Economic Policy
July 12, 2022

Where Did it Come From? – A Note on the Origin of Money

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Overview

One of the most pondered questions in society is “why do we have money?” Many question why we cannot simply live in a society where people create the necessary resources and exchange with one another. This is a question that revolves around the origin of money. Those already versed in economics typically hold the barter theory of money, which was mainly developed by Adam Smith and Carl Menger; however, there are some contentions to this theory which have mainly come about due to anthropologist David Graeber and his book, Debt: The First 5000 Years. This article aims both to explain the barter theory of money and defend it from Graeber’s critiques. 


The Barter Theory of Money 

The barter theory of money is one that describes bartering as the basis for money. More specifically, it outlines that individuals within society have recognized the issues that arise by only engaging in barter exchange. From this recognition, people began to use different items as a medium of exchange until society found the most “marketable good” which would become the universal medium of exchange. One might first ask, “what is wrong with bartering as a means for exchange?” To answer this, we first have to understand the concept of bartering. Bartering is simply the exchange of one good or service for another without a medium to facilitate the exchange (i.e. direct exchange). For example, if person A were to trade fuel to person B in exchange for fur, then that would be a barter transaction. However, if person A were to give person B$20 for the fur, that would not be a barter transaction as there was no direct exchange of one good for another, but rather, an exchange of one good for a medium that would later be used to purchase a different good. 

The issue with bartering arises with something called the double coincidence of wants. A double coincidence in this context means that person A wants the good person B is selling, while person B simultaneously wants the good person A is selling. With bartering, this double coincidence must occur- in other words, person A must want what person B is selling and person B must want what person A is selling. This illustrates the difficulty person A faces when attempting to  acquire their desired goods or services, as they must have a good or service that the opposite party also desires AND is willing to exchange their goods or services for. Due to the unlikelihood of this occurring, person A is forced to go down a rabbit hole trying to find someone who has the good they desire who must also desire the good person A has in exchange. As stated before, this is vastly inefficient and unsustainable; therefore, the necessity of a medium is recognized. A medium allows individuals to exchange with one another without necessarily having a good that the other party desires  (i.e. indirect exchange). Initially, metals such as gold or silver became mediums of exchange because they were the most “marketable goods.” This meant that they were commodities that had such high value in society that everybody would accept them in an exchange, and they would do so for the sake of being able to exchange them for other goods rather than for their own use, thus facilitating exchange. People would thus accept a certain amount of gold or silver for whatever good or service they were selling because they could then use said gold or silver to purchase whatever it was they desired. This allows people within society to best attain their desired ends as they are not restricted to situations of double coincidence. Overall, this is the generally accepted theory of how money came to be in society, but like all theories, it has its critics. 


Defense Against Criticism

As acknowledged earlier on, the main critiques of this theory have stemmed from the anthropologist David Graeber and have since been adopted by Modern Monetary Theorists.Graeber found that there is an utter lack of anthropological evidence for the barter theory of money, meaning  he found that no barter economy has ever existed. This claim is also supported by anthropologist Caroline Humprhey. So, what is the reason for this? How can one continue to purport this theory after encountering this information? As economist George Selgin put, “The mere lack of historical or anthropological evidence of past barter economies is itself no more evidence against Smith’s account than it is evidence in favor of it.” The barter theory does not assert that entire economies existed for any long periods of time before  civilizations slowly adapted to the concept of money. Rather, it would assert that if certain economies did exist that fully relied upon bartering, they would either quickly find a medium of exchange or fall apart. This does not only explain why Graeber found a lack of evidence but can transform the critique into a support for the theory. From another point of view, the logic Graeber utilizes can be classified as survivorship bias. Survivorship bias would mean that Graeber does not acknowledge the possibility of the existence of a barter economy because it may not have made it past a certain point to which it would be “visible.” When reviewing Graber’s book, Julio Huato states “Graeber’s attitude is like that of a chemist rejecting the idea that unstable radioactive isotopes of a certain chemical element exist and tend to evolve into stable isotopes because the former are only exceptionally found in nature, while the latter are common.” This is not to say barter economies most certainly did exist, but rather to state that Graeber’s logic is unsound. Most importantly, even if it were to be assumed that a barter economy never existed, it does not entirely defeat this theory. This is because it can be acknowledged that bartering existed on some level, particularly between strangers. And if it existed on any level at all, it means that people were able to recognize the concept and could infer the problems that arise from it. The recognition of the concept is realistically all that is needed for the development of money, thus minimizing the critique Graber has while assuming its truth. 

