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Introduction to a History of Money 1

MONEY: AN ALTERNATIVE STORY

ric Tymoigne and L. Randall Wrayi

Overview.

To be sure, we will never know the origins of money. First, the origins are lost in themists of timealmost certainly in pre-historic time. (Keynes, 1930, p. 13) It has long beenspeculated that money predates writing because the earliest examples of writing appear to berecords of monetary debtshence, we are not likely to uncover written records of moneysdiscovery. Further, it is not clear what we want to identify as money. Money is social in natureand it consists of complex social practices that include power and class relationships, sociallyconstructed meaning, and abstract representations of social value. (Zelizer 1989) There isprobably no single source for the institution of modern capitalist economies that we callmoney. When we attempt to discover the origins of money, we are identifying institutionalizedbehaviors that appear similar to those today that we wish to identify as money. Thisidentification, itself, requires an underlying economic theory. Most economists focus on marketexchanges, hypothesizing that money originated as a cost-reducing innovation to replace barter,and highlighting the medium of exchange and store of value functions of money. While this isconsistent with the neoclassical preoccupation with market exchange and the search for a uniqueequilibrium 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 itsorigins? It is possible that one might find a different history of money depending on thefunction that one identifies as the most important characteristic of money. While manyeconomists (and historians and anthropologists) would prefer to trace the evolution of the moneyused as a medium of exchange, our primary interest is in the unit of account function of money. ii

Our alternative history will locate the origin of money in credit and debt relations, with the unitof account emphasized as the numraire in which they are measured. The store of value functioncould also be important, for one stores wealth in the form of others debts. On the other hand, themedium of exchange function and the market are de-emphasized as the source of moneysorigins; 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 theelaborate 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 ofeconomic transaction, but of events like marriage, killing, coming of age, being challenged topotlatch, joining a secret society, etc. (Polanyi, 1957 (1968), p. 198). Wergild fines were paidby transgressors directly to victims and their families, and were established and levied by publicassemblies. A long list of fines for each possible transgression was developed, and a designatedrememberer would be responsible for passing it down to the next generation. As Hudson(2004b) 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 weregradually converted to payments made to an authority. This could not occur in an egalitariantribal society, but had to await the rise of some sort of ruling class. As Henry (2004) argues forthe case of Egypt, the earliest ruling classes were probably religious officials, who demandedtithes. Alternatively, conquerors required payments of tribute by a subject population. Tithes and


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tribute thus came to replace wergild fines, and eventually fines for transgressions againstsociety (that is, against the crown), paid to the rightful ruler, could be levied for almost anyconceivable activity. (See Peacock, 2003-4.)

Later, taxes would replace most fees, fines and tribute (although this occurredsurprisingly latenot until the 19th century in England). (Maddox, 1969) These could be self-

imposed as democracy gradually replaced authoritarian regimes. In any case, with thedevelopment 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 keyinnovation was the transformation of what had been a debt to the victim to a universal debt ortax obligation imposed by and payable to the authority. The next step was the standardization ofthe obligations in terms of a unit of accounta money. At first, the authority might have levied avariety of in-kind fines (and tributes, tithes, and taxes), in terms of goods or services to bedelivered, one for each sort of transgression (as in the wergild tradition). When all payments aremade to the single authority, however, this became cumbersome. Unless well-developed marketsalready existed, those with liabilities denominated in specific goods or services could find itdifficult to make such payments. Or, the authority could find itself blessed with anoverabundance of one type of good while short of others. Further, in-kind taxes provided anincentive for the taxpayer to provide the lowest quality goods required for payment of taxes asshown below in the case of tobacco.

Denominating payments in a unit of account would simplify mattersbut would requirea central authority. As Grierson (1977, 1979) realized, development of a unit of account wouldbe conceptually difficult. (See also Henry, 2004.) It is easier to come by measures of weight orlengththe length of some anatomical feature of the ruler (from which, of course, comes ourterm for the device used to measure short lengths like the foot), or the weight of a quantity ofgrain. By contrast, development of a money of account used to value items with no obvioussimilarities required more effort. Hence, the creation of an authority able to impose obligationstransformed wergild fines paid to victims to fines paid to the authority and at the same timecreated the need for and possibility of creation of the monetary unit.

