To be sure, we will never “know” the origins of money. First, the origins are
lost “in the mists of time”—almost certainly in pre-historic time. (Keynes,
1930, p. 13) It has long been speculated that money predates writing because the
earliest examples of writing appear to be records of monetary debts—hence, we
are not likely to uncover written records of money’s “discovery”. Further, it is
not clear what we want to identify as money. Money is social in nature and it
consists of complex social practices that include power and class relationships,
socially constructed meaning, and abstract representations of social value. (Zelizer
1989) As Hudson (2004) rightly argues, ancient and even “primitive” society was
no less complex than today’s society. Economic relations were highly embedded
within complex social structures that we little understand today. (Polanyi 1971)
There is probably no single source for the institution of modern capitalist
economies that we call “money”.
More importantly, trying to uncover “the” origins of money is almost certainly
an impossible or at least misguided endeavor unless it is placed within the
context of a theoretical framework. When we attempt to discover the origins of
money, we are identifying institutionalized behaviors that appear similar to
those today that we wish to identify as “money”. This identification, itself,
requires an underlying economic theory. Most economists focus on market
exchanges, and begin with the hypothesis that money originated as a
cost-reducing innovation to replace barter. They highlight the medium of
exchange and store of value functions of money. The ideal medium of exchange is
a commodity whose value is intrinsic, and the value of each marketed commodity
is denominated in the medium of exchange through the asocial forces of supply
and demand. While this approach to money is consistent with the neoclassical
preoccupation with market exchange and the search for a unique equilibrium price
vector, it is not so obvious that it can be adopted within heterodox analysis.
If money did not originate as a cost-minimizing alternative to barter, what were
its origins? It is, of course, a difficult task to develop an alternative story
that recognizes a variety of forms of social organization—that is, an analysis
that is historical. As Grierson notes,
Study of the origins of money must rely heavily on inferences from early
language, literature, and law, but will also take account of evidence regarding
the use of ‘primitive’ money in modern non-western societies. Such evidence, of
course, has to be used with care. (Grierson, 1977, p. 12)
Grierson also recognizes that there may be a difference between societies that
appear to use money incidentally, and those whose economies are organized around
the use of money: ‘Some systems, while employing shells or other commodities
frequently used as ‘money’, may not necessarily be monetary at all’ (ibid., p.
It is possible that one might find a different ‘history of money’ depending on
the function that one identifies as the most important characteristic of money.
While many economists (and historians and anthropologists) would prefer to trace
the evolution of the money used as a medium of exchange, our primary interest is
in the unit of account function of money. Our alternative history will locate
the origin of money in credit and debt relations, with the unit of account
emphasized as the numéraire in which credits and debts are measured. The store
of value function could also be important, for one stores wealth in the form of
others’ debts. On the other hand, the medium of exchange function and the market
are de-emphasized with regard to money’s origins; indeed, credits and debits can
exist without markets and without a medium of exchange.
Innes (1913, 1914, 1932) suggested that the origins of credit and debt can be
found in the elaborate system of tribal wergild designed to prevent blood feuds.
(See also Grierson, 1977; 1979; Goodhart, 1998; and Wray, 2004) As Polanyi put
it: “the debt is incurred not as a result of economic transaction, but of events
like marriage, killing, coming of age, being challenged to potlatch, joining a
secret society, etc.” (Polanyi, 1957 (1968), p. 198). Wergild fines were paid by
transgressors directly to victims and their families, and were established and
levied by public assemblies. A long list of fines for each possible
transgression was developed, and a designated “rememberer” would be responsible
for passing it down to the next generation. As Hudson (2004) reports, the words
for debt in most languages are synonymous with sin or guilt, reflecting these
early reparations for personal injury. Originally, until one paid the wergild
fine, one was “liable”, or “indebted” to the victim. It is almost certain that
wergild fines were gradually converted to payments made to an authority. This
could not occur in an egalitarian tribal society, but had to await the rise of
some sort of ruling class. As Henry (2004) argues for the case of Egypt, the
earliest ruling classes were probably religious officials, who demanded tithes.
Alternatively, conquerors required payments of tribute by a subject population.
Tithes and tribute thus came to replace wergild fines, and eventually fines for
“transgressions against society” (that is, against the crown), paid to the
rightful ruler, could be levied for almost any conceivable activity. (See
Later, taxes would replace most fees, fines and tribute (although this occurred
surprisingly late—not until the 19th century in England). (Maddox, 1969) These
could be self-imposed as democracy gradually replaced authoritarian regimes. In
any case, with the development of “civil” society and reliance mostly on payment
of taxes rather than fines, tithes, or tribute, the origin of such payments in
the wergild tradition have been forgotten. A key innovation was the
transformation of what had been a debt to the victim to a universal “debt” or
tax obligation imposed by and payable to the authority. The next step was the
standardization of the obligations in terms of a unit of account—a money. At
first, the authority might have levied a variety of in-kind fines (and tributes,
tithes, and taxes), in terms of goods or services to be delivered, one for each
sort of transgression (as in the wergild tradition). When all payments are made
to the single authority, however, this became cumbersome. Unless well-developed
markets already existed, those with liabilities denominated in specific goods or
services could find it difficult to make such payments. Or, the authority could
find itself blessed with an overabundance of one type of good while short of
others. Further, in-kind taxes provided an incentive for the taxpayer to provide
the lowest quality goods required for payment of taxes as shown below in the
case of tobacco.
Denominating payments in a unit of account would simplify matters—but would
require a central authority. As Grierson (1977, 1979) realized, development of a
unit of account would be conceptually difficult. (See also Henry, 2004.) It is
easier to come by measures of weight or length—the length of some anatomical
feature of the ruler (from which, of course, comes our term for the device used
to measure short lengths like the foot), or the weight of a quantity of grain.
By contrast, development of a money of account used to value items with no
obvious similarities required more effort. Hence, the creation of an authority
able to impose obligations transformed wergild fines paid to victims to fines
paid to the authority and at the same time created the need for and possibility
of creation of the monetary unit.
Orthodoxy has never been able to explain how individual utility maximizers
settled on a single numéraire. (Gardiner, 2004; Ingham, 2004a) While use of a
single unit of account results in efficiencies, it is not clear what
evolutionary processes would have generated the numéraire. According to the
conventional story, the higgling and haggling of the market is supposed to
produce the equilibrium vector of relative prices, all of which can be
denominated in the single numéraire. However, this presupposes a fairly high
degree of specialization of labor and/or resource ownership—but this pre-market
specialization, itself, is hard to explain. (Bell, Henry, and Wray 2004) Once
markets are reasonably well-developed, specialization increases welfare;
however, without well-developed markets, specialization is exceedingly risky,
while diversification of skills and resources would be prudent. It seems
exceedingly unlikely that either markets or a money of account could have
evolved out of individual utility maximizing behavior.
It has long been recognized that early monetary units were based on a specific
number of grains of wheat or barley. (Wray, 1990, p. 7) As Keynes argued, “the
fundamental weight standards of Western civilization have never been altered
from the earliest beginnings up to the introduction of the metric system”
(Keynes, 1982, p. 239) These weight standards were then taken over for the
monetary units, whether the livre, sol, denier, mina, shekel, or later the
pound. (Keynes, 1982; Innes, 1913, p. 386; Wray, 1998, p. 48) This relation
between the words used for weight units and monetary units generated speculation
from the time of Innes and Keynes that there must be some underlying link.
Hudson (2004) explains that the early monetary units developed in the temples
and palaces of Sumer in the third millennium BC were created initially for
internal administrative purposes: “the public institutions established their key
monetary pivot by making the shekel-weight of silver (240 barley grains) equal
in value to the monthly consumption unit, a ‘bushel’ of barley, the major
commodity being disbursed”. (Hudson, 2004, p. 111) Hence, rather than the
intrinsic value (or even the exchange value) of precious metal giving rise to
the numéraire, the authorities established the monetary value of precious metal
by setting it equal to the numéraire that was itself derived from the weight of
the monthly grain consumption unit. This leads quite readily to the view that
the unit of account was socially determined rather than the result of individual
optimization to eliminate the necessity of a double coincidence of wants.
