Money and its Origins

Shahzavar Karimzadi

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136239021
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The concept of the origin of money has been a topic of interest and discussion to almost all schools of economic thought. However, in spite of minor differences of interpretation, most views share an underlying core principal about the rise and origin of money, implicit in which is the central belief that barter exchange preceded the money economy.

This new book offers a challenge to this belief, and argues that it is only by making this challenge that we will be in the position to accurately trace the roots of money. In an ambitious undertaking, the book has gathered and classified the major theories of the origin of money and assessed each at length, before presenting an innovative, alternative theoretical framework for the formation and the rise of money. It blends the objections made against the principal explanations of the origins of money and presents a terminological clarification between what can or cannot be classified as money.

This study has wide-ranging implications, in terms of both the operation of the economy and the implementation of monetary policy, and will be of interest to all those working in the areas of finance, monetary economics, economic theory and the history of economic thought.

1 Introduction

An Overview

The concept of the origin of money has been fraught with perpetual misunderstanding among all shades of economic thought. The exposition found in economic textbooks is drawn from one tradition, and with some slight variation of expression, has been recurring in numerous subsequent texts. Consequently, the formulation of the idea is uninformative, obscure and wrapped up in a great deal of mysticism. In spite of minor differences of interpretation, both the views expressed by either erudite economists or economics textbooks share an underlying core principle about the rise and origin of money.

Of all apodictic arguments in relation to the origin of money, the one with widest appeal is the barter exchange argument. Implicit in this idea is the central belief that barter exchange preceded the money economy. This argument marks the real inception of money into the cumbersome and laborious nature of the barter exchange economic model.

This belief has its primary roots in the writings of ancient Greek philosophy. The argument at first sight appears to be a common sense self-explanatory cliché, a kind of flawless truism. On closer inspection we can discover that it is contrary, in essence, to what it appears to be. It turns out to be no more than a piece of sophistry with an irremovable flawed process of reasoning. This fallacy is essentially due to and grounded in the construction of the argument itself.

The pseudo-rational inference that money originated as a solution to the cumbersome constituents of the barter exchange rests on nothing but false deductive reasoning and unreliable historical evidence. As an explanation this theory is virtually barren. The precepts and prescriptions offered by the theory lack the certainty or authority that is expected of a scientific doctrine.

It is only by removing this abyss, which has impaired the orthodox theory for so long, that we will be in the position to accurately trace the roots of money. Otherwise, there is no way out of this impasse. Unless we undo the central paralogism involved in the construction of this theory, we will not be able to disclose the real origin of money. Removing the sources of the most palpable contradictions in the theory would allow us to draw a conclusion that will have the character of true universality and strict inner necessity.

The main thrust of this book is centred on the unresolved riddles of the origin of money. It revolves primarily on the logical and historical inconsistencies of the mainstream theory of the foundation of money. It attempts to ponder on the subject of the birth of money as a social and economic entity and will explore the facts of commercial life under which money invariably and necessarily came into existence. By highlighting and explaining the prime necessities of the origin of money, the book makes an honest attempt to elucidate and answer a number of crucial questions such as: When did money originate? What were the chief requirements of the rise of money? What are the intrinsic attributes and inherent qualities of money? What are the principal drawbacks of the mainstream theory of the origin of money?

Reduced to its essence, the argument of this book encompasses three primary objectives. The book exposes the deep-seated misconceptions of the traditional theory of the origin of money. This is a critical examination that dissects the intricacies of the prevailing views to refute their validity step by step. The second goal of the book is to provide an innovative and systematic theory of the origin of money. It is intended to offer an in-depth alternative synthesis, which is free from the shortcomings of the conventional explanation of the origin of money. Presenting a compelling and comprehensive theory that is all-inclusive, consistent, historically and logically well-founded, and is applicable. This alternative analytical framework takes the reader into the intricacy of time and the mode of deductive reasoning to explain the actual sources of the origin of money. Breaking from traditional theory opens new lines of inquiry and insight. Exploration of the implications of the proposed theory thus leads us to the third key objective of this study as it seeks to explain the implication of the alternative theory on the institutions, configuration, conduct, instruments, targets and implementation of monetary policy.