Orthodoxy has never been able to explain how individual utility maximizers settled on asingle numraire. (Gardiner, 2004; Ingham, 2004) While use of a single unit of account results inefficiencies, it is not clear what evolutionary processes would have generated the numraire.According to the conventional story, the higgling and haggling of the market is supposed toproduce the equilibrium vector of relative prices, all of which can be denominated in the singlenumraire. However, this presupposes a fairly high degree of specialization of labor and/orresource ownershipbut 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, whilediversification of skills and resources would be prudent. Thus, it seems exceedingly unlikely thateither markets or a money of account could have evolved out of individual utility maximizingbehavior.

In fact, it has long been recognized that early monetary units were based on a specificnumber of grains of wheat or barley. (Wray, 1990, p. 7) As Keynes argued, the fundamentalweight standards of Western civilization have never been altered from the earliest beginnings upto the introduction of the metric system (Keynes, 1982, p. 239) These weight standards werethen taken over for the monetary units, whether the livre, sol, denier, mina, shekel, or the pound.(Keynes, 1982; Innes, 1913, p. 386; Wray, 1998, p. 48) This relation between the words used forweight units and monetary units generated speculation from the time of Innes and Keynes that


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there must be some underlying link. Hudson (2004a) explains that the early monetary unitsdeveloped in the temples and palaces of Sumer in the third millennium BC were created initiallyfor internal administrative purposes: the public institutions established their key monetary pivotby making the shekel-weight of silver (240 barley grains) equal in value to the monthlyconsumption unit, a bushel of barley, the major commodity being disbursed. (Hudson, 2004b,

p. 111) Hence, rather than the intrinsic value (or even the exchange value) of precious metalgiving rise to the numraire, the authorities established the monetary value of precious metal bysetting it equal to the numraire that was itself derived from the weight of the monthly grainconsumption unit. This leads quite readily to the view that the unit of account was sociallydetermined rather than the result of individual optimization.

To conclude our introduction, we return to our admission that it is not possible to write adefinitive history of money. We start from the presumption that money is a fundamentally socialphenomenon or institution, whose origins must lie in varied and complex social practices. We donot view money as a thing, a commodity with some special characteristics that is chosen tolubricate a pre-existing market. Further, we believe that the monetary unit almost certainlyrequired and requires some sort of authority to give it force. We do not believe that a strong casehas yet been made for the possibility that asocial forces of supply and demand could havecompetitively selected for a unit of account. Indeed, with only very rare exceptions, the unit ofaccount throughout all known history and in every corner of the globe has been associated with acentral authority. Hence, we suppose that there must be some connection between a centralauthoritywhat we will call the state--and the unit of account, or currency. In the next sectionwe will lay out the scope of the conceptual issues surrounding the term money, before turningto a somewhat more detailed examination of the history of money.

What is money? Conceptual issues.

Before telling any story about the history of money, one should first identify the essentialcharacteristics of a monetary system:

1- The existence of a method for recording transactions, that is, a unit of accountand toolsto record transactions.

2- The unit of account must be social, that is, recognized as the unit in which debts andcredits are kept.

3- The tools are monetary instruments (or (monetary)iii debt instruments): they record thefact 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, frombytes in a hard drive to physical objects (like cowry shells). Anything can be a monetaryinstrument, as long as, first, it is an acknowledgement of debt (that is, something that hasbeen 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): theymust be impersonal from the perspective of the receiver (but not the issuer) andtransferable at no or low discount to a third party. A check is a monetary instrument butnot usually a money-thing because it is not transferable (it names the receiver). Currencyis a money-thing because it is transferable and impersonal from the perspective of thereceiver but it is a debt of the issuer (treasury or central bank).

5- There is a hierarchy of monetary instruments, with one debt issuer (or a small number ofissuers) whose debts are used to clear accounts. The monetary instruments issued by


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those high in the hierarchy will be the money things.

