver D. Cooke, Hartford.

Smithin, J. 2000. “‘Babylonian Madness’: On the Historical and Sociological Origins of Money,” in J. Smithin, J. (ed.), 2000. What is Money?, Routledge, London and New York.

von Reden, S. 1997. “Money, Law and Exchange: Coinage in the Greek Polis,” Journal of Hellenic Studies 117: 154–176.

von Reden, S. 2002. “Money in the ancient economy: A survey of recent research,” Klio 84.1: 141–174.

Wray, L. R. 2002. “State Money,” International Journal of Political Economy 32.3: 23-40

Menger on the Origin of Money

Carl Menger (1840-1921), the founder of Austrian economics, wrote this classic paper:

Menger, C. 1892. “On the Origin of Money,” Economic Journal 2: 238–255.

Menger imagines a world without money. In this world, people exchange goods for goods in spot transactions (barter). What happens when person A wants a good from person B, but the latter does not want the goods the former has to trade? This is the famous problem of the double coincidence of wants.

Menger notes that commodities have “different degrees of saleableness,” and that money has a virtually unlimited saleableness (Menger 1892: 242–243). Yet the differences of degrees of saleableness apply to many other commodities. Many goods once bought cannot be sold again except at a loss (Menger 1892: 244).

What do you do with your excess goods once you have obtained what you immediately want in a barter exchange? What do you do if you are unable to obtain what you want through a direct barter spot transaction? It makes sense for you to obtain goods with a high degree of saleableness, and then exchange these in the wider community at present or in the future. By this process, the most saleable good (or goods) becomes the medium of exchange (Menger 1892: 249).

I find it curious that even Menger makes this concession at the beginning of the following important paragraph:

“It is not impossible for media of exchange, serving as they do the commonweal in the most emphatic sense of the word, to be instituted also by way of legislation, like other social institutions. But this is neither the only, nor the primary mode in which money has taken its origin. This is much more to be traced in the process depicted above, notwithstanding the nature of that process would be but very incompletely explained if we were to call it ‘organic,’ or denote money as something ‘primordial,’ of ‘primaeval growth,’ and so forth. Putting aside assumptions which are historically unsound, we can only come fully to understand the origin of money by learning to view the establishment of the social procedure, with which we are dealing, as the spontaneous outcome, the unpremeditated resultant, of particular, individual efforts of the members of a society, who have little by little worked their way to a discrimination of the different degrees of saleableness in commodities.” (Menger 1892: 250).

Menger concludes that precious metals have arisen as a medium of exchange among many peoples because “their saleableness is far and away superior to that of all other commodities” (Menger 1892: 252). Yet Menger also recognises 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). Another important point is that Menger held that the government reduces the uncertainty associated with “several commodities serving as currency” by 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 have perfected precious metals in their function as money (Menger 1892: 255).

There are a number of problems with Menger’s paper, as follows:

(1) The flawed assumption running through the paper is that a money-less human society would be one where goods are obtained to a significant extent by barter spot transactions. This is clear in the hypothetical scenario Menger (1892: 241–243) envisages early in his paper.

It is perfectly possible that money might have arisen this way, but it is quite another thing to say that it can only ever have arisen in this way, and in no other way. The Austrians have a militant position on the origin of money that appears to me to go well beyond what Menger said in this 1892 article. For modern Austrians,

“[sc. Mises’s] Regression Theorem also shows that money, in any society, can only become established by a market process emerging from barter. Money cannot be established by a social contract, by government imposition, or by artificial schemes proposed by economists.” (Rothbard 2009: 61).

Yet it appears to me that Menger explicitly rejects this idea here:

“It is not impossible for media of exchange, serving as they do the commonweal in the most emphatic sense of the word, to be instituted also by way of legislation, like other social institutions. But this is neither the only, nor the primary mode in which money has taken its origin.” (Menger 1892: 250).

That seems to leave some room in Menger’s view for government law to establish money.

It is obvious that the historical origin of money cannot be traced to one moment of invention in the past: for there have undoubtedly been multiple independent instances in history where things have emerged as a unit of account and medium of exchange in different societies in different times. It is far more likely that the origins of money are complex. Here history and anthropology matter: the idea that you can sit in an armchair and use deduction to obtain apodictic certainty about how some complex social practice arose in the past is nonsensical. Empirical evidence and inductive reasoning are clearly important.

The obsession with barter spot transactions seen in Menger ignores another fundamental relation: the existence of debt/credit transactions (which might even be construed as reciprocal gift giving). As David Graeber argues,

“[the] great flaw of the economic model is that it assumed spot transactions. I have arrowheads, you have beaver pelts, if you don’t need arrowheads right now, no deal. But even if we presume that neighbors in a small community are exchanging items in some way, why on earth would they limit themselves to spot transactions? If your neighbor doesn’t need your arrowheads right now, he probably will at some point in the future, and even if he won’t, you’re his neighbor—you will undoubtedly have something he wants, or be able to do some sort of favor for him, eventually. But without assuming the spot trade, there’s no double coincidence of wants problem, and therefore, no need to invent money.

... What anthropologists have in fact observed where money is not used is not a system of explicit lending and borrowing, but a very broad system of non-enumerated credits and debts. In most such societies, if a neighbor wants some possession of yours, it usually suffices simply to praise it (‘what a magnificent pig!’); the response is to immediately hand it over, accompanied by much insistence that this is a gift and the donor certainly would never want anything in return. In fact, the recipient now owes him a favor. Now, he might well just sit on the favor, since it’s nice to have others beholden to you, or he might demand something of an explicitly non-material kind (‘you know, my son is in love with your daughter...’) He might ask for another pig, or something he considers roughly equivalent in kind. But it’s almost impossible to see how any of this would lead to a system whereby it’s possible to measure proportional values.”
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.