To conclude our introduction, we return to our admission that it is not possible
to write a definitive history of money. We start from the presumption that money
is a fundamentally social phenomenon or institution, whose origins must lie in
varied and complex social practices. We do not view money as a “thing”, a
commodity with some special characteristics that is chosen to lubricate a
pre-existing market. Further, we believe that the monetary unit almost certainly
required and requires some sort of authority to give it force. We do not believe
that a strong case has yet been made for the possibility that asocial forces of
“supply and demand” could have competitively selected for a unit of account.
Indeed, with only very rare exceptions, the unit of account throughout all known
history and in every corner of the globe has been associated with a central
authority. Hence, we begin with the presumption that there must be some
connection between a central authority—what we will call “the state”--and the
unit of account, or currency. In the next sections, we will use our alternative
approach to examine specific historical cases—many of these are well-known and
have already been the subject of analysis by orthodox economists. We will show
that a different interpretation can be given that is more consistent with a
Keynesian/Institutionalist view of economics. First, however, we will lay out
the scope of the conceptual issues surrounding the term “money”.
money? Conceptual issues.
Before telling any story about the history of money, one
should first ask what are the essential characteristics of a monetary system.
The five essential elements of any monetary system are:
1-The existence of a method for recording transactions, that is, a unit of
account and tools to record transactions.
2-The unit of account must be social, that is, recognized as the unit in
which debts and credits are kept.
3-The tools are monetary instruments (or (monetary)[i]
debt instruments): they record the fact that someone owes to another a certain
number of units of the unit of account. Monetary instruments can be of different
forms, from bookkeeping entries to coins, from bytes in a hard drive to physical
objects (like cowry shells). Anything can be a monetary instrument, as long as,
first, it is an acknowledgement of debt (that is, something that has been issued
by the debtor, who promises to accept it back in payment by creditors) and,
second, it is denominated in a unit of account.
4-Some monetary instruments are money-things that are transferable
(‘circulate’): they must be impersonal from the perspective of the receiver (but
not the issuer) and transferable at no or low discount to a third party. A check
is a monetary instrument but not usually a money-thing because it is not
transferable (it names the receiver).[ii]
Currency is a money-thing because it is transferable and impersonal from the
perspective of the receiver but it is a debt of the issuer (treasury or central
5-There is a hierarchy of monetary instruments, with one debt issuer (or a
small number of issuers) whose debts are used to clear accounts. The money
instruments issued by those high in the hierarchy will be the money things.
five characteristics imply that a history of money would be concerned with at
least three different things: The history of debts (origins of debt, nature and
type of debts before and after the emergence of a legal system), the history of
accounting (origins, unit(s) used, evolution of units, purpose), and the history
of monetary and non-monetary debt instruments (forms, issuers, name, value in
terms of the unit of account) and their use (emergency,[iii]
special types of transactions like shares, daily commercial transactions,
etc.)). Behind each of these histories lie politico-socio-economic factors that
are driving forces and that would also need to be studied carefully.
In addition, while telling the story of money one has to
avoid several pitfalls. First, the dangers of ethnocentrism are always present
when one studies societies that are totally different from current modern
(In his criticism of Amstrong’s study of Rossel Island, Dalton (1965) provides a
wonderful example of these dangers.) Second, one should not concentrate the
analysis on specific debt instruments: as Grierson (1975, 1977) notes, the
history of money and the history of coins are two different histories. Focusing
on coins would not only limit the study to one type of debt instrument, but
would also avoid a detailed presentation of units of account—and, indeed, could
be highly misleading regarding the nature of money.[v]
Third, the nature of money cannot be reduced to the simple functions of medium
of exchange or means of payment. Using a physical object for economic
transactions does not necessarily qualify it as money-thing, and one risks
confusing monetary payment with payment in kind. This point is developed below.
Fourth, and finally, the existence and use of money does not imply that an
economy is a monetary economy, i.e. an economy in which the accumulation of
money is the driving force of economic decisions.
Thus, looking at the history of money is a gigantic and very
difficult task. In addition, it is an interdisciplinary subject because it
involves, among others, the fields of politics, sociology, anthropology,
history, archeology, and economics (in addition to requiring ability to read
many different languages). There is no doubt that progress in all those
disciplines will bring new light to the dark story of money.
Money in primitive, archaic, and modern societies.
A brief history of money can be begun by dividing the history
of humanity into three analytically different types of society, along the lines
posed by Polanyi, Dalton, and others: primitive, archaic, and modern economies
(Dalton 1971, Bohannan and Dalton 1962). This analytical framework does not
exclude the possibility that, in reality, some of the characteristics of one
type of society were mixed with others in any given society. However, such a
division is useful for telling a story about the evolution of money.
In primitive societies, there is no notion of private
in the sense of ownership of the means of production (agricultural land,
forests, fisheries) and so no possibility of a society based on barter (in the
economic sense of the term) or commercial exchange: these are marketless
economies. Redistribution (in the sense of a central institution that collects
and allocates resources) is also nonexistent as the products of hunting and
gathering are provided to everybody according to custom on the basis of needs
and social status (the latter not being inherited but varying with age and
gender, the eldest having a central role in the management of tribe (Simons,
1945)). In this type of society, there are no laws defined by a legal code.
However, there is a well-defined system of obligations, offenses and
compensations. Obligations are “pre-legal obligations” (Polanyi, 1957 (1968), p.
181), defined by tradition (marriage, providing help, obtaining favors, making
friends, etc.). These obligations are personal, and magic and the maintenance of
social order play a central role in their existence. Their fulfillment can be
qualitative (dancing, crying, loss of social status or role, loss of magical
power, etc.) or quantitative (transfer of personal objects that can be viewed as
a net transfer of wealth) (Ibid., p. 182).[vii]
In addition, payment of compensation is not standardized but rather takes the
form of in-kind payment, with type and amount of payment established socially.
In primitive societies there is, therefore, no economic or
social need for accounting, even if debts are present, because they are
egalitarian societies in which exchange is usually reciprocal (the purpose of
exchange is not to better one’s position, but rather to bring members of the
society closer together—often by redistribution), accumulation of wealth is
or nonexistent (Schmandt-Besserat, 1992, 170), and the fulfillment of
obligations is not standardized. Some methods of computing existed, for example,
to record time (Ibid., 160) in order to calculate the phases of the moon, the
seasons, and other natural phenomena, or to count numbers and measure volume.
That is why one can find notches on different objects like bones that date at
least back to 60000 B.C. (Ibid., p. 158). However, there was no need to keep
detailed records of debts.
One can date the emergence of money to the development of
large archaic societies between 3500-3000 B.C. in the Ancient Near East. In this
type of society, market transactions exist but are peripheral and mostly
developed for external commercial transactions. Given the relatively low
importance of trade (and/or its control by the ruling authorities) and the
minimal power of merchants, one should not search for the origins of money in
this direction. Trade was included in a larger socio-economic framework based on
the redistribution of the economic output (mainly crops but also handicrafts
tools, and other finished products (Hudson and Wunsch 2004a)). This
centralization emerged as the rules of primitive tribal societies were
progressively weakened, bringing profound social changes (Henry 2004). A highly
organized and stratified society with a religious upper class (king, princes and
high rank priests) was progressively formed. Reciprocity was progressively
weakened and social ranks emerged. Religion replaced magic and led to the
emergence of sacral obligations, i.e. obligations under the sanction of religion
(Polanyi, 1957 (1968) p. 198).
With the emergence of a powerful administration, a legal
system also developed, and, with it, legal obligations. The latter are not
customary obligations even if they may include the latter in a modified way.
