Money Did Not Come From Barter - It Came From Blood Feuds

Professor L. Randall Wray, discussing the origin of money, which forms the foundational conception of money in Modern Monetary Theory. The usual origin story for money as given by economists is that humans began by bartering in markets, but that this was difficult because of the "double coincidence of wants" problem: I have to have something you want and you have to have something I want, right now, or else we can't trade. From this, a medium of exchange is selected by an evolutionary process, beginning with seashells and beads, and eventually settling on gold.

Then, the story goes, people discover that gold is sort of burdensome to carry and difficult to protect, so they arrange to keep it with the village goldsmith. The goldsmith hands out receipts, and people realize that these receipts can be used as money in place of the gold. This is, supposedly the beginning of paper money. Then the goldsmith realizes that not everybody will come to claim their gold on the same day, so the goldsmith can create receipts from thin air and spend or lend them as money. This is, supposedly, the origin of bank lending, or credit money.

The biggest problem with this story is that there's no historical evidence for it whatsoever, nor do we observe barter-based markets today within the tribal societies that are still around. The reason is obvious: if you're living in a small tribe, you know everybody. You don't need exact, proportional, spot-trade equivalence of the kind used in barter if you're doing all of your business with your cousin, or your neighbor. In practice, we find that these kinds of societies arrange themselves along informal credit relations: I'll help you out a bit here, then you'll help me out with something else later.

This is problematic for the barter story because it doesn't involve quantitative relations, ie. there are no prices. When you are engaged in repeated informal credit with your cousin, you don't need to keep track of exactly who owes whom how much, nor what kind of goods are exactly equivalent to other goods.

The time when you DO want exact proportional equivalence is during punishment for crimes. This is the ancient tribal tradition of "weregild," or "man price," in which tribal societies would draw up detailed codes of law specifying fines imposed for specific crimes. Without these kinds of legitimated official punishments, violence would tend to cycle into blood feuds. Weregild is instituted in tribal societies to stop the blood feuds and revenge cycles.

So while exchange of goods for daily subsistence involved no prices, these lengthy schedules of fines would have exact, detailed prices for everything to be found in the village, to tell you what sort of payment would absolve you of your crimes. If the prices weren't viewed as fair, then the warring families would not be satisfied and the revenge would ensue.

From these fine schedules arises naturally the concept of the "unit of account," that is, money as a social measuring unit, which is used to measure the value of things. Almost always a measure of a weight of grain, this could serve as a common basis for specifying fines. Ie. cutting off somebody's ear would require paying 50 shekels, while cutting off their nose would require 70 shekels, etc, which a detailed listing of how many shekels a chicken was worth, how many a cow was worth, etc.

Next, as societies grew larger such that not everybody knew all of their neighbors, the concept of rough credit equivalence was transformed into exact credit. That is, instead of an informal IOU between neighbors, you could record (in some form) an IOU for an exact quantity, and this IOU could be transferable. These IOUs would get denominated in the unit of account used for the schedule of fines, and connote a obligation for general value ('you owe somebody something worth 50 shekels') rather than a specific good ('you owe me 10 pigs').

And finally, the schedule of fines would be managed by some sort of authority, which today we would call "the state." Fines might have originally began as payments to the victim's family, but along the way became payments directly to the authority, for use in the "public purpose." The authority could also issue IOUs in exchange for goods, and did so. When authorities would levy these fines, they would have realized that they could require the fine to be paid in the authority's own IOU, which would create a demand for that IOU (also denominated in the unit of account). The authority would be able to spend its IOUs to anybody in the community, then that person would spend that IOU with the person who owed the fine, and finally that person would use that IOU to satisfy the fine.

Today we call these state IOUs "currency" and we carry them around in our wallets.