Saturday, March 5, 2011

The Origins of Money

The conception of the origin of money I alluded to in my earlier post about liberalism is not, of course, the one with which most people are familiar.

In the standard telling, originally people used a barter economy, where (to oversimplify the story a bit) a chicken farmer would carry some eggs to market and exchange them for other things he needed, like sugar or flour.

Eventually certain commodities, especially precious metals but also fishhooks and other oddities, became accepted as the standard medium of exchange, leading eventually to paper currency that was "backed" by some commodity.

It's not clear exactly who originated this story, but it's been disproven for some time by anthropological research. The details of the story are interesting (if you like that sort of thing) but kind of involved, so if you really want to know the ins and outs of how money originated you can check out L Randall Wray's Understanding Modern Money. Thankfully the relevant portion is currently available on Google Books' preview so you can read it without finding a copy of the book.

The key point, though, is that money never really derived its value from any commodity, and did not evolve as a lubricant to the barter system (which never really existed.) Attempts have been made from time to time to peg the value of a currency to the price of a certain commodity (especially gold) but the value of money comes from its status as TWINTOPT - That Which Is Needed To Pay Taxes.


  1. have you read A. Mitchell Innes's "What is Money"? you can find it among mosler's suggested readings. extremely detailed and a bit of a slog, it paints an almost tragicomic history of monies. clearly always a creature of the state, though

  2. Yes, Innes is not very readable but he is very good. My favorite thing about that article is the bit of trivia that there once was a coin called the Half-Ass.