Indeed, the essential differences between pre-legal customary obligations, and
sacral and legal obligations, are that the latter are generalized, compulsory
and standardized. These obligations, by allowing the concentration of a large
portion of the economic output, were essential to the redistributive nature of
the economic system. If one takes Babylonia during the late Uruk period (3100
B.C.) as an example, there were at least three different kinds of obligations:
gifts to gods that became “regularized, standardized, and obligatory for the
general populace” (Schmandt-Besserat, 1992, p. 172, p. 180), duties in terms of
provision of a portion of the production goal determined by Royal standard
(Nissen et al., 1993, Chapter 11), and tributes from cities conquered by
southern city states (Schmandt-Besserat, 1992, pp. 182-183).
With the progressive standardization and generalization of
compulsory obligations, several innovations had to be developed to enforce them.
Among them, the counting and recording of debts was essential and it apparently
took several millennia to develop a uniform numerical system: starting from 8000
B.C. with concrete counting via plain tokens used as calculi, to 3100 B.C with
the creation of abstract counting (and writing) via pictographic tablets
(Schmandt-Besserat 1992, Nissen et al. 1993, Englund 2004). This transition from
concrete counting (each thing is counted one by one, with a different method of
counting for different things) to abstract counting (a number can represent
heterogeneous items) was central to development of the unit of account. Several
units of account might exist in the beginning:
Depending on the economic sector, the means of comparison or the measure of
standardized norms and duties could be silver, barley, fish, or ‘laborer-day,’
that is, the product of the number of workers multiplied by the number of days
they worked. (Nissen et al., 1993, pp. 49-50).
But the units were progressively reduced to two (silver and
barley), and apparently silver eventually became the single unit of account.
Archeologists are still not sure why silver was chosen (Hudson and Wunsch, 2004,
p. 351), maybe because it played a central role in the gift giving to the palace
and temple (Hudson 2004). Some of the earliest records of debts come from
Babylonia, inscribed on clay shubati (‘received’) tablets; these indicated a
quantity of grain, the word shubati, the name of the person from whom received,
the name of the person by whom received, the date, and the seal of the receiver
or of the king’s scribe (when the king was the receiver). The tablets were
either stored in temples where they would be safe from tampering, or they were
sealed in cases which would have to be broken to reach them. All the
inscriptions listed above would be repeated on the case, but the enclosed tablet
would not contain the name and seal of the receiver. Thus if the case were
broken, the tablet would not be complete. Only when the debt was repaid would
the case be broken (allowing the debtor to observe that the inscription on the
case matched that of the enclosed tablet). Unlike the tablets stored in temples,
the ‘case tablets’ could have circulated without fear of tampering. However, we
do not know whether the shubati could have circulated as payments made to third
parties. In any case, “money things” were not needed, even though these early
societies used markets. Rather, purchases were made at prices set by the
authorities on the basis of credit. The merchants would keep a running tally for
customers, which would be settled later (usually at harvest). For example,
tallies of debts for beer consumed would be kept, with the tally settled at
harvest by delivery of barley at the official price and measured in the money of
account. Hudson (2000, 2004) documents widespread use of money for accounting
purposes as well as sophisticated understanding of compound interest on debt in
these archaic societies.
To sum up the argument to this point, early money units
appear to have been derived from weight units which may have developed from the
practice of wergeld. Palaces created the money units to simplify accounting.
They also had to establish price lists to value items in the money of account.
Initially all of this may have been only to facilitate internal record-keeping,
but eventually use of the internal unit of account spread outside the palace.
Commercial transactions, rent payments, and fees, fines, and taxes came to be
denominated in the money of account. Use of the money of account in private
transactions might have derived from debts owed to the palaces. Once a money
rent, tax or tribute was levied on a village, and later on individuals, the
palace would be able to obtain goods and services by issuing its own
money-denominated debt in the form of tallies. Coins came much later, but were,
like the tallies, evidence of the Crown's debt. Use of precious metals in the
coins may have been adopted simply to reduce counterfeiting, however, as we
explain below, use of precious metal had far reaching consequences both for
operation of monetary systems as well as for the development of the theory of
Historical evidence suggests that most ‘commerce’ from the
very earliest times was conducted on the basis of credits and debits—rather than
on the basis of coins. Innes writes of the early European experience: ‘For many
centuries, how many we do not know, the principal instrument of commerce was
neither the coin nor the private token, but the tally[ix]’
(ibid. p. 394). This was a ‘stick of squared hazel-wood, notched in a certain
manner to indicate the amount of the purchase or debt’, created when the ‘buyer’
became a ‘debtor’ by accepting a good or service from the ‘seller’ who
automatically became the ‘creditor’ (ibid.). ‘The name of the debtor and the
date of the transaction were written on two opposite sides of the stick, which
was then split down the middle in such a way that the notches were cut in half,
and the name and date appeared on both pieces of the tally’ (ibid.). The split
was stopped about an inch from the base of the stick so that one piece, the
‘stock’ was longer than the other, called the ‘stub’ (also called the ‘foil’).
The creditor would retain the stock (from which our terms capital and corporate
stock derive) while the debtor would take the stub (a term still used as in
‘ticket stub’) to ensure that the stock was not tampered with. When the debtor
retired his debt, the two pieces of the tally would be matched to verify the
amount of the debt.
Tallies could circulate as ‘transferable, negotiable
instruments’—that is as money-things. One could deliver the stock of a tally to
purchase goods and services, or to retire one’s own debt. ‘By their means all
purchases of goods, all loans of money were made, and all debts cleared’ (Innes,
1913, p. 396). A merchant holding a number of tally stocks of customers could
meet with a merchant holding tally stocks against the first merchant, ‘clearing’
his tally stub debts by delivery of the customers’ stocks. In this way, great
‘fairs’ were developed to act as ‘clearing houses’ allowing merchants ‘to settle
their mutual debts and credits’; the ‘greatest of these fairs in England was
that of St. Giles in Winchester, while the most famous probably in all Europe
were those of Champagne and Brie in France, to which came merchants and bankers
from all countries’ (ibid.). Debts were cleared ‘without the use of a single
coin’; it became common practice to ‘make debts payable at one or other of the
fairs’, and ‘[a]t some fairs no other business was done except the settlement of
debts and credits’, although retail trade was often conducted at the fairs.
While conventional analysis views the primary purpose of the fairs as retail
trade, Innes postulated that the retail trade originated as a sideline to the
clearing house trade.[x]
Boyer-Xambeu et al. (1994) concur that 12th and 13th
century European medieval fairs were essential in the trading and net settling
of bills of exchange, the latter being done in several ways, from the (rare) use
of coins, to bank transfers, the carrying forward of net positions to the next
fair (one of the most frequently used techniques), and the use of transferable
bills of exchange (Ibid., p. 34, pp. 38-39, p. 65). These bills of exchange
(that were at first not transferable and used exclusively in intra-European
trades) were, along with debenture bills for intra-nation trade between cities,
the preferred debt instruments used by merchants in commerce. Coins were rarely
Even if one accepts that much or even most trade took place
on the basis of credits and debts, this does not necessarily disprove the story
of the textbooks. Perhaps coins existed before these tallies (records of debts),
and surely the coins were made of precious metals. Perhaps the debts were made
convertible to coin, indeed, perhaps such debt contracts were enforceable only
in legal tender coin. If this were the case, then the credits and debts merely
substituted for coin, and net debts would be settled with coin, which would not
be inconsistent with the conventional story according to which barter was
replaced by a commodity money (eventually, a precious metal) that evolved into
stamped coins with a value regulated by embodied precious metal. In the orthodox
story, credits and debits follow the invention of coin, and paper “fiat” money
is a late invention. There are several problems with such an interpretation.
First, the credits and debts are at least 2000 years older
than the oldest known coins—with the earliest coins appearing only in the 7th
Second, the denominations of most (but not all—see Kurke 1999) early precious
metal coins were far too high to have been used in everyday commerce. For
example, the earliest coins were electrum (an alloy of silver and gold) and the
most common denomination would have had a purchasing power of about ten sheep,
so that ‘it cannot have been a useful coin for small transactions’ (Cook, 1958,
p. 260). They might have sufficed for the wholesale trade of large merchants,
but they could not have been used in day-to-day retail trade.[xii]
Furthermore, the reported nominal value of coins does not appear to be closely
regulated by precious metal content but rather was established through official
proclamation (see below). Note also that the value of coins was set by public
proclamation—and was not usually stamped on coins until quite recently.
