Money, Part I
The long history of (free)
I will start a series explaining what money actually is. I have been pondering the essence of money for close to 30 years, and I think it’s time to reveal what I have discovered. I will also write a book about it. I think that money or, more precisely, our current misconception of it, is behind most of our economic woes.
We will start the series with a very revealing historical summary on the origins of money. These posts will be free to all.
Money has been my interest for a long time. This is naturally no surprise as my first memories of the economy are from the era just before the early 1990’s banking crisis of Finland. My first living memory of money is a TV-commercial of now defunct Saving’s Bank Group. In it people were hauling a barrow full of money from a bank stating “come get yours”. Even as a pre-teen I understood that this cannot end well, and it didn’t.
In this first part of what is likely to be a long series of blogs, I will settle one persistent misconception about money. This is that “real money” would be something to do with gold, silver or whatever precious metal or ‘cryptography’. The simple fact is that even history of money does not support the view “gold-bugs” or “crypto-bugs”.
Money, at a very rudimental level, is just a mean of exchange, and as such it has come to be.
The early days
People have traded for a very long time, possibly even since the becoming of Homo Sapiens. Over the millenia, trade has consisted of many different kinds of commodities. We know that, for example, obsidian, a black volcanic glass originating from Cappadocia, central Turkey, was traded to Cyprus and the Zagros mountains on the borders of Irag and Iran as early as 7000 B.C.1
Moreover, mysterious ‘tokens’ have been found all over the historic sites of Near East, and date to around 7000 B.C.2 No definite explanation to what these tokens were used exists, but one can argue that they could also have acted as an early form of money.
Current archaeological research has established that the measurement of economic interactions, i.e. accounting, predates writing.3 The clay tablets discovered at the birthplace of Mesopotamia, the Temple of Uruk, were used as an accounting tool for commodities and even for human labor as early as 3100 B.C. Some financial archaelogists even claim that writing was invented just to improve the efficiency of economic trade (through more efficient) accounting.
In the ancient Mesopotamian city of Ur, in modern Iraq, where while silver and barley were often used as contract measurements, everything was based on accounts.4 There are clear indications that contracts or payments, accounted in clay tablets, were credited to individuals. That is, the '“tabs” of merchants and financiers mimicked currency. This implies that the “clay” profits were counted as real and the financier’s debt served as money. Thus, accounting and credit, were the principles of ancient Mesopotamian monetary system.
It is very likely that the first accounting practices were invented to make trade more efficient, and then debt was invented to improve the efficiency even more. Most likely, they were invented at the same time, while “debt”, in its essence, could have existed even longer. The main point is that they were not tied to gold or silver or to another precious metal. They (accounting and debt) were already then wholly abstract entities created to enhance trade and act a money.
Ancient China
Cowries (seashells) and bone imitation cowries had been used Chinese civilizations at least since the pre-Bronze age (before 3300 B.C.).5 The question is, have they been used as coins or maybe just status items? According to the current financial archaeological research, this remains an open question.
However, the founder of the Qin dynasty, Qin Shi Huang, abolished the use of cowries as money implying that, at least, in 221 B.C., cowries were used as money.6 Yet using cowries as money persisted in Yunnan till the fourteenth century C.E.
Cowries actually fit quite nicely to the requirements of coinage. They last thousands of years, they are uniform in size, easily recognizable and portable. They were also rather hard to come by, because the rarity of cowries in the Yellow River basin, meaning that their (money) supply was relatively fixed.7
These historical records imply that cowries may have very well been used as money in ancient China possibly for thousands of years B.C.
The stone money of Yap
Probably the most striking example “money” was found from a small island, Yap, in the Pacific. The island eventually became a part of the German Empire in 1899. Then it was revealed, by a American adventurer William Henry Furness III, that the island had a rather sophisticated monetary system. This was striking as the market in Yap included just three products: fish, coconuts and sea cucumber (the only “luxury” item).
