Origin Of Money

Mainstream views

Money as a Solution to the Barter Problem

The most prevalent mainstream view posits that money arose as a spontaneous solution to the inefficiencies of barter economies. Barter, which involves the direct exchange of goods and services, suffers from the 'double coincidence of wants' problem. This means that for a trade to occur, each party must possess something that the other desires. Money, acting as a medium of exchange, eliminates this constraint. Individuals can sell their goods or services for money and then use that money to purchase other goods or services from anyone else, regardless of whether the initial trading partner desired their specific offering. This greatly reduces transaction costs and fosters greater economic activity. This view emphasizes the role of decentralized, voluntary interactions in the emergence of money, without necessarily requiring top-down direction from a central authority.

Evolutionary Process Driven by Market Efficiency

The mainstream view also emphasizes the evolutionary process by which certain commodities became widely accepted as money. Historically, various goods have served as money, but those that were durable, portable, divisible, fungible, and relatively scarce were more successful. These characteristics made them more suitable as a medium of exchange, store of value, and unit of account. Through a process of competition and selection in the marketplace, certain commodities, often precious metals like gold and silver, gradually gained prominence as money because they minimized transaction costs and provided a reliable store of value. This evolution is seen as driven by the collective actions of individuals seeking to improve the efficiency of their economic interactions. While state involvement can play a role, it's generally regarded as a later development that formalizes or regulates existing monetary practices rather than initiating them.

Conclusion

The mainstream perspective on the origin of money highlights its emergence as a spontaneous, market-driven solution to the inefficiencies of barter. The evolutionary process favors commodities with inherent characteristics that make them suitable as a medium of exchange, store of value, and unit of account, ultimately fostering greater economic activity and efficiency.

References

  1. Menger, C. (1892). On the Origin of Money. The Economic Journal, 2(6), 239-255.
  2. Jevons, W. S. (1875). Money and the Mechanism of Exchange. D. Appleton and Company.
  3. Kocherlakota, N. R. (1998). Money is Memory. Journal of Economic Theory, 81(2), 232-251.
  4. Selgin, G. A. (2003). Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821. University of Michigan Press.
  5. Humphrey, D. B. (1985). Payments Finality and Risk of Settlement Failure. In Technology and the Regulation of Financial Markets (pp. 97-111). Springer, Boston, MA.

Alternative views

1. Money as a Tool of Social Control: The State Theory of Money

The mainstream view often treats money as spontaneously emerging from barter or market needs. However, the State Theory of Money (Chartalism) argues that money originates not from private exchange, but as a creature of the state. According to this view, governments create money by imposing taxes or other obligations payable in a specific unit of account. To meet these obligations, individuals must acquire the state's 'money,' thus establishing its value and driving its circulation. The evidence cited includes historical examples where taxation predates coinage and paper currency's acceptance relies on its usability for tax payments. This perspective implies that the state, rather than the market, holds primary control over the monetary system, with profound implications for fiscal and monetary policy.

Attributed to: Georg Knapp, The State Theory of Money; Modern Money Theory (MMT) proponents

2. Money as a Debt-Based System: The Credit Theory of Money

This view challenges the notion that money emerges from a need to efficiently exchange goods and services. Instead, it posits that money is fundamentally a form of debt or credit. In this framework, banks don't simply lend out existing deposits; they create new money when they make loans. The loan creates both an asset (the loan owed to the bank) and a liability (the deposit in the borrower's account). The repayment of debt extinguishes money. Proponents point to historical records showing that credit systems predate commodity money and argue that even modern currency is essentially a form of IOU from central banks or commercial banks. This perspective highlights the inherent instability of debt-based money systems and the potential for financial crises.

Attributed to: Alfred Mitchell-Innes, What is Money?; David Graeber, Debt: The First 5,000 Years**

3. Money as a Conspiracy: The Austrian Critique of Fiat Currency

While not necessarily a 'conspiracy theory' in the pejorative sense, some Austrian economists view the state's control over money as inherently prone to corruption and manipulation. They argue that fiat currencies (currencies not backed by a physical commodity like gold) are susceptible to inflation and debasement by governments seeking to finance their spending or manipulate the economy. They maintain that this manipulation benefits those closest to the government and the banking system at the expense of ordinary citizens whose savings are eroded by inflation. Evidence is cited from historical periods of hyperinflation and currency devaluation. The proposed solution is often a return to sound money, such as a gold standard, or decentralized cryptocurrencies, limiting the state's ability to control the money supply.

Attributed to: Ludwig von Mises, The Theory of Money and Credit; Murray Rothbard, What Has Government Done to Our Money?**

Common ground

What both sides accept, and the questions they actually split on.

Where they agree

  • Money serves as a medium of exchange and a unit of account.
  • The state plays some role in the modern monetary system, whether regulating it or controlling it.
  • Money's acceptance and value depend on people's willingness to use it, and different monetary forms have appeared throughout history.

Where they part ways

  1. Did money originate as a spontaneous market solution to barter or as a creation of the state?

    MainstreamMoney emerged spontaneously from decentralized, voluntary exchange to overcome the double coincidence of wants, with the state arriving later to formalize existing practices.

    AlternativeMoney originated as a creature of the state, which created demand for it by imposing taxes and obligations payable in its unit of account.

  2. Is money fundamentally a commodity or a form of debt and credit?

    MainstreamCommodities such as gold and silver became money because their durability, portability, divisibility and scarcity made them efficient for exchange and as a store of value.

    AlternativeMoney is fundamentally a form of debt or IOU, with credit systems predating commodity money and loans creating new money.

  3. Is state involvement in money a benign or necessary development or a source of harm?

    MainstreamState involvement is a later development that formalizes or regulates monetary practices that markets already established.

    AlternativeAustrian critics hold that state control of fiat money invites inflation and debasement that benefit those close to government and banks at the expense of ordinary savers, and they favor sound money such as gold or cryptocurrencies.

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  • Mainstream
  • Alternative

References

    1. Menger, C. (1892). On the Origin of Money. The Economic Journal, 2(6), 239-255.
    1. Jevons, W. S. (1875). Money and the Mechanism of Exchange. D. Appleton and Company.
    1. Kocherlakota, N. R. (1998). Money is Memory. Journal of Economic Theory, 81(2), 232-251.
    1. Selgin, G. A. (2003). Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821. University of Michigan Press.
    1. Humphrey, D. B. (1985). Payments Finality and Risk of Settlement Failure. In Technology and the Regulation of Financial Markets (pp. 97-111). Springer, Boston, MA.
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