And, finally, it is quite unlikely that coins would have been
invented to facilitate trade, for ‘Phoenicians and other peoples of the East who
had commercial interests managed satisfactorily without coined money’ for many
centuries (Cook, 1958, p. 260). Indeed, the introduction of coins would have
been a less efficient alternative in most cases. While the textbook story argues
that paper ‘credit’ developed to economize on precious metals, we know that
metal coins were a late development. In other words, lower-cost alternatives to
full-bodied coin were already in use literally thousands of years before the
first coins were struck. Further, hazelwood tallies or clay tablets had lower
non-monetary value than did precious metals, thus it is unlikely that metal
coins would be issued to circulate competitively (for example, with hazelwood
tallies) unless their nominal value were well above the value of the embodied
What then are coins, what are their origins, and why are they
accepted? Coins appear to have originated as ‘pay tokens’ (in Knapp’s colourful
phrase), as nothing more than evidence of debt. Many believe that the first
coins were struck by government, probably by Pheidon of Argos about 630 BC
(Cook, 1958, p. 257). Given the large denomination of the early coins and
uniform weight (although not uniform purity – which probably could not have been
tested at the time), Cook argues that ‘coinage was invented to make a large
number of uniform payments of considerable value in a portable and durable form,
and that the person or authority making the payment was the king of Lydia’
(ibid., p. 261). Further, he suggests ‘the purpose of coinage was the payment of
This thesis was modified ‘by Kraay (1964) who suggested that governments minted
coins to pay mercenaries only in order to create a medium for the payment of
(Redish, 1987, pp. 376–7). Crawford has argued that the evidence indicates that
use of these early coins as a medium of exchange was an ‘accidental consequence
of the coinage’, and not the reason for it (Crawford, 1970, p. 46). Instead,
Crawford argued that ‘the fiscal needs of the state determined the quantity of
mint output and coin in circulation’, in other words, coins were intentionally
minted from the beginning to provide ‘state finance’ (ibid.).
Similarly, Innes argued that ‘[t]he coins which [kings]
issued were tokens of indebtedness with which they made small payments, such as
the daily wages of their soldiers and sailors’ (Innes, 1913, p. 399). This
explains the relatively large value of the coins – which were not meant to
provide a medium of exchange, but rather were evidence of the state’s debt to
‘soldiers and sailors’. The coins were then nothing more than ‘tallies’ as
described above – evidence of government debt.
What are the implications of this for our study of money? In
our view, coins are mere tokens of the Crown’s (or other issuer’s) debt, a small
proportion of the total ‘tally’—the debt issued in payment of the Crown’s
Just like any private individual,
the government pays by giving acknowledgments of indebtedness—drafts on the
Royal Treasury, or some other branch of government. This is well seen in
medieval England, where the regular method used by the government for paying a
creditor was by ‘raising a tally’ on the Customs or some other revenue-getting
department, that is to say by giving to the creditor as an acknowledgment of
indebtedness a wooden tally. (Ibid., p. 397–8)[xvi]
would the Crown’s subjects accept hazelwood tallies or, later, paper notes or
token coins? Another quote from Innes is instructive:
The government by law obliges
certain selected persons to become its debtors. It declares that so-and-so, who
imports goods from abroad, shall owe the government so much on all that he
imports, or that so-and-so, who owns land, shall owe to the government so much
per acre. This procedure is called levying a tax, and the persons thus forced
into the position of debtors to the government must in theory seek out the
holders of the tallies or other instrument acknowledging a debt due by the
government, and acquire from them the tallies by selling to them some commodity
or in doing them some service, in exchange for which they may be induced to part
with their tallies. When these are returned to the government Treasury, the
taxes are paid. (Ibid., p. 398)
on to note that the vast majority of revenues collected by inland tax collectors
in England were in the form of the exchequer tallies:
[p]ractically the entire business of
the English Exchequer consisted in the issuing and receiving of tallies, in
comparing the tallies and the counter-tallies, the stock and the stub, as the
two parts of the tally were popularly called, in keeping the accounts of the
government debtors and creditors, and in cancelling the tallies when returned to
the Exchequer. It was, in fact, the great clearing house for government credits
taxpayer did not have to seek out individually a Crown tally, for matching the
Crown’s creditors and debtors was accomplished ‘through the bankers, who from
the earliest days of history were always the financial agents of government’
(Innes, 1913, p. 399). That is, the bank would intermediate between the person
holding Crown debt and the taxpayer who required Crown debt in order to pay
The exchequer began to assign debts owed to the king whereby ‘the tally stock
held in the Exchequer could be used by the king to pay someone else, by
transferring to this third person the tally stock. Thus the king’s creditor
could then collect payment from the king’s original debtor’ (Davies, 1997, p.
150). Further, a brisk business developed to ‘discount’ such tallies so that the
king’s creditor did not need to wait for payment by the debtor.[xix]
The inordinate focus of economists on coins (and especially
on government-issued coins), market exchange and precious metals, then, appears
to be misplaced. The key is debt, and specifically, the ability of the state to
impose a tax debt on its subjects; once it has done this, it can choose the form
in which subjects can ‘pay’ the tax. While government could in theory require
payment in the form of all the goods and services it requires, this would be
quite cumbersome. Thus it becomes instead a debtor to obtain what it requires,
and issues a token (hazelwood tally or coin) to indicate the amount of its
indebtedness; it then accepts its own token in payment to retire tax
Certainly its tokens can also be used as a medium of exchange (and means of debt
settlement among private individuals), but this derives from its ability to
impose taxes and its willingness to accept its tokens, and indeed is
necessitated by imposition of the tax (if one has a tax liability but is not a
creditor of the Crown, one must offer things for sale to obtain the Crown’s
In the transition from feudalism (a system in which money is
used, however, not a system that one would identify as a “monetary production
economy”, as Keynes put it) to capitalism (an economic system based on
production for market to realize profits), one finds a period of the emergence
and consolidation of national spaces of sovereignty during which kings
progressively gained power over the multiple princes and lords of their
territory, and battled with kings of other sovereign areas:
Until the seventeenth century the
borders of the various kingdoms were vague and constantly disputed in a state of
permanent warfare, and the politics of those days were nothing but war continued
by other means. (Boyer-Xambeu et al., 1994, p. 105)
‘transition’ period recorded several periods of monetary anarchy because of the
lack of control (but also the lack of understanding (Boyer-Xambeu et al., 1994))
of the monetary system by the kings and their administration. For complex
reasons, the value of coins became more closely associated with precious metal
content. What had begun as merely a “token” indicating the issuer’s debt took on
a somewhat mysterious form that contained intrinsic value. Part of the appeal of
precious metal coins was no doubt the fact that they would have value outside
the sovereign’s domain. Further, the issuer would not be able to “cry down” (see
below) the value of the coins below the value of embodied precious metal
(because the coinage could be melted down for bullion). Hence, while use of
precious metal in coinage began for technical reasons (to reduce counterfeiting
through limited access to the metal—see Heinsohn and Steiger 1983) or cultural
reasons (use of high status material—see Kurke 1999), regulation of the metal
content came to be seen as important to maintain the coin’s value. This created
a problem, however, by producing an incentive to clip coins to obtain the
valuable metal. When the king received his clipped coins in payment of taxes,
fees, and fines, he lost bullion in every “turnover”. This made it difficult to
maintain metal content in the next coinage. And, because international payments
by sovereigns could require shipment of bullion, this reduced the king’s ability
to finance international payments. Hence began the long history of attempts to
regulate coinage, to punish clippers, and to encourage a favorable flow of
bullion (of which Mercantilism represents the best known example—see Wray,
After private coinage was forbidden, the right to coin was
usually delegated to private masters that worked under contract (Boyer-Xambeu et
al., 1994, p. 45). The profit motive that drove the masters (but also the
money-changers, who were central intermediaries in the trafficking of coins
(Ibid., p. 62, p. 123)) led to conflicts between the king and the rest of the
agents involved in the monetary system, and widespread infractions existed:
clipping, debasement, billonage.[xxi]
Billonage was a very widespread
traffic with merchants (who bought the coins at a lower price to resell them at
a higher one), with money changers (who put faulty coins back into circulation
and kept only good ones), and even with royal agents (who collected funds in
every specie and sent only the worst ones to the treasury). From the sixteenth
century on, conviction for this practice systematically carried the death
sentence. But its eradication was much more effectively achieved by the legal
authorization to weigh coins in all kinds of transactions, which prevented coins
of different weight and fineness to be considered equivalent. (Ibid., p. 55)
The coins were rude and clumsy and
forgery was easy, and the laws show how common it was in spite of penalties of
death, or the loss of the right hand. Every local borough could have its local
mint and the moneyers were often guilty of issuing coins of debased metal or
short weight to make an extra profit. […] [Henry I] decided that something must
be done and he ordered a round-up of all the moneyers in 1125. A chronicle
records that almost all were found guilty of fraud and had their right hands
struck off. Clipping was commoner still, and when (down to 1280) the pennies
were cut up to make halfpennies and farthings, a little extra clip was simple
and profitable. […] Clipping did not come to an end before the seventeenth
century, when coins were machine-made with clear firm edges […]. (Quigguin,
196?, p[. 57-58)
kings actively fought any alteration of the intrinsic value of coins which
represented an alteration of the homogenous monetary system that they tried to
impose. This preoccupation also fueled the belief that intrinsic value
determines the value of money.