These five characteristics imply that a history of money would be concerned with at least threedifferent things: The history of debts (origins of debt, nature and type of debts before and afterthe 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, special types oftransactions like shares, daily commercial transactions, etc.)). Behind each of these histories liepolitico-socio-economic factors that are driving forces and that would also need to be studiedcarefully.

In addition, while telling the story of money one has to avoid several pitfalls. First, thedangers of ethnocentrism are always present when one studies societies that are totally differentfrom current modern societies. (Dalton 1965) Second, one should not concentrate the analysis onspecific debt instruments: as Grierson (1975, 1977) notes, the history of money and the history ofcoins are two different histories. Focusing on coins would not only limit the study to one type ofdebt instrument, but would also avoid a detailed presentation of units of accountand, indeed,could be highly misleading regarding the nature of money.iv Third, the nature of money cannotbe reduced to the simple functions of medium of exchange or means of payment. Using aphysical object for economic transactions does not necessarily qualify it as money-thing, and onerisks confusing monetary payment with payment in kind. Fourth, and finally, the existence anduse of money does not imply that an economy is a monetary economy, i.e. an economy in whichthe 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, itis an interdisciplinary subject because it involves, among others, the fields of politics, sociology,anthropology, history, archeology, and economics. There is no doubt that progress in all thosedisciplines 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 threeanalytically different types of society, along the lines posed by Polanyi, Dalton, and others:primitive, archaic, and modern economies (Dalton 1971, Bohannan and Dalton 1962). Thisanalytical framework does not exclude the possibility that there is some transition and overlap,however, such a division is useful for telling a story about the evolution of money.

Primitive:In primitive societies, there is no notion of private propertyv in the sense of ownership of

the means of production (agricultural land, forests, fisheries) and so no possibility of a societybased on barter (in the economic sense of the term) or commercial exchange: these aremarketless economies. However, there is a well-defined system of obligations, offenses andcompensations. Obligations are pre-legal obligations (Polanyi, 1957 (1968), p. 181), definedby tradition (marriage, providing help, obtaining favors, making friends, etc.), with magic andthe maintenance of social order playing a central role in their existence. Their fulfillment can bequalitative (dancing, crying, loss of social status or role, loss of magical power, etc.) orquantitative (transfer of personal objects that can be viewed as a net transfer of wealth) (Ibid., p.182). In addition, payment of wergild compensation is not standardized but rather takes the form


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of in-kind payment, with type and amount of payment established sociallyas discussedpreviously.

In primitive societies there is, therefore, no economic or social need for accounting, evenif debts are present, because they are egalitarian societies in which exchange is usually reciprocal(the purpose of exchange is not to better ones position, but rather to bring members of the

society closer togetheroften by redistribution), accumulation of wealth is repressed ornonexistent (Schmandt-Besserat, 1992, 170), and the fulfillment of obligations is notstandardized. Some methods of computing existed, for example, to record time (Ibid., 160) inorder to calculate the phases of the moon, the seasons, and other natural phenomena, or to countnumbers and measure volume. That is why one can find notches on different objects like bonesthat date at least back to 60000 B.C. (Ibid., p. 158). However, there was no need to keep detailedrecords of debts.

Archaic

One can date the emergence of money to the development of large archaic societiesbetween 3500-3000 B.C. in the Ancient Near East. In this type of society, market transactionsexist but are peripheral and mostly developed for external commercial transactions. Given therelatively low importance of trade (and/or its control by the ruling authorities) and the minimalpower of merchants, one should not search for the origins of money in this direction. Trade wassubsumed under a larger socio-economic framework based on the redistribution of the economicoutput (mainly crops but also handicrafts tools, and other finished products (Hudson andWunsch, 2004)). This centralization emerged as the rules of primitive tribal societies wereprogressively weakened, bringing profound social changes (Henry 2004). A highly organizedand stratified society with a religious upper class (king, princes and high rank priests) wasprogressively formed, while reciprocity was progressively weakened. Religion replaced magicand led to the emergence of sacral obligations, i.e. obligations under the sanction of religion.