In theory, one could even transfer debts/IOUs and obtain commodities in this way.

Most probably, money has emerged in complex ways:

(1) from debt/credit transactions and transfers of IOUs;

(2) from wergild-like social practices (e.g., some Medieval societies),

(3) from government-based designation of a unit of account and the demand for taxes measured in that unit of account (e.g., ancient Mesopotamia; see below), and

(4) barter between strangers and in international trade. The cacao money of Mesoamerica and the salt money of Ethiopia may well be instances of money emerging through barter (Graeber 2011: 75). However, in long distance trade, barter transactions might have led to the origin of money in the sense of a money of account (to measure the value of other commodities), but even here may not have widely functioned as a medium of exchange.

As Graeber notes, money in the sense of a money of account (as a measure of value of commodities) can very probably emerge before the medium of exchange role.

And in actual human societies (whether small hunter gatherer or agricultural communities, or larger tribe/group communities with more complex economic organisation with greater division of labour), the way goods are obtained and distributed may be by open-ended sharing, centralized allocation (e.g., Iroquoi allocation of goods by women’s councils), “gift exchange,” where a present good is exchanged for the social obligation of a future “gift,” even though there does not need to be exact value equivalence. Social relations complicate even this “gift exchange” economy: some people may not even bother to call in the gifts owed to them, they might accept something of lesser value in the end. Such money-less societies can persist for centuries, with barter spot transactions remaining insignificant or confined to external transactions with strangers.

The emergence of money from such arrangements appears to have much to do with the legal or social systems of penalties and fines for crimes, injuries or slights. It was here that things – prized things – were used to measure value, in the sense of compensation for injury.

The origin of money in ancient Mesopotamia appears to be in the development of an abstract money of account in the temple and palace institutions: these temples and palaces represented 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. Many prices were set and administered in the money of account which developed from weight units. The two units of account were (1) the shekel of silver (which was equal to the monthly grain ration) and (2) barley. In the private economy, exchange involved a high degree of credit/debt transactions or “gift exchange,” not simply barter in spot transactions (Hudson 2004: 102). Silver money of account spread to the private economy mostly notably as a means of paying debts to temples and palaces (Hudson 2004: 115). But many ordinary people could pay in commodities, and the administered pricing system in terms of silver/grain developed in the temples was to assist in calculation of payments in kind.

(2) Menger holds that precious metals emerged as the medium of exchange for their “special saleableness.” He thinks that no “accident, nor the consequence of state compulsion, nor voluntary convention of traders effected this” (Menger 1892: 254). This seems to contradict his statement on p. 250 (cited above).

In fact, Menger’s view is highly questionable, since metals were not especially divisible or used in uniform divisible units until the invention of coinage. Most bullion and metal would have been of too high a value for ordinary transactions. The historical origin of coinage in Western civilization lies with the state:

“the state’s role in the development of coinage is undisputed … Coinage was not an endogenous development of the economic sphere, as Menger held, nor was it created merely in order to facilitate trade which had existed thousands of years before money and was in no need of facilitation” (Peacock 2006: 642).

To be fair to Menger, he did not assert that coinage “was an endogenous development of the economic sphere.” What Menger believed is that precious metal as commodity money (not necessarily coined) emerged because of its “special saleableness.” But this is not necessarily true, because precious metal was unlikely to have been used in daily, ordinary transactions by common people before small unit coins. Coins were the creation of the state, and even the early coins were minted in denominations far too high for small transactions (Kraay 1964). The reason that coinage eventually became a widely-accepted medium of exchange and unit of account was that the state demanded its issued coin back for payment of taxes and other payments to the state, such as harbour dues and fines. This process is what monetized the economy and encouraged the use of coinage as a medium of exchange. This is essentially the Chartalist explanation of monetised economies.

We can end by noting that, in contrast to the cultish, dogmatic assertions of Rothbard (2009: 61), Menger recognised that the state improved the effectiveness of money through issuing coinage, and in fixing exchange ratios between commodity money. He also allowed that a medium of exchange might be instituted by way of government legislation (Menger 1892: 250).

UPDATE
I will also look at Menger’s Principles of Economics (1st edn. 1871) in the section on money, but I think most of the criticisms above will also apply to it.

DAVID GRAEBER LINKS

Graeber, David, 2009. “Debt: The First Five Thousand Years,” Eurozine.com, 20th August.

“What is Debt? – An Interview with Economic Anthropologist David Graeber,” August 26, 2011.

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

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.

BIBLIOGRAPHY

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

Hudson, M. 2004. “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.

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

Menger, Carl, 2007. Principles of Economics (trans. Grundsätze der Volkwirthschaftslehre [1st edn. 1871] by J. Dingwall and B. F. Hoselitz), Ludwig von Mises Institute, Auburn, Alabama.

Menger, C. 1892. “On the Origin of Money,” Economic Journal 2: 238–255.

Murphy, Robert P. 2003. “The Origin of Money and Its Value,” Mises Daily, September 29, 2003
http://mises.org/daily/1333

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.

Rothbard, M. N., 2009, The Essential von Mises, Ludwig von Mises Institute, Auburn, Alabama.