However, kings were solely responsible for the nominal value
of coins, and sometimes were forced to change that (Boyer-Xambeu et al., 1994),
by crying them up or down. Crying down the coinage (reducing the value of a coin
as measured in the unit of account—recall that nominal values were not usually
stamped on coins until recently) was an often-used method of increasing taxes.
If one had previously delivered one coin to pay taxes, now one had to deliver
two if the sovereign lowered the nominal value of coins by half (also
representing an effective default on half the crown’s debt). In any case, any
nominal change in the monetary system “was carried out by royal proclamation in
all the public squares, fairs, and markets, at the instigation of the ordinary
provincial judges: bailiffs, seneschals, and lieutenants” (Ibid., p. 47). The
higher the probability of default by the sovereign on his debts (including coins
and tallies), the more desirable was an embodied precious metal to be used in
recording those debts. In other words, coins with high precious metal content
would be demanded of sovereigns that could not be trusted.[xxii]
This probably explains, at least in part, the attempt to operate gold (or
silver) standards during the transition from monarchies to democracies that
occurred with the rise of capitalism and the modern monetary production economy.
Unfortunately, this relatively brief experiment with gold has misled several
generations of policymakers and economists who sought the essence of money in a
commodity—precious metals—and ignored the underlying credits and debts.
Eventually, we returned to the use of “pure token” money,
that is, use of “worthless” paper or entries on balance sheets as we abandoned
use of precious metal coins and then even use of a gold reserve to “back up”
paper notes. Those who had become accustomed to think of precious metal as
“money” were horrified at the prospect of using a “fiat money”—a mere promise to
pay. However, all monetary instruments had always been debts. Even a gold coin
really was a debt of the crown, with the crown determining its nominal value by
proclamation and by accepting it in payment of fees, fines and taxes at that
denomination. The “real” or relative value (that is, purchasing power in terms
of goods and services) of monetary instruments is complexly determined, but
ultimately depends on what must be done to obtain them. The monetary instruments
issued by the authority (whether they take the form of gold coins, green paper,
or balance sheet entries) are desired because the issuing authority will accept
them in payment (of fees, fines, taxes, tribute, and tithes) and because the
receivers need to make these payments. If the population does not need to make
payments to the authority, or if the authority refuses to accept the monetary
instruments it had issued, then the value of those monetary instruments will
fall toward their value as commodities. In the case of entries on balance sheets
or paper notes, that is approximately zero; in the case of gold coins, their
value cannot fall much below the value of the bullion. For this reason, the gold
standard may have been desirable in an era of monarchs who mismanaged the
With the rise of capitalism and the evolution of
participatory democracy, elected representatives could choose the unit of
account (the currency), impose taxes in that currency, and issue monetary
instruments denominated in the currency in government payments. The private
sector could accept these monetary instruments without fear that the government
would suddenly refuse them in payment of taxes, and (usually) with little fear
that government would “cry down” the currency by reducing the nominal value of
its debts. At this point, a gold standard was not only unnecessary, but also
hindered operation of government in the public interest. Through the 19th
and early 20th centuries, governments frequently faced crises that
forced them off gold; they would attempt to return but again face another
crisis. In the aftermath of WWII, the Bretton Woods system adopted a dual
gold-dollar standard that offered more flexibility than the gold standard.
However, this system ultimately proved to also have significant flaws and
effectively came to an end when the US abandoned gold. We thus came full circle
back to a system based on “nothing” but credits and debits—IOUs. Unfortunately,
substantial confusion still exists concerning the nature of money and the proper
policy to maintain a stable monetary system.
This brief history of money makes several important points.
First, the monetary system did not start with some commodities used as media of
exchange, evolving progressively toward precious metals, coins, paper money, and
finally credits on books and computers. Credit came first and coins, late comers
in the list of monetary instruments, are never pure assets but are always debt
instruments—IOUs that happen to be stamped on metal. Second, many debt
instruments other than coins were used, and preferred, in markets. Third, even
if debt instruments can be created by anybody, the establishment of a unit of
account was (almost always) the prerogative of a powerful authority. Without
this unit of account, no debt instruments could have become monetary instruments
because they could not have been recorded in a generalized unit of account but
rather only as a specific debt.
In the next section we turn to two specific case studies that
help to demonstrate the main principles we are advancing. The first case
provides a negative example—the supposed use of
tobacco as money in the early American colonies (a very similar story is told
about the use of animal pelts as money in Canada). This is often used as an
example of the use of a commodity as money, that can be extrapolated back
through time to explain the use of money in primitive society (indeed, Adam
Smith begins his “economic history” with a story about the exchange of deer for
beaver). We will argue that use of tobacco does not lend credence to the view
that “primitive money” took the form of a commodity. The second is a positive
example, examining the creation of monetary economies in African colonies. Here
the motives and processes that lead to the introduction of money into the
economy are clear, and, we believe, consistent with the story we are telling
about money’s origins.
Primitive Monies and Colonial Monies.
The best example put forward to make the case that tobacco
was a money-thing is the case of Virginia in the early 17th century:
Tobacco was an accepted medium of
exchange in the southern colonies. Quit rents and fines were payable in tobacco.
Individuals missing church were fined a pound of tobacco. In 1618, the governor
of Virginia issued an order that directed that “all goods should be sold at an
advance of twenty-five percent, and tobacco taken in payment at three shillings
per pound, and not more or less, on the penalty of three years of servitude to
the Colony.” […] Virginia was using “tobacco notes” as a substitute for currency
by 1713. These notes originated after tobacco farmers in Virginia began taking
their tobacco crops to warehouses for weighing, testing, and storage […]. The
inspectors at the rolling houses were allowed to issue notes or receipts that
represented the amount of tobacco being held in storage for the planter. These
notes were renewable and could be used in lieu of tobacco for payment of debts.
