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: The term gold standard is often erroneously thought to refer to a currency where notes were fully backed by and redeemable in an equivalent amount of gold. The British pound was the strongest, most stable currency of the 19th Century and often considered the closest equivalent to pure gold, yet at the height of the gold standard there was only sufficient gold in the British treasury to redeem a small fraction of the currency then in circulation. In 1880, US government gold stock was equivalent in value to only 16% of currency and demand deposits in commercial banks. By 1970, it was about 0.5%. The gold standard was only a system for exchange of value between national currencies, never an agreement to redeem all paper notes for gold. The classic gold standard prevailed during the period 1880 and 1913 when a core of leading trading nations agreed to adhere to a fixed gold price and continuous convertibility for their currencies. Gold was used to settle accounts between these nations. With the outbreak of World War I, Britain was forced to abandon the gold standard even for their international transactions. Other nations quickly followed suit. After a brief attempt to revive the gold standard during the 1920s, it was finally abandoned by Britain and other leading nations during the Great Depression. Prior to the abolition of the gold standard, the following words were printed on the face of every US dollar: "I promise to pay the bearer on demand, the sum of one dollar" followed by the signature of the US Secretary of the Treasury. Other denominations carried similar pledges proportionate to the face value of each note. The currencies of other nations bore similar promises too. In earlier times this promise signified that a bearer could redeem currency notes for their equivalent value in gold or silver. The US adopted a silver standard in 1785, meaning that the value of the US dollar represented a certain equivalent weight in silver and could be redeemed in silver coins. But even at its inception, the US Government was not required to maintain silver reserves sufficient to redeem all the notes that it issued. Through much of the 20th Century until 1971, the US dollar was ‘backed’ by gold, but from 1934 only foreign holders of the notes could exchange them for metal. [edit] Fiat money Fiat money refers to money that is not backed by reserves of another commodity. The money itself is given value by government fiat (Latin for "let it be done") or decree, enforcing legal tender laws, previously known as "forced tender", whereby debtors are legally relieved of the debt if they pay it in the government's money. By law, the refusal of a legal tender (offering) extinguishes the debt in the same way acceptance does.[97] At times in history (e.g. Rome under Diocletian, and post-revolutionary France during the collapse of the assignats) the refusal of legal tender money in favor of some other form of payment was punished with the death penalty. Governments through history have often switched to forms of fiat money in times of need such as war, sometimes by suspending the service they provided of exchanging their money for gold, and other times by simply printing the money that they needed. When governments produce money more rapidly than economic growth, the money supply overtakes economic value. Therefore, the excess money eventually dilutes the market value of all money issued. This is called inflation. See open market operations. In 1971 the United States finally switched to fiat money indefinitely. At this point in time many of the economically developed countries' currencies were fixed to the US dollar (see Bretton Woods Conference), and so this single step meant that much of the western world's currencies became fiat money based. Following the Gulf War the president of Iraq, Saddam Hussein, repealed the existing Iraqi fiat currency and replaced it with a new currency. Despite having no backing by a commodity and with no central authority mandating its use or defending its value, the old currency continued to circulate within the politically isolated Kurdish regions of Iraq. It became known as the "Swiss dinar". This currency remained relatively strong and stable for over a decade. It was formally replaced following the Iraq War. Barter and the Origin of Money Alejandro Nadal Economic theory has a serious and embarrassing problem: it does not appear to have a rigorous and well-defined concept of money. This is why orthodox textbooks, when introducing money have to resort to a descriptive sleight of hand and state that “money is what money does”. They typically go on to say that it is the unit of account, the means of exchange and a reserve of value. But they fail to add that these functions are not exclusive of money. That money poses a serious problem for mainstream economic theory is best exemplified by the fact that the most sophisticated account of interdependent markets (general equilibrium theory) does not tolerate the introduction of money (Hahn 1982). That’s an amazing headline story, one that should be taught in Economics 101. Where does this problem come from? It’s a long and multi-faceted story, and it has to do with the orthodox narrative about the origin of money. This story, repeated from Adam Smith to Samuelson, states that in the beginning there was a barter economy and that because transaction costs were so high, men invented money. In the words of Mill (1965), “money is a machine for doing quickly and commodiously what could be done without it”. And Mill added that “the introduction of money does not interfere with the laws of value,” something Frank Hahn would dispute. As a transactions technology, money is accessory and the price formation and trading processes can be analyzed in a moneyless world. Thus, the key assumption of orthodox theory is that trading can take place in the absence of money. What if somebody showed that pair wise trading is impossible in a moneyless world? Consider the following economy comprising three agents and three commodities (Veendorp 1970). To simplify matters, assume the economy has already reached an equilibrium price vector in which all prices are equal to one (p* = 1, 1, 1). Because this is a theory of a decentralized economy, exchanges are organized through bilateral or pair wise markets (see Lesson 11 in Walras (1954:158): if n is the number of commodities, there are n(n – 1)/2 bilateral markets of the type A:B. In this example the matrix of excess demands is as follows (agents in lines and goods in columns, a negative sign denotes an offer to sell, zero denotes goods that are of no interest to an agent). Goods Agents A B C I 1 0 -1 II -1 1 0 III 0 -1 1 This economy is in equilibrium (and agents are bound by their budget constraints). And yet, lo and behold, trade at equilibrium prices is impossible! As can be seen, Agent I will go to market [A : C] because she demands good A and offers good C. But she has nobody to trade with. Agent II will go to market [A : B] because she demands one unit of B and offers one unit of A. But, again, she finds no counterpart. Finally, agent III will go to market [B : C] but she has no one to trade with. The barter operations needed to realize the optimal plans of the agents in this economy are not feasible, even if equilibrium prices have already been attained. Of course, the source of the problem is the lack of a means of exchange. Things would be different if agents were allowed to demand a good in order to use it is a means of exchange. But Veendorp also shows that in larger economies (more than three agents), when everyone is allowed to demand goods in order to use them as means of exchange, we arrive at the same situation: pair wise barter may become impossible. (By a fluke, the configuration of the excess demand function may be such that trading can take place, but in general there is no reason to expect this will happen).