The book consists of 11 chapters. The opening chapter provides an overall outline of the subject of study. The chapter covers a brief background of the subject of enquiry then it proceeds to the exposition of the principal objective of the study. Following on from the initial discussion the nature of the research and research method employed in this study will be brought to light and explained. The last part of Chapter 1 is devoted to the planning and structure of the book. This part is on an instruction to the reader about the format and organization of the book. It describes the layout in which the forthcoming chapters are arranged and provides a synopsis of each chapter.

From Chapter 2 onwards each chapter will examine one aspect or theory of the origin of money. Each chapter is centred on a specific related theme. Apart from the first two chapters, the remaining nine chapters are designed to analyse the standard alternative theories of the origin of money. The identification and classification of various theories of the origin of money into distinctive theories is one implicit novel feature of this book.

Detection, classification and explanation of each theory of the origin of money, in a dependable and internally consistent synthesis, is the essential manner in which to approach this subject. Needless to say there is an awareness of multiple theories of the origin of money. Discerning this fact is nearly universally acknowledged. What is fresh in this book is that it has sharpened the differences between competing theories. Here not only are different interpretations of the origin of money brought into a self-contained argument but also during the course of this process clear demarcation lines are drawn between the competing theories.

In addition, the book also brings all these theories together under one umbrella, in an orderly and integrated manner. This approach has its own distinctive merits. One advantage of this approach is that it allows us to reveal methodically the specific emphasis that each theory has on the origin of money. That is to say it enables us to locate and mark the distinguishing features of each theory in relation to the alternative theories of the origin of money.

Two Economic Systems

Nearly every textbook on economics has got something to articulate in relation to the issue of money. More often it is an assertion that is logically incoherent. Hidden in the proposition is the subsequent conclusion that money has emerged at one particular point in time. This conclusion in turn begs the question that the entire history of the economy can be divided into two distinct periods. In simple terms there is the period when money did not exist and there is the period when money came into being. The former economy is a moneyless economy whereas the latter economy is a money-using economy. This conclusion is essentially consistent with the whole supporting premises of the hypothesis.

Money is a human phenomenon. The development of money does not relate directly to the biological evolution of human beings but rather to their social and economic interactions. The time scale of the genesis of money is not in the field of the biological order. It has taken literally millions of years for man to evolve. This process of evolution is not where we seek to locate the historical formation of money

The postulate that money has emerged at a specific time in history is also compatible with its accompanying premises. On this matter we can establish a definite conclusion, which is not a matter of opinion. We can categorically prove that money is not an eternal phenomenon. The time scale of its existence is not akin with that of the universe. These processes are in a distinct and different time scale. The time scale for the history of money is closely connected with one particular and unique activity of man as a social being. It is related to trade.

Human beings are a social species. So money is ultimately a means of establishing certain social and economic interactions within these social groups. Money is not an ad hoc creation of a definite individual. The creation of money is rather a socially conditioned occurrence. On this account we can conclusively assert that money must have emerged at a certain economic and social formation and it has not always been in existence.

The matter cannot be proved categorically merely by means of gathering a range of evidence from past communities. Archaeological findings, ancient literature and the remains of inscriptions from the past cannot satisfactorily account for the origins of money. Neither can its existence be proved conclusively and solely from the study of current commercial and economic activities. Of course these factors are important components of the real origin of money but they will never lead us to a definite conclusion. Using this method will assist and enhance our understanding of the matter but it does not provide us with a conclusive theory.