[…] Later, in 1755, the Virginia Assembly authorized the payment of tobacco
debts in money at two pence per pound. Fines in Virginia were payable in
tobacco. For example, a master caught harboring a slave that he did not own was
subject to a fine of 150 pounds of tobacco. The Maryland Tobacco Inspection Act
of 1747 was modeled after the Virginia statute. The Maryland statute required
tobacco to be inspected and certified before export in order to stop trash from
being put in the tobacco. […] Inspection notes were given for the tobacco that
was inspected. Those notes were passed as money in Maryland. The use of
warehouse receipts for tobacco and other commodities would spread to Kentucky as
settlers began to cultivate that region. (Markham, 2002, pp. 44-45).
appears that in these colonies, tobacco served as money. However, what the
preceding example actually shows is that the states of Virginia and Maryland
were heavily involved in the trade of tobacco (and other commodities too) which
was central to the economy of these states (Ibid., p. 35). By accepting tax
payments (or any other dues) in tobacco at a relatively high fixed price, they
could influence tobacco output by keeping prices up, and could make it easier
for farmers to pay their taxes. This, however, does not qualify the payment as a
monetary payment but rather as a payment in kind at an exchange ratio (or price)
that was administered by authorities. This payment in kind allowed debtors and
creditors to settle their debt positions. As Markham put it clearly right after
the passage quoted above:
One method for financing private
transactions in the colonies was through records of account kept by tradesmen
and planters. Credits and debits were transferred among other merchants and
traders. This was a form of “bookkeeping barter” in which goods were exchanged
for other goods, and excess credits were carried on account. The barter economy
that prevailed in the colonies required “voluminous record-keeping … to carry
over old accounts for many years.” This practice would continue through the
eighteenth century […]. (Ibid., p. 46)
money was present in this example in two ways: first via the unit of account (in
English pounds, shillings, and pennies) and as a non-transferable debt
instrument via the records on the books. Also note that the author actually
makes a distinction between a medium of exchange (tobacco) and a money of
account: the payment of tobacco debts is made possible “in money at two pence
per pound.” This clearly shows that tobacco was not a money-thing, but rather a
commodity with an administered price.[xxiii]
The “bookkeeping barter” was a system of credits and debits kept in the money of
account. While tobacco was not a monetary instrument, tobacco notes were debt
instruments representing so many units of tobacco, and with these units valued
in the money of account at the administered price.
The cases of creation of colonial monies offer a fairly
transparent example of the purposeful introduction of money into societies that
had not previously used money. We will look at the problem faced by colonizers
of Africa when they tried to monetize the economy.
Mathew Forstater argues that colonial Africa offers an
excellent source of examples of monetization of economies through imposition of
taxes because these are recent cases with accurate records.
Colonial governments thus required
alternative means for compelling the population to work for wages. The
historical record is clear that one very important method for accomplishing this
was to impose a tax and require that the tax obligation be settled in colonial
currency. This method had the benefit of not only forcing people to work for
wages, but also of creating a value for the colonial currency and monetizing the
colony. […] [A]lthough taxation was often imposed in the name of securing
revenue for the colonial coffers, and the tax was justified in the name of
Africans bearing some of the financial burden of running colonial state, in fact
the colonial government did not need the colonial currency held by Africans.
What they needed was for the African population to need the currency, and that
was the purpose of the direct tax. (Forstater, 2005a, p. 55, p. 60)
examined the specific case of the British colonial government of Central Africa.
The immediate needs of the Pioneers
were for land and the labor to make that land productive. Conquest provided the
Pioneers with the land [...] Labor was another matter. Slavery, seizing local
people and forcing them to work on the land, had become reprehensible in
European eyes [...] In any case, in the beginning the Pioneers assumed – it
seemed obvious to them – that labor would be forthcoming to work the land if
wages were offered. Wages were offered, but Bantu did not come forth to work the
land. The solution imposed by the Pioneers was a requirement that a head tax be
paid in money, thus requiring that Bantu work to earn the money to pay the tax
(Neale, 1976, p. 79)
This was a
common experience throughout Africa. For example, Magubane examined the case of
Every adult African male was
required to pay a labour tax of two pounds, with another two pounds for the
second and each additional wife of a polygamist […]. (Magubane, 1979, p. 48)
As Neale notes, imposition of taxes
to obtain labour ‘was not a happy solution’; the indigenous peoples ran off ‘as
soon as they had earned the money required to pay the tax’; the pioneers ‘quite
rightly as they saw the world, thought the Bantu shiftless, lazy, dishonest,
incompetent, and irresponsible’, while the Bantu ‘quite rightly as they saw the
world, thought the Pioneers threatening, brutal, and at least somewhat crazy’
(Neale, 1976, pp. 79–80). Over time, tribal life was destroyed. As Neale argues
‘to “blame it all on money” would be wrong’, but the indigenous people
increasingly ‘came to need and then to want money and the things money would buy
[…] money was certainly an important element in changing the lives of the
descendants of both white and black in Central Africa’ (ibid., 1976, pp. 80–81).
Thus taxation in the form of money in the colonies not only
assisted in the destruction of the traditional economies, but also helped in the
development of monetary economies. This is not meant to imply that taxation
alone would be sufficient to induce market production for money. Colonists
sometimes found it necessary to eliminate alternatives to markets, for example,
by destroying crops that allowed self-sufficiency. Or, colonists created a
demand for luxury or status goods by destroying egalitarianism in order to
create an upper class wanted goods from markets. That other means were used in
addition to imposition of monetary taxes shows just how incorrect the textbook
story is. Far from a ‘social consensus’ to use money as an efficient alternative
to barter, development of a monetary economy in many of the colonies required
imposition of taxes and use of force. As Rodney argued only a ‘minority eagerly
took up the opportunity’ (Rodney, 1974, p. 157) to produce cash crops in order
to obtain European goods – and this is after they had been exposed to them. It
is far more difficult to believe that individuals in a traditional society would
hit upon the idea of producing crops for market to obtain money in order to
obtain goods which did not even exist!
In conclusion, the colonial authorities were faced with the
problem of inducing indigenous populations to supply labour; they realized that
simply offering money – even if in the form of gold or silver coins – would not
call forth the required labour. Nor was enslavement, or other forms of
compulsion, generally acceptable or successful at this time. Thus they relied on
imposition of taxes, payable (usually) in the form of the European currencies
that could only be obtained from the colonizers. This would not only generate
the labour needed by the colonialists, but it would also help lead to the
destruction of tribal society and the creation of a monetary economy.[xxiv]
Clearly, as the European money had to come initially from the colonists, taxes
could, at best, only return money the governor had spent. The origin of the tax
was not to raise monetary revenue, but to provide real goods and services to the
governor (and, eventually, to induce cash crop production).
Finally, the example of the colonial governors may be more
important than is readily apparent, for here is a case in which taxes are
imposed by an external authority whose only legitimacy in the eyes of the
population might be threat of use of force. The transition might have been
smoother if the state’s authority to levy taxes had been seen as derived from
democratic principles. However, the power to tax and to define the form in which
the tax would be paid set in motion the process of monetization of the economy.
The important point is that ‘monetization’ did not spring forth from barter; nor
did it require ‘trust’ – as most stories about the origins of money claim.[xxv]
All this shows that reducing the study of money to the study
of a medium of exchange or a means of payment can lead to confusion. It is
likewise confusing to equate tribal society exchange with monetary exchange.
Transactions with “primitive money” or “special purpose money” should be seen as
a transfer of “treasure items, wealth, valuables, and heirlooms” (Dalton, 1965
(1967), 277), i.e. a transfer in kind, rather than as a monetary payment. The
problem is that the westerner who is accustomed to use of money as a medium of
exchange will try to find money in primitive society. As Grierson put it:
The nature and functioning of most
‘primitive’ currencies are known to us only through the reports of casual
travellers, colonial administrators, or professional anthropologists, who will
not always have realized what questions to ask, when they have been in a
position to ask questions at all, or how best to interpret the answers they
received. (Grierson, 1977, p. 13)
To sum up, an
object can qualify as currency only if it is monetized. The monetization does
not rest on the fulfillment of some specified function such as medium of
exchange, store of value, or means of payment. To determine whether something
has been monetized one should check if the thing is, first, an acknowledgement
of debt (that is, something issued in payment, and something that the issuer
promises to accept back in payment), and, second, that its nominal value is
clearly defined (either by proclamation or by inscription) in terms of a unit of
account. An object can also be involved in the monetary system by giving the
name to the unit of account (such as a unit weight of barley or of silver).
