The nature of money

Steven Hail

Are you sure you know what ‘money’ really is?

I think this is a fair question to ask most people. If you aren’t sure, I recommend you to read a book which I came across a couple of years ago.

Anthropologist David Graeber’s ‘Debt: the First 5,000 Years’ isn’t perfect, and would have benefited from him having an acquaintance with Modern Monetary Theory (MMT), but it is still a tour de force, and what it reveals about the history of money and debt is, of course, highly supportive of MMT. After all, history is biased towards the truth, in ways that economic theory often isn’t.

The origins of money are lost in the mists of time, and almost certainly predate any sophisticated form of writing. We can be sure that money has been with us for thousands of years longer than coinage. We can also be sure that money pre-dates widespread, organised markets. The Adam Smith myth of money developed to get around the problems of barter is a pure myth. It has no more truth or evidence than any ancient and primitive religion – even though it is one of the founding myths of economics.

In ancient times, and even in modern times in some societies, people lived in a form of fundamental communism.

From each according to their ability, to each according to their need. There were gifts but there were no transactions. Man did not ‘truck and barter’ – at least not within the community; not with people with whom he was to have a continuing relationship. Resources were shared, and people lived in a form of mutuality. This was the behaviour that was expected, in basically subsistence communities.

The same way that you would not accept payment from a friend for a favour, and would not expect to pay them in return. Money and barter were unnecessary within small tribal groups.

The only form of quasi-barter was between neighbouring tribes, and in a sense was an alternative to and even a sublimation of conflict. Tribes would meet in a ceremonial context, and individuals would bargain with each other for the exchange of possessions, according to established rules and customs. But in no sense was this a form of economic exchange.

Items of ceremonial value would also be used in hierarchical gifts, as wedding payments and even payments of compensation for injuries done. Again, the payments were symbolic, and in no sense supposed to reflect any underlying fundamental value in exchange.

The first monetary system of which we have any written evidence is that of Mesopotamia, over 5,000 years ago. It seems that the development of agriculture and a surplus over subsistence made it possible for leaders to develop temple/palace communities, with staff and soldiers. This led to war and pillage, turning to tribute turning to taxation.

Taxation was originally valued in terms of portions of barley (a sheckel was 60 portions), but could be paid in many ways. A sheckel of barley was also valued in terms of silver.

Markets eventually were developed around armies and temple complexes. These markets operated amongst locals largely on a credit basis. Very little silver was used as a medium of exchange, and most was held in the temple. It would have been simple to issue silver coinage, but this was not done and was not necessary.

Records of debts were often lodged in the form of clay tablets in the temples. In addition, governments developed a practice of lending to traders at interest, in order to obtain goods not available in Mesopotamia. Such records may themselves have been traded – a very early form of token money.

Lending at interest then became common amongst merchants. There was a credit economy, based on virtual money. There was virtually no physical medium of exchange, for centuries.

There were developed debt jubilees – which wiped out consumer but not commercial debts periodically – based on the idea that compound interest would lead to debts growing out of control and the spread of debt peonage undermining the state otherwise.

What does this tell us? Money initially was a unit of account for debts, or a standard of deferred payment. Money was a way of recording values and not a thing, or not principally a thing.

Money as a point scoring system has always been the principal role of money, and money has usually been whatever scoring system a central authority laid down.

Even when money as a thing has been commodity money or predominantly fiat token money and when credit money (or virtual money) has been less significant, there has always been considerable elasticity in the relationship between any measure of money and spending. Near monies can be developed, or money substitutes: money can also be withdrawn from circulation due to a demand for liquidity.

Larger armies and spreading geographical interests eventually led to the development of coinage. Coins, and later paper money were tokens. Tally sticks in medieval England were tokens too. Given value by an authority, and at least in part backed by a requirement or pay taxes or fees.

And yet, monetary measuring systems proved resilient often to the disappearance of the tokens to which they had once been linked and the governments that had derived them.

It is known that – more than once – coins virtually disappeared from circulation, with a reversion to money purely as a unit of account (not a reversion to barter). This happened after the fall of Rome for centuries. It also happened after Charlemagne. Their coinage virtually disappeared, but their value system remained in place for centuries – largely based on credit in local communities.

Indeed the transition from commodity/ token money to credit/virtual money and back has been a cyclical one down the centuries.

So it has not always made sense to think of money as ‘a thing’ or medium of exchange, while the enduring characteristic of money has been as a points scoring system or unit of account.

Understanding this fundamentally changes your view of monetary theory in macroeconomics, and undermines much of the mainstream in the discipline.

The Government cannot run out of money, as money is not a thing. It is a scoring system, superbly suited to being recorded on a spreadsheet.

That’s all our monetary system is — a big spreadsheet. And a sovereign government can enter in its account any numbers it should choose.

An exorbitant privilege indeed.

Steven Hail is a Lecturer in Economics at the University of Adelaide, and is an ERA member.