The thing that is not immediately obvious or noticeable is the degree of the absurdity of the theory. There has been collective acknowledgement of this theory by the community of economists ever since its formation. It is hard to imagine a modern society without money, but modern societies were not in existence in the distant past. They are in every respect fundamentally different from the earlier human societies. What has not changed is the nature of human species as social beings and their cooperation and economic interactions to provide the necessities of life. Money is consistent with the economic and commercial circumstances of modern societies. As the social, economic and commercial circumstances have evolved and changed so have the nature of economic interactions and cooperation among the people who make up these communities and societies. The production, distribution and exchange of goods and services have taken different forms and for this reason the instruments of production, distribution and exchange had to adapt themselves to the changing circumstances of the time.

One cannot play down the importance of money in modern economies. At the same time modern economies and societies do not have the economic and social circumstances associated with past societies. Modern economies should not therefore be the only source which we examine when we seek to analysis the origin of money. The reason that one fails to reach a firm conclusion on this basis is that the evidence employed in confirmation of the theory are narrow, speculative and contingent.

Beside doubtful supporting evidence we also have to deal with the issue of a circular argument. In a sense the argument is not just circular but is also incompatible with deductive reasoning. Mainstream economics has developed an argument that is neither original nor profound. A closer examination of the theory reveals that the ultimate conclusion is inconclusive. It is not a proven value free theory.

The Mainstream View

It is reasonable to suppose, however, that as the pace of economic development quickened it proliferated concerted potent advances; in trade, commerce and technology. As a result the scales of transactions have become larger and their nature more complex. This is where the conventional theory of the origin of money contains a tiny kernel of truth. The dedicated apostles may have diverse descriptions of the process of the formation of money but they all share a common central perspective. They all relate the origin of money to the inherent contradictions of economic transactions in earlier societies. As these societies were propelled by the means of their inherent economic contradictions their economies were transformed toward a more advanced stage. The belief in change and movement of the economy to a higher stage are the points where the general agreement begins to falter.

A change will transform a state of affairs from one situation into another. In conventional economics the economy prior to the formation of money is classified as a barter exchange system. This is a grand unifying theory that captures and embodies everything associated with the mainstream perspective. Barter exchange is a theory of everything that is not a monetary economy. On this basis a demarcation line is drawn between the barter exchange economy and the monetary economy. At its heart the barter exchange economy is characterized by truck or payment in goods. Whereas in a monetary economy the direct exchange of one commodity for another is replaced with a formal medium of exchange. Goods are exchanged with a medium and the medium then is employed in turn to buy other goods.

This is the grand unifying theory of orthodox economics. Within this concept are the hidden laws and the mysteries of the barter system and the monetary economy. It is in this distinction that mainstream economists try to obtain different insights about both types of economy. A closer examination of the matter will reveal, as the story unfolds, that the whole precept is compromised by a range of preconceived notions. The theory overlooks both the logical and empirical evidence of the origin of money.

The traditional theory of the origin of money maintains that under the direct exchange of goods the economic agents will encounter a difficulty that hinders the process of exchange and consequently leaves them short of their desired goods. This is the central difficulty in the mainstream view that will lead to the destruction of the system and the formation of a new order. The chief difficulty associated with direct exchange of goods or the barter exchange is said to be the existence of the double coincidence of wants.

The necessity of money becomes imperative under conditions of exchange that is subject to the double coincidence of wants. The solution offered to this difficulty is indirect exchange. We encounter the difficulty of the double coincidence of wants since there is no common denominator in the barter system. In the absence of a common unit of exchange the economic agents are left with one option: to find a counterparty that has got the good you require and is willing to exchange his goods with your goods. Subject to these qualifications they maintain whatever you obtain or get constitutes money. This is analogous to saying that the formation of a medium of exchange is money and money is the solution to the problem of coincidence of wants.

The proposition that by adopting this common medium of exchange it is then regarded as the origin of money should not be accepted without close scrutiny. All that means is that in the absence of a common denominator of exchange there is no money. This conclusion has been borne out of subsequent observations of economies that use some kind of a medium of exchange. If it were indeed true that a medium of exchange is money then the origin of money would be that of the origin of a common medium of exchange.