With the emergence of a powerful administration, a legal system also developed, and,with it, legal obligations. These differ from tribal obligations in that the former are generalized,compulsory and standardized. These obligations, by allowing the concentration of a large portionof the economic output, were essential to the redistributive nature of the economic system. Withthe progressive standardization and generalization of compulsory obligations, severalinnovations had to be developed to enforce them. Among them, the counting and recording ofdebts was essential and it apparently took several millennia to develop a uniform numericalsystem: starting from 8000 B.C. with concrete counting via plain tokens used as calculi, to 3100B.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 (eachthing is counted one by one, with a different method of counting for different things) to abstractcounting (the same number can represent different types of items) was central to development ofthe 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 standardizednorms and duties could be silver, barley, fish, or laborer-day, that is, the product of the numberof 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 silvereventually became the single unit of account. Archeologists are still not sure why silver waschosen (Hudson and Wunsch, 2004, p. 351), maybe because it played a central role in the gift


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giving to the palace and temple (Hudson, 2004a). In any case, money things were not needed,even though these early societies used markets and had recorded debts and creditsmostfamously on clay shubati tablets. Rather, purchases were made on credit at prices set by theauthorities on the basis of credit. The merchants would keep a running tally for customers, whichwould 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 inthe money of account. Hudson (2000, 2004a) documents such widespread use of money foraccounting purposes as well as sophisticated understanding of compound interest on debt inthese archaic societies.

To sum up the argument to this point, early money units appear to have been derivedfrom weight units, created to simplify accounting. The palace authorities also had to establishprice lists to value items in the money of account. Initially all of this may have been undertakenonly to facilitate internal record-keeping, but eventually use of the internal unit of account spreadoutside the palace. Commercial transactions, rent payments, and fees, fines, and taxes came to bedenominated in the money of account. Use of the money of account in private transactions mighthave derived from debts owed to the palaces. Once a money rent, tax or tribute was levied on avillage, and later on individuals, the palace would be able to obtain goods and services by issuingits own money-denominated debt in the form of tallies.

Modern: tallies and coinsHistorical evidence suggests that most commerce from the very earliest times was

conducted on the basis of credits and debitsrather than on the basis of precious metal 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(ibid. p. 394). This was a stick of squared hazel-wood, notched in a certain manner to indicatethe amount of the purchase or debt, created when the buyer became a debtor by accepting agood or service from the seller who automatically became the creditor (ibid.). The name ofthe debtor and the date of the transaction were written on two opposite sides of the stick, whichwas then split down the middle in such a way that the notches were cut in half, and the name anddate appeared on both pieces of the tally (ibid.). The split was stopped about an inch from thebase of the stick so that one piece, the stock was longer than the other, called the stub (alsocalled the foil). The creditor would retain the stock (from which our terms capital andcorporate 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 piecesof the tally would be matched to verify the amount of the debt.

Tallies could circulate as transferable, negotiable instrumentsthat is as money-things.One could deliver the stock of a tally to purchase goods and services, or to retire ones 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 witha merchant holding tally stocks against the first merchant, clearing his tally stub debts bydelivery of the customers stocks. In this way, great fairs were developed to act as clearinghouses allowing merchants to settle their mutual debts and credits; the greatest of these fairsin England was that of St. Giles in Winchester, while the most famous probably in all Europewere those of Champagne and Brie in France, to which came merchants and bankers from allcountries (ibid.). Debts were cleared without the use of a single coin; it became commonpractice to make debts payable at one or other of the fairs, and [a]t some fairs no otherbusiness was done except the settlement of debts and credits, although retail trade was often


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conducted at the fairs. While conventional analysis views the primary purpose of the fairs asretail trade, Innes postulated that the retail trade originated as a sideline to the clearing housetrade.vi Boyer-Xambeu et al. (1994) concur that 12 th and 13th century European medieval fairswere essential in the trading and net settling of bills of exchange, the latter being done in severalways, 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 ofexchange (Ibid., p. 34, pp. 38-39, p. 65). These bills of exchange were, along with debenture billsfor intra-nation trade between cities, the preferred debt instruments used by merchants incommerce. Coins were rarely used.