Furness expected to find just a barter system, but the very opposite appeared. The monetary system of Yap consisted of fei, which were large, solid, thick stone wheels ranging in diameter from a foot to twelve feet.8 Moreover, because of the simple cumbersomeness of it, transfers of fei from one household to another were rare. Still numerous transactions took place, and even when the balances would require settlement, the fei often remained at the former owner’s premises.
So, the good people of Yap had not invented and used a totally inpractical currency (meaning that it would not change hands), but they had a credit system. We can safely assume that this system had been in use for a very long time. Moreover, both the ‘Yappian’ money and credit were thus probably invented at the same time.
Probably the most prominent economist of the 20th century, John Maynard Keynes, wrote after he had been informed on the findings of Furness III that:
[Furness III] has brought us into contact with people whose ideas on currency are probably more truly philosophical than those of any other country. Modern practice in regard to gold reserves has a good deal to learn from the more logical practices of the island of Yap.9
At that moment, J.M. Keynes probably had his epiphany on the nature of money, which stated that money did not start nor was it, philosophically, a commodity, but an abstract entity.
Money as an entity
Our current historical knowledge on money tells a compelling story on its origins. Money was invented to enhance trade and we as a humanity absolutely did not transfer from a barter economy to precious metals. Gold was used as an asset in Egypt at least 3000 years ago in different forms, but it’s not the origin of money. Gold is not “real money”.’
Money is a complex societal entity, which cannot be described with one axiom or meaning. Money has had one major function ovet time: to enable and enhance trade, and humans have traded for a very long time. This directly implies that money have been around for a very long time.
The really interesting question is, why hasn’t money evolved with the economy? If we look at development of finance and its origins (simple debt relations; more on this later), it has developed massively especially during the past 50 years. Yet, money has effectively remained the same (even though it has been ‘digitalized’).
Are we sure that money has not developed also, but we have just failed to acknowledge it? I think we have missed something major in our monetary system that has led us to the current “monetary catastrophe”.
Coggan, Philip (2020, p. 15). More: The 10,000-Year rise of the World Economy.
See, Goetzman, W.N. (2017, p. 148): Money Changes Everything: How Finance Made Civilization Possible.
See, e.g., Goetzman, W.N. (2017, p. 23): Money Changes Everything: How Finance Made Civilization Possible.
See, Goetzman, W.N. (2017, p. 42, 51): Money Changes Everything: How Finance Made Civilization Possible.
See, Goetzman, W.N. (2017, p. 148): Money Changes Everything: How Finance Made Civilization Possible.
See, Goetzman, W.N. (2017, p. 148): Money Changes Everything: How Finance Made Civilization Possible.
See, Goetzman, W.N. (2017, p. 148): Money Changes Everything: How Finance Made Civilization Possible.
See, Martin (2014, p. 3-5): Money: The Unathorized Biography.
See J.M. Keynes (1915): The island of stone money. The Economic Journal, (25)98: 281-283.
Usually money has been defined to have three properties:
- medium of exchange
- unit of account
- store of value
In the recent years I've started to question if it's really necessary to have all these three features in the same thing. What if the economy had two or three different things that had one or two these properties?
Maybe even more? Who says that everyone has to use the same thing for the store of value or unit of account?
Thank you for this first installment. I look forward to reading further developments, wherein additional social/economic functions of money (store of value, unit of account) are discussed.
Just as Keynes saw a connection between Yap stones and gold reserves, he too must have been struck by how the money-concept was sufficiently ingrained in Yap society that whatever method was used to keep accounts straight (possibly just collective memory), it was a social good, as much as a common language is a social good for a society. But unlike a common language, the Yap money system requires a certain level of social trust, in the sense of what some now refer to as 'high-trust' and 'low-trust' societies.
If Yap society had seen a substantial influx of non-Yaps, I suspect that the stone-money system would have been confined to native Yaps, or may have disappeared altogether as the level of social trust declined.
Countries like Finland and Japan must be among the highest-trust societies, which makes them among the nicest places to live. I wonder how the coming crisis will change the overall social trust of the countries it affects.