However, this does not necessarily qualify the object as currency unless it has
been monetized. If the commodity has been monetized, it may have a value that
differs from the unit of account, e.g. one cowry shell can be worth 2 cowries of
unit of account, depending on what the issuer decides.[xxvi]
Conclusion: Modern Money.
In this chapter we briefly examined the origins of money,
finding them in debt contracts and more specifically in tax debt that is levied
in money form. Similarly, we argued that coins were nothing more than tokens of
the indebtedness of the Crown, or, later, the government’s treasury.
Significantly, even though coins were long made of precious metal, it was only
relatively recently that gold standards were adopted in an attempt to stabilize
gold prices to try to stabilize the value of money. We do not have the space
here to examine in detail the (mostly) 18th and 19th
century experiments with gold standards, however, it would be a mistake to try
to infer too much about the nature of money from the operation of a gold
standard that was a deviation from usual monetary practice. Throughout history,
monetary systems relied on debts and credits denominated in a unit of account,
or currency, established by the authority. Adoption of a gold standard merely
meant that the authority would then have to convert its debts to gold on demand
at a fixed rate of conversion. This did not really mean that gold was money, but
rather that the official price of gold would be pegged by the authority. Hence,
even the existence of a gold standard—no matter how historically insignificant
it might be—is not inconsistent with the alternative view of the history of
In truth, we can probably never discover the origins of
money. Nor is this crucial for understanding the nature of the operation of
modern monetary systems, which have been variously called state money or
chartalist money systems. (Knapp 1924, Keynes, 1930; Goodhart 1998, Wray 1998)
Most modern economies have a state money that is quite clearly defined by the
state’s ‘acceptation’ at ‘public pay offices’. (Knapp, 1924) The operation of a
state money can be outlined succinctly: the state names the unit of account (the
dollar), imposes tax liabilities in that unit (a five dollar head tax), and
denominates its own “fiat money” liabilities in that account (a one dollar
note). It then issues its own liabilities in payment, and accepts those in
payment of taxes. As Davies notes, this necessary link between public spending
and money was far more obvious in the Middle Ages:
Minting and taxing were two sides of
the same coins of royal prerogative, or, we would say, monetary and fiscal
policies were inextricably connected. Such relationships in the Middle Ages were
of course far more direct and therefore far more obvious than is the case today.
In the period up to 1300 the royal treasury and the Royal Mint were literally
together as part of the King’s household. (Davies, 2002, p. 147)
There are two real world complications that require some
comment. First, most payments in modern economies do not involve use of a
government-issued (state, “fiat”) currency; indeed, even taxes are almost
exclusively paid using (private) bank money. Second, government money is not
emitted into the economy solely through treasury purchases. In fact, the central
bank supplies most of our currency (paper notes), and it is the proximate
supplier of almost all of the bank reserves that are from the perspective of the
nonbanking public perfect substitutes for treasury liabilities. Obviously if we
simply consolidate the central bank and the treasury, calling the conglomerate
“the state”, we eliminate many complications. When one uses a bank liability to
pay “the state”, it is really the bank that provides the payment services,
delivering the state’s fiat money, resulting in a debit of the bank’s reserves.
When the state spends, it provides a check that will be deposited in a bank,
leading to a reserve credit on the books of the bank. Note that payments using
bank money within the private sector merely cause reserves to shift from one
bank to another, thus can be entirely ignored. Leaving aside for a second
actions initiated by the central bank, only payments to the treasury or cash
withdrawals from banks cause a reduction of banking system reserves, while
payments by the treasury result in reserve credits.
But the treasury is not the only source of reserve injections
or deductions. Central banks principally provide reserves at the discount window
or through open market purchases of sovereign debt, foreign currencies, or gold.
They also can drain reserves by reversing these actions: unwinding loans or
through open market sales. In addition, central banks engage in various
transactions with their treasury, however, these internal actions have no
implications for the nonstate sector. For example, a central bank might buy
treasury debt and credit the treasury’s deposit at the central bank, but this
has no impact on banking system reserves until the treasury “uses” its
deposit—perhaps by purchasing labor or output from the private sector.
Many economists misunderstand the nature of the internal
accounting procedures followed by the Central Bank and Treasury—procedures that
are self-imposed. For example, in the US, the Treasury spends by drawing on an
account it holds at the Fed, relying on the Fed to debit its account and credit
a bank’s reserves. It would be more transparent if the Treasury simply spent by
crediting a private bank account directly. Similarly, taxpayers send checks to
the Treasury, which deposits them at the Fed, leading to a credit to the
Treasury’s account and a debit to the private bank’s reserves. Again, it would
change nothing if the payment of taxes simply led to a direct reduction of bank
reserves by the Treasury. Things are made even more complex because the Treasury
maintains accounts at private banks, depositing its tax receipts, then moving
the deposits to the Fed before spending. Obviously, so long as Treasury deposits
are held within the banking system, there is no impact on banking system
reserves, and, hence, Treasury deposits at private banks can be ignored—because
the bank simply debits the taxpayer’s account and credits the Treasury’s
We will not pursue here any of this accounting in more
detail; readers are referred to Wray (1998) and Bell (2000). The only thing that
must be understood is that the state “spends” by emitting its own liability
(mostly taking the form of a credit to banking system reserves). A tax payment
is just the opposite: the state taxes by reducing its own liability (mostly
taking the form of a debit to banking system reserves). In reality, the state
cannot “spend” its tax receipts which are just reductions of outstanding state
liabilities. When a household issues an IOU to a neighbor after borrowing a
gallon of milk, it will receive back the IOU when the debt is repaid. The
household cannot then “spend” its own IOU, rather, it simply tears up the note
(this was also true with gold coins, which were government liabilities: once
received in payment of taxes, coins were usually melted down to verify the gold
content and ensure that clipping did not occur (Grierson, 1975, p. 123)). This
is effectively what the state does with its tax “receipts.” Essentially, then,
the state spends by crediting bank accounts and taxes by debiting them. And all
of this works only because the state has first exerted its sovereignty by
imposing a tax liability on the private sector.
We thus conclude this story about the origins and nature of
money. Money is a complex social institution, not simply a “thing” used to
lubricate market exchanges. What is most important about money is that it serves
as a unit of account, the unit in which debts and credits (as well as market
prices) are denominated. It must be social—a socially recognized measure, almost
always chosen by some sort of central authority. Monetary instruments are never
commodities, rather, they are always debts, IOUs, denominated in the socially
recognized unit of account. Some of these monetary instruments circulate as
“money things” among third parties, but even “money things” are always
debts—whether they happen to take a physical form such as a gold coin or green
paper note. While one can imagine a “free market” economy in which private
participants settle on a unit of account and in which all goods and assets
circulate on the basis of private debts and credits, in practice in all modern
monetary systems the state plays an active role in the monetary system. It
chooses the unit of account; it imposes tax liabilities in that unit; and it
issues the money thing that is used by private markets for ultimate clearing.
Any story of money that leaves out an important role for the state represents
little more than fantasy, a story of what might have been, that sheds little
light on the operation of real world monetary systems.
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course not all acknowledgements of debt are monetary in nature, i.e. do
not respect the following characteristics. One may, for example, give to
another person a piece of rock or whatever and promise to take it back,
but, if no relation to a unit of account is established, the piece of
rock is just a reminder that some owes some else something. This could
be used to show the social status of a person in primitive societies. In
this sense, the famous “stone-money”, does not seem to qualify as a
monetary debt instrument.
[ii]The idea that a
monetary instrument is a money-thing because it is generally acceptable
is not a good criterion. Today, coins and notes can be refused in
payment at stores so they are not “generally” taken in payment.
Continuing with this criterion would then lead to inquire what
proportion of acceptance (100%, 90%, 80%) would be the appropriate
amount for “generally”—leading to more confusion about the nature of
Miller (1968) shows nice examples of “emergency money” used during the
depression years in the US and notes that: “while much of the scrip was
technically illegal, no government action was ever taken” (Ibid., p.