Even if one accepts that much or even most trade took place on the basis of credits anddebts, this does not necessarily disprove the story of the textbooks, according to which creditsand debits follow the invention of coin, with paper fiat money and even later invention.Perhaps coins existed before these tallies (and other records of debts), and surely the coins weremade of precious metals. Perhaps the debts were made convertible to coin, indeed, perhaps suchdebt contracts were enforceable only in legal tender coin. If this were the case, then the creditsand debts merely substituted for coin, and net debts would be settled with coin, which would notbe inconsistent with the conventional story according to which barter was replaced by acommodity money (eventually, a precious metal) that evolved into stamped coins with a valueregulated by embodied precious metal. There are several problems with such an interpretation.

First, the credits and debts are at least 2000 years older than the oldest known coinswith the earliest coins appearing only in the 7 th century BC. Second, the denominations of most(but not allsee Kurke (1999)) early precious metal coins were far too high to have been used ineveryday 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, sothat it cannot have been a useful coin for small transactions (Cook, 1958, p. 260). They mighthave sufficed for the wholesale trade of large merchants, but they could not have been used inday-to-day retail trade.vii Furthermore, the reported nominal value of coins does not appear to beclosely regulated by precious metal content, nor was the value even stamped on the coins untilrecently, but rather was established through official proclamation (see below).

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 managedsatisfactorily without coined money for tens of centuries (Cook, 1958, p. 260). Indeed, theintroduction of coins would have been a less efficient alternative in most cases. While thetextbook story argues that paper credit developed to economize on precious metals, we knowthat lower-cost alternatives to full-bodied coin were already in use literally thousands of yearsbefore 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 tocirculate competitively (for example, with hazelwood tallies) unless their nominal value werewell above the value of the embodied precious metal.viii

What then are coins, what are their origins, and why are they accepted? Coins appear tohave originated as pay tokens (in Knapps colourful phrase), as nothing more than evidence ofdebt. Many believe that the first coins were struck by government, probably by Pheidon of Argosabout 630 BC (Cook, 1958, p. 257). Given the large denomination of the early coins and uniformweight (although not uniform puritywhich probably could not have been tested at the time),Cook argues that coinage was invented to make a large number of uniform payments ofconsiderable value in a portable and durable form, and that the person or authority making thepayment was the king of Lydia (ibid., p. 261). Further, he suggests the purpose of coinage was


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the payment of mercenaries (ibid.).ix This thesis was modified by Kraay (1964) who suggestedthat governments minted coins to pay mercenaries only in order to create a medium for thepayment of taxesx (Redish, 1987, pp. 376-377). Crawford has argued that the evidence indicatesthat use of these early coins as a medium of exchange was an accidental consequence of thecoinage, 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 otherwords, 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 andsailors (Innes, 1913, p. 399). This explains the relatively large value of the coinswhich werenot meant to provide a medium of exchange, but rather were evidence of the states debt tosoldiers and sailors. The coins were then nothing more than tallies as described aboveevidence of government debt.

What are the implications of this for our study of money? In our view, coins are meretokens of the Crowns (or other issuers) debt, a small proportion of the total tallythe debtissued in payment of the Crowns expenditures.

Just like any private individual, the government pays by giving acknowledgments of indebtednessdrafts on the Royal Treasury, or some other branch of government. This is well seen inmedieval England, where the regular method used by the government for paying a creditor wasby raising a tally on the Customs or some other revenue-getting department, that is to say bygiving to the creditor as an acknowledgment of indebtedness a wooden tally. (Ibid., pp. 397-398)xi

But why would the Crowns subjects accept hazelwood tallies or, later, paper notes or tokencoins? 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. Thisprocedure is called levying a tax, and the persons thus forced into the position of debtors to thegovernment must in theory seek out the holders of the tallies or other instrument acknowledging adebt due by the government, and acquire from them the tallies by selling to them somecommodity or in doing them some service, in exchange for which they may be induced to partwith their tallies. When these are returned to the government Treasury, the taxes are paid. (Ibid.,p. 398)

Each taxpayer did not have to seek out individually a Crown tally to pay taxes, for matching theCrowns creditors and debtors was accomplished through the bankers, who from the earliestdays 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 whorequired Crown debt in order to pay taxes.xii The exchequer began to assign debts owed to theking whereby the tally stock held in the Exchequer could be used by the king to pay someoneelse, by transferring to this third person the tally stock. Thus the kings creditor could thencollect payment from the kings original debtor (Davies, 1997, p. 150). Further, a brisk businessdeveloped to discount such tallies so that the kings creditor did not need to wait for paymentby the debtor.