Graeber’s criticism does not end there. It also holds that not only did barter economies not exist, but other economies labeled “gift-giving economies” did exist without money or bartering. Further, Graeber claims that credit came before money and bartering as illustrated by these “gift-giving economies.” A few issues arise here, but the first problem is Graeber’s conflation of barter with spot transaction barter. Bartering, as defined previously, is simply the direct exchange of one good or service for another for the sake of acquiring said good or service. No where is it implied that bartering must be a spot transaction, meaning the entire exchange occurs at one place at one time. Spot transaction bartering is still bartering, but so is intertemporal barter. Intertemporal bartering is simply barter with the specification that one good or service is delivered at a different time than the other. If person A gives person B a coat on Monday, and person B gives a lamp to person A on Tuesday, that would still be a barter transaction, as there was a direct exchange of two goods for the sake of acquiring said goods. When Graeber describes these gift giving economies, he’s really describing intertemporal bartering. The people that uphold his position describe it as debt; however, debt is not a contradictory concept to bartering. Once person A exchanges the coat to person B, person B is in debt to person A until they deliver them the lamp. If we change the example to say that person A and person B exchange goods at relatively the same time, we could still technically describe one as being in debt, it would just be for a significantly less amount of time. Typically, in an exchange, one person gives up their good first and then the second person gives up their good a few seconds after. By Graeber’s account, this cannot be bartering but is rather debt. Once person Agives up their good and does not receive the good they are owed, person B is in debt. This is meant to illustrate the absurdity behind the idea that debt and bartering are mutually exclusive concepts, as the concept of debt can be applied to almost every exchange. The only way this can be avoided is if Graeber or someone else were to apply an arbitrary time interval which establishes when someone goes “in debt.” Overall, it has been shown that these “gift-giving economies''can truly be classified as barter economies. However, it must be admitted that the context of these economies lies in small intertwined communities, thus, the problems of barter would not be as prevalent. This will be further expounded upon in the final section. 

Besides the concept of bartering itself and how it can be applied, Graeber’s principles can be assumed true, but his conclusion that credit came before barter is still wrong. This is because both were practiced but just in differing contexts. It can be admitted that earlier on, credit was most common among tightly knit communities while bartering was utilized by strangers. Graeber states, “Now, all this … hardly means that barter does not exist — or even that it’s never practiced by the sort of people Smith would have referred to as ‘savages’. It just means that it’s almost never employed, as Smith imagined, between fellow villagers. Ordinarily, it takes place between strangers, even enemies.” Now, Graeber does acknowledge the existence of bartering in certain contexts; however, he undermines its actual importance. Even if we were to assume his conception of barter, his acknowledgement ties back to the beginning of the justification for this theory. By him saying that it existed on some level, even assuming that level was minimal, this shows that people had grounds to recognize its imperfections thus inciting movement towards money. So as stated before, his acknowledgement of its existence from the beginning is enough to support this theory of the origin of money. It does not  matter if Smith did or did not claim it would occur within these tightly knit communities as it is not essential to the theory. It is not the “Smithian theory of money,” it’s the barter theory which has been added on to since Smith, specifically with thinkers like Carl Menger who most certainly have been left out of this conversation. 

Thinkers like Carl Menger are especially relevant when discussing the concept of “tightly knit communities.” This is because he himself admitted that money became more necessary as the division of labor and private property expanded because when there became a larger market for exchange, the double coincidence would become more apparent as more people are looking for more goods. On the flip side, he admits that smaller communities are capable of sustaining themselves without money. Menger had stated, “People had probably tried to satisfy their wants, over immeasurable periods of time, essentially in tribal and family no-exchange economies until, aided by the emergence of private property, especially personal property, there gradually appeared multifarious forms of trade in preparation for the exchange [of] proper of goods. …Only then, and hardly before the extent of barter and its importance for the population or for certain segments of the population had made it a necessity, was the objective basis and precondition for the emergency of money established.” So, it can be seen that what Graeber labeld “gift-giving economies” were capable of sustaining themselves without money, even when we classify it as bartering. And this is where the barter theory needs to include more context. Similar to what Menger said himself, the issue with bartering as the means to sustain a civilization is abruptly clear, however the expansion of the division of labor and goods available for trade is when the issues begin to actualize themselves. To exemplify this, think of a society in which there are only 100 people, and the only goods produced are food, clothing, and shelter. This would mean that there is a vastly limited amount of resources that a person could actually demand, and thus it is much easier for the double coincidence to occur. However, if we were to take the modern United States as an example, we would see that there are endless demands a person may have thus the chance of the double coincidence occurring decreases substantially. 


Conclusion 

All together, the barter theory of the origin of money has been explained and defended. This article has not aimed to debate the anthropologiucal truth of Graeber’s assertions but has focused on the conceptual mishaps in his arguments. For, the essence of the barter theory truly lies in the idea of recognizing the inefficiencies of bartering, no matter what level it occurred on. It has also been noted that the issues of bartering would begin to exacerbate as society shifted towards an expansion of private property and the division of labor. The concept of bartering has also been more thoroughly explained to not only mean spot transactions and to be compatible with the concept of debt. Graeber’s various criticisms lie in a misunderstanding of what the barter theory actually proposes, improper logical conclusions, and attacks on non essential characteristics of the theory. The barter theory remains the proper explanation for how money has arisen within society, but it can be oversimplified and misrepresented. It should be more thoroughly explained to include some of the key historical aspects Graeber has mentioned, so the position can be more properly defended.