89). During sieges, this kind of emergency monetary instruments was also
Related to this is the fact that some notions, like property,
redistribution or social rank, do not apply to all kinds of societies
and so should be used very carefully (at least a definition of what is
meant should be provided).
example, early coins did not have any value in terms of unit of account
written on them. They may have a name (like écu du soleil, real, gros
tournois, ducat, penny, dime, or quarter) but this does not tell
anything about the unit of account. As Grierson said, a full description
of each coins requires the statement of the unit of account (main
denomination and sub-denomination) like a “penny of 2 pence” or a “gros
of 4 deniers” (Grierson, 1975, p. 88).
importance of private property for the history of money has been put
forward by Heinsohn and Steiger (2000).
Polanyi (1957 (1965), p. 181) reserves the word “payment” for the
quantitative fulfillment of obligations but in a more general sense, “to
pay” means “to pacify” (Innes 1913) so even qualitative fulfillment can
be called a payment.
one accumulated resources s/he must consumed, destroy them, or share
them with other members of the tribe. This, at the same time, increases
the social status of the giver.
(1997) also notes the ‘ancient’ origins of tallies and quotes Anthony
Steel to the effect that ‘English medieval finance was built upon the
tally’ (Davies, 1997, p. 147). The word tally seems to have come from
the Latin talea which means a stick or a slip of wood; notches in sticks
had long been used for recording messages of various kinds (Davies,
1997, p. 147). Note that one of the most common ‘notches’ was the score,
which indicated 20 pounds; a one pound notch was a small groove the size
of a barley grain – see the discussion below.
merchants may have brought goods to the market to use to settle
accounts, with a retail trade developing from this practice. Admittedly,
the view expounded by Innes is controversial and perhaps too extreme.
What is important and surely correct, however, is his recognition of the
importance of the clearing house trade to these fairs. He also noted
that such clearing house fairs were held in ancient Greece and Rome, and
in Mexico at the time of the conquest.
[xi] It is
possible that the early Egyptian empires had taxes, debts and money;
however, only a few examples of papyrus paper credits and debits
[xii] It is
true that there are coins of base metal with much lower nominal value,
but it is difficult to explain why base metal was accepted in retail
trade when the basis of money is supposed to be precious metal.
is often asserted that coins were invented to facilitate long distance
trade (as precious metal coins would have high value relative to
weight). As Grierson notes ‘The evidence, however, is against the
earliest coins having been used to faciliate trade of such a kind, for
the contents of hoards points overwhelmingly to their local circulation’
(Grierson, 1977, p. 10).
Grierson also advances this thesis: ‘The alternative view is that since
coins were issued by governments – the supposed issue of the earliest
coins by merchants is unproven and unlikely – it was administrative
rather than economic needs they were intended to serve. Such needs
would have included the payment of mercenaries . . .’ (Grierson, 1977,
Crawford suggests that ‘[c]oinage was probably invented in order that a
large number of state payments might be made in a convenient form and
there is no reason to suppose that it was ever issued by Rome for any
other purpose than to enable the state to make payments . . .’
(Crawford, 1970, p. 46). Further, ‘[o]nce issued, coinage was demanded
back by the state in payment of taxes’ (ibid.).
wooden tallies were supplemented after the late 1670s by paper ‘orders
of the exchequer’, which in turn were accepted in payment of taxes
(Grierson, 1975, p. 34). The ‘tallia divenda’ developed to allow the
king to issue an exchequer tally for payment for goods and services
delivered to the court.
Davies similarly notes the importance of the tallies for payment of
taxes and the development of a clearing system at the exchequer (Davies,
1997, pp. 146–8).
This poses the interesting question of the origins of the word “bank.”
The most common origin given to the word is given by Boyer-Xambeu et al.
(1994, p. 62): “The origins of the term (from the Italian banchieri)
clearly shows that the banks was dived from the money changer’s ‘bench,’
not primarily from loans.” However, Kregel (1998, pp. 15ff.) challenged
this view: “It is generally believed that the English word ‘bank’ is
derived from the Italian ‘banco’, which is thought to derive from the
bench or long table used by money changer […]. The similarity between
the two words is misleading, and most probably mistaken. Rather, the
historical evidence suggests that the origin of the English ‘bank’ comes
from the German ‘banck.’ This is the German equivalent of the Italian
‘monte’, which means a ‘mound’ or a ‘store’ where things are kept for
future use. […] The modern English equivalent would be ‘fund’, which is
the name used in England for the public debts of the English sovereign.
[…] Thus the first Venetian ‘Banck’ or Monte, created in order to
finance Venetian war expenditure also produced the first secondary
market in which the certificates could be exchanged.” This alternative
view of the origins of the word ‘banks’ thus clearly contradicts the
first view: the first purpose of banks was to create loans. If one goes
back to Mesopotamia in 3100 B.C., the relevance of the second
interpretation becomes clearer. The temples and palace acted as bankers
by providing loans, essentially in terms of advances of raw materials,
capital assets, or barley products for consumption (monetary loans
existed but were limited (Hudson, 2000, p. 25)), recorded on clay
tablets (Van De Mieroop, 2000): the first role of banks were to act as
clearing house (matching debts and credits by establishing obligations
recorded on tablets and checking if obligations were fulfilled) and
also, that use of the hazelwood tallies continued in England until 1826.
Ironically, the tallies went out in a blaze of glory, or of ignominy,
depending on one’s point of view. After 1826, when tallies were returned
to the exchequer, they were stored in the Star Chamber and other parts
of the House of Commons. ‘In 1834, in order to save space and economize
on fuel it was decided that they should be thrown into the heating
stoves of the House of Commons. So excessive was the zeal of the stokers
that the historic parliament buildings were set on fire and razed to the
ground’ (Davies, 1997, p. 663).
is, even most private transactions took place on credit rather than
through use of coin as a medium of exchange. McIntosh notes in a study
of London of 1300–1600:
Any two people might build up
a number of outstanding debts to each other. As long as goodwill between
the individuals remained firm, the balances could go uncollected for
years. When the parties chose to settle on an amicable basis, they
normally named auditors who totaled all current unpaid debts or
deliveries and determined the sum which had to be paid to clear the
slate. (McIntosh, 1988, p. 561)
Billonage is defined as: “1) sale of coins at their legal value after
buying them at the price of unminted metal; 2) taking coins of a better
intrinsic out of circulation.” (Boyer-Xambeu et al., 1994, 209).
Indeed, the creation of the Bank of England can be traced to a default
by the crown on tally debts that made merchants reluctant to accept the
king’s promises to pay. Hence, the Bank of England was created
specifically to buy crown debt and to issue its own notes, which would
circulate (with the help of laws that effectively eliminated circulation
of bank notes issued by rivals). See Wray 1990.
Grierson (1977, 16-17) used this criteria to differentiate “money” and
“money substitutes”: However, this only criteria of fixed price relative
to the unit of account fail to consider the other criteria of the
necessity to be an acknowledgement of debt.
Neale and others emphasize, this was not always a happy, smooth process
even when colonizers might have had good intentions.
similar story could be told about the creation of a monetary economy out
of the feudal European economy. While money and markets had existed for
many centuries, the feudal economy of Europe was largely
‘non-monetized’, with most production done by peasants for their own
consumption or to be provided as an in kind payment of rent to feudal
lords. Just as in the case of the African colonies, taxation payable in
money form (and imposition of rents in money form) induced production
for markets and helped to destroy the traditional economy. (See Aston
and Philpin, 1987, and Hoppe and Langton, 1994.)
more familiar case for this materialization of the unit of account is of
course the existence of coins that were supposed to be representative of
the unit of account. But, as Innes says, “nobody has ever seen a
dollar”: units of account are purely abstract concepts. Thus the
disappearance of the coins supposed to represent a monetary unit did not
alter in any way this unit.