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The inordinate focus of economists on coins (and especially on government-issuedcoins), market exchange and precious metals, then, appears to be misplaced. The key is debt, andspecifically, the ability of the state to impose a tax debt on its subjects; once it has done this, itcan choose the form in which subjects can pay the tax. While government could in theoryrequire 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 tokenin payment to retire tax liabilities.xiii Certainly its tokens can also be used as a medium ofexchange (and means of debt settlement among private individuals), but this derives from itsability to impose taxes and its willingness to accept its tokens, and indeed is necessitated byimposition of the tax (if one has a tax liability but is not a creditor of the Crown, one must offerthings for sale to obtain the Crowns tokens).

Modern: the gold standardIn the transition from feudalism (a system in which money is used, however, not a system thatone would identify as a monetary production economy, as Keynes put it) to capitalism (aneconomic system based on production for market to realize profits), one finds a period of theemergence and consolidation of national spaces of sovereignty during which kings progressivelygained power over the multiple princes and lords of their territory, and battled with kings ofother sovereign areas. This transition period recorded several periods of monetary anarchybecause 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 ofcoins became more closely associated with precious metal content. What had begun as merely atoken indicating the issuers debt took on a somewhat mysterious form whose value wassupposed to be determined by embodied metal. Hence, while use of precious metal in coinagebegan for technical reasons (to reduce counterfeiting through limited access to the metalseeHeinsohn and Steiger 1983) or cultural reasons (use of high status materialsee Kurke 1999),regulation of the metal content came to be seen as important to maintain the coins value. Thiscreated 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 inevery 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 thekings ability to finance international payments. Hence began the long history of attempts toregulate coinage, to punish clippers, and to encourage a favorable flow of bullion (of whichMercantilism represents the best known examplesee Wray (1990)).

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 themoney-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, andwidespread infractions existed: clipping, debasement, billonage.xiv

The coins were rude and clumsy and forgery was easy, and the laws show how common it was inspite of penalties of death, or the loss of the right hand. Every local borough could have its localmint and the moneyers were often guilty of issuing coins of debased metal or short weight tomake 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 andhad their right hands struck off. Clipping was commoner still, and when (down to 1280) the


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pennies were cut up to make halfpennies and farthings, a little extra clip was simple andprofitable. [] Clipping did not come to an end before the seventeenth century, when coins weremachine-made with clear firm edges []. (Quigguin, 196?, p. 57-58)

Thus, kings actively fought any alteration of the intrinsic value of coins which represented analteration of the homogenous monetary system that they tried to impose. This preoccupation alsofueled the belief that intrinsic value determines the value of money.

However, kings were actually responsible for the nominal value of coins, and sometimeswere forced to change that (Boyer-Xambeu et al., 1994), by crying them up or down. Cryingdown the coinage (reducing the value of a coin as measured in the unit of accountrecall thatnominal values were not usually stamped on coins until recently) was an often-used method ofincreasing taxes. If one had previously delivered one coin to pay taxes, now one had to delivertwo if the sovereign lowered the nominal value of coins by half (also representing an effectivedefault on half the crowns debt). Any nominal change in the monetary system was carried outby royal proclamation in all the public squares, fairs, and markets, at the instigation of theordinary provincial judges: bailiffs, seneschals, and lieutenants (Ibid., p. 47). The higher theprobability of default by the sovereign (of which crying down the coinage represented just one

example) on his debts (including coins and tallies), the more desirable was an embodied preciousmetal to be used in recording those debts. In other words, coins with high precious metal contentwould be demanded of sovereigns that could not be trusted.xv This probably explains, at least inpart, the attempt to operate gold (or silver) standards during the transition from monarchies todemocracies that occurred with the rise of capitalism and the modern monetary productioneconomy. Unfortunately, this relatively brief experiment with gold has misled severalgenerations of policymakers and economists who sought the essence of money in a commodityprecious metalsand ignored the underlying credits and debts.