On the surface this sounds compelling but it does not add anything to our understanding of origin of money. It is merely a tantalizing parody, a partial resolution to our conundrum. Conventional wisdom seems intriguing but it fails to tell us the actual truth about the origin of money. As we are not dealing here with clear-cut facts this puzzle has baffled many generations of economists, but simultaneously has shown their fondness for the classical theory.

The question of how money emerged cannot be answered solely through the provision of some crude facts and observations. This statement equally applies to the orthodox view on the medium of exchange account of the origin of money. The question to a large extent is a subjective one and is open to all sorts of interpretation. Matters regarding the origin of money, the universe or even the origin of writing cannot be resolved with the simple accumulation of facts and careful observations of such facts. No matter how many facts and observations one can accumulate, that in itself is not sufficient to draw a workable conclusion about the origin of money. This is one flaw among many of the conventional theories of the origin of money.

At this stage of our argument we arrive at two premises of the traditional view of the origin of money. The first premise is the statement that at one time there was no money, and they describe this type of economic system as a barter exchange system. Following this premise is the statement that money came into being because the barter exchange system, where the goods are exchanged directly, had inherent contradictions and thus reached its limitation. It became unworkable as a result of the development of the division of labour and specialization of occupations. Money subsequently arose through the realization of the inconveniences and shortcomings of the previous barter system.

The charge against the popular explanation of the origin of money lies on one of these two premises. Money is not a realm of nature but within the realm of social construction. The latter is a creation of human interactions with their surrounding environment and nature. Money is ultimately a human construction. It is the result of the exigencies of living under specific social relations of production. Thus its origin is not congruent with that of the origin of man.

The rise of money is the end of an era. To this end there is universal agreement. As to the nature and type of economy that existed before the formation of money there are opposing opinions. The conventional view is highly adamant and conclusive about the type of economy that existed in moneyless societies. These economies are dubbed barter exchange economies. They are described as fairly complex societies that have existed at definite historical period and allege that some elements of these societies still remain in very remote and distant parts of world.

The fact of the matter is that these claims have never been substantiated nor can they be substantiated. A matter of such profound importance as a moneyless economy that lacks any definite date or specific society in specific time and location is nothing more than an unqualified assertion. It is simply counterintuitive to have a society without money. A society is materially different from a family or a group of people living in isolation in small groups. The conventional perception of the barter exchange economy is in the context of fairly developed and complex societies. Many colourful terms are used, such as an economy in kind, direct exchange and a natural economy, but we are not told with any reasonable degree of certainty where and when these societies existed.

The preoccupation of mainstream economics with the barter exchange economy has been the chief culprit in preventing the community of economists looking for and developing a clear understanding of the origins of money. The misunderstanding has been perpetuated by subsequent generations of economists. Those economists who firmly believe in the existence of a barter exchange economy have failed to come up with a definite instance of a barter exchange economy. What they have come up with are societies that lack a single medium of exchange.

The conventional wisdom is on the correct side of the equation when it divides the economy into two broad and general categories, the moneyless economy and the monetary economy, when talking about the origin of money. They are on the right track in their characterization of a moneyless economy. However, their description of a moneyless economy is irrelevant, illogical and unhistorical. The popular version of the origin of money oversimplifies the matter and as such their depiction of barter exchange can fit many scenarios. It can fit what they call the rudimentary economies up to highly developed contem...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Contents
• Preface
• Acknowledgements
• 1. Introduction
• 2. Money as a discovery or an invention
• 3. Division of labour and production of surplus products
• 4. Initiation of money from the act of exchange
• 5. The exchange in kind versus the exchange against a medium
• 6. The origin of money and the most marketable good
• 7. Money originated from its functions
• 8. Money as a creation of debt payment or a creature of the state
• 9. Inherent difficulties of the barter system and the origin of money
• 10. The nature and the true origin of money
• 11. Conclusion: The origins of money and how it came into being
• Bibiliography
• Index