Modern: the return to fiat money: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 evenuse of a gold reserve to back up paper notes. Those who had become accustomed to think ofprecious metal as money were horrified at the prospect of using a fiat moneya merepromise to pay. However, all monetary instruments had always been debts. Even a gold coinreally was a debt of the crown, with the crown determining its nominal value by proclamationand by accepting it in payment of fees, fines and taxes at that denomination. The real orrelative value (that is, purchasing power in terms of goods and services) of monetary instrumentsis complexly determined, but ultimately depends on what must be done to obtain them. Themonetary instruments issued by the authority (whether they take the form of gold coins, greenpaper, or balance sheet entries) are desired because the issuing authority will accept them inpayment (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 authorityrefuses to accept the monetary instruments it had issued, then the value of those monetaryinstruments will fall toward their value as commodities. In the case of entries on balance sheetsor paper notes, that is approximately zero; in the case of gold coins, their value cannot fall muchbelow the value of the bullion. For this reason, the gold standard may have been desirable in anera of monarchs who mismanaged the monetary systemeven though the gold standardrepresents something of an aberration with respect to moneys history.


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Through the 19th and early 20th centuries, governments frequently faced crises that forcedthem off gold; they would attempt to return but again face another crisis. In the aftermath ofWWII, the Bretton Woods system adopted a dual gold-dollar standard that offered moreflexibility than the gold standard. However, this system ultimately proved to also havesignificant 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 debitsIOUs. With the rise ofmodern capitalism and the evolution of participatory democracy, elected representatives couldchoose the unit of account (the currency), impose taxes in that currency, and issue monetaryinstruments denominated in the currency in government payments. The private sector couldaccept these monetary instruments without fear that the government would suddenly refuse themin payment of taxes, and (usually) with little fear that government would cry down thecurrency by reducing the nominal value of its debts. At this point, a gold standard was not onlyunnecessary, but also hindered operation of government in the public interest. Unfortunately,substantial confusion still exists concerning the nature of money and the proper policy tomaintain a stable monetary system.

This brief history of money makes several important points. First, the monetary systemdid not start with some commodities used as media of exchange, evolving progressively towardprecious metals, coins, paper money, and finally credits on books and computers. Credit camefirst and coins, late comers in the list of monetary instruments, are never pure assets but arealways debt instrumentsIOUs that happen to be stamped on metal. Second, many debtinstruments other than coins were used, and preferred, in markets. Third, even if debt instrumentscan be created by anybody, the establishment of a unit of account was (almost always) theprerogative of a powerful authority. Without this unit of account, no debt instruments could havebecome monetary instruments because they could not have been recorded in a generalized unit ofaccount but rather only as a specific debt.

Conclusion: Modern Money.

In this chapter we briefly examined the origins of money, finding them in debt contractsand more specifically in tax debt that is levied in money form. Similarly, we argued that coinswere nothing more than tokens of the indebtedness of the Crown, or, later, the governmentstreasury. Significantly, even though coins were long made of precious metal, it was onlyrelatively recently that gold standards were adopted in an attempt to stabilize gold prices to try tostabilize the value of money. It would be a mistake to try to infer too much about the nature ofmoney 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 ofaccount, or currency, established by the authority. Adoption of a gold standard merely meant thatthe authority would then have to convert its debts to gold on demand at a fixed rate ofconversion. This did not really mean that gold was money, but rather that the official price ofgold would be pegged by the authority. Hence, even the existence of a gold standardno matterhow historically insignificant it might beis not inconsistent with the alternative view of thehistory of money.

In truth, we can probably never discover the origins of money. Nor is this crucial forunderstanding the nature of the operation of modern monetary systems, which have beenvariously called state money or chartalist money systems. (Knapp 1924, Keynes, 1930; Goodhart1998, Wray 1998) Most modern economies have a state money that is quite clearly defined by


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the states acceptation at public pay offices. (Knapp, 1924) The operation of a state moneycan be outlined succinctly: the state names the unit of account (the dollar), imposes tax liabilitiesin that unit (a five dollar head tax), and denominates its own fiat money liabilities in thataccount (a one dollar note). It then issues its own liabilities in payment, and accepts those inpayment 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 Ageswere of course far more direct and therefore far more obvious than is the case today. In the periodup to 1300 the royal treasury and the Royal Mint were literally together as part of the Kingshousehold. (Davies, 2002, p. 147)

There are two real world complications that require some comment. First, most paymentsin modern economies do not involve use of a government-issued (state, fiat) currency; indeed,even taxes are almost exclusively paid using (private, fiat) bank money. Second, governmentmoney 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 ofthe bank reserves that are from the perspective of the nonbanking public perfect substitutes fortreasury liabilities. Obviously if we simply consolidate the central bank and the treasury, callingthe conglomerate the state, we eliminate many complications. When one uses a bank liabilityto pay the state, it is really the bank that provides the payment services, delivering the statesfiat money, resulting in a debit of the banks reserves. When the state spends, it provides a checkthat will be deposited in a bank, leading to a reserve credit on the books of the bank. Hence, asInnes long ago argued, banks act as intermediaries between government and the public.

We will not pursue here any of this accounting in more detail; readers are referred toWray (1998) and Bell (2000). The only thing that must be understood is that the state spendsby 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 theform of a debit to banking system reserves). In reality, the state cannot spend its tax receiptswhich are just reductions of outstanding state liabilities. When a household issues an IOU to aneighbor 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 alsotrue with gold coins, which were government liabilities: once received in payment of taxes, coinswere 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 allof this works only because the state has first exerted its sovereignty by imposing a tax liability onthe private sector.

It is important to note that there is a whole other story about the rise of banks and theevolution of the private banking system. Orthodoxy presents banks as intermediaries betweensavers and borrowers, and posit a deposit multiplier that constrains bank lending to thequantity of reserves supposedly controlled by the central bank. We do not have the space toexplore these issues in any detail, but reject the orthodox approach. (See Wray 1990.) Above wenoted the intermediary function played by banks, used by government to accomplish its fiscalactivities. In addition, banks play a critical function in all capitalist economies as creators ofcreditthat is, banks accept IOUs of borrowers and issue their own IOUs in the form of bank


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deposits. These are used by the nonbank public as means of payment and stores of value. In mostcases, credits and debits are cleared on the balance sheets of these private banks, while banks usethe liabilities of the government only for net clearing (among banks and with the government). Intruth, banks are never reserve constrainedindeed, all modern central banks ensure that bankshave the reserves required or desired. All of this is critically important for the operation of

modern monetary production economies, but is not so essential for our study of the origins ofmoney. In a sense, the activities of the private banks can be seen as derivative, as their creditsand debits are all denominated in the state money of account, and as the money-things issued bythe state are used for ultimate clearing. (See Gardiner 2004, Wray 1990, and Wray 1998.)

We thus conclude this story about the origins and nature of money. Money is a complexsocial institution, not simply a thing used to lubricate market exchanges. What is mostimportant 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 sociala socially recognized measure,almost always chosen by some sort of central authority. Monetary instruments are nevercommodities, rather, they are always debts, IOUs, denominated in the socially recognized unit ofaccount. Some of these monetary instruments circulate as money things among third parties,but even money things are always debtswhether they happen to take a physical form such asa gold coin or green paper note. While one can imagine a free market economy in whichprivate participants settle on a unit of account and in which all goods and assets circulate on thebasis of private debts and credits, in practice in all modern monetary systems the state plays anactive role in the monetary system. It chooses the unit of account; it imposes tax liabilities in thatunit; and it issues the money thing that is used by private markets for ultimate clearing. Anystory of money that leaves out an important role for the state represents little more than fantasy, astory of what might have been, that sheds little light on the operation of real world monetarysystems.

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Rise and Fall of Monetary Economics. Naples, Italy: University of Bremen.________. 2000. The property theory of interest and money. In Smithin, J. (ed.), What is Money?, 67-100.

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Theories of Money, 79-98. Northampton: Edward Elgar. 2004Hudson, Michael and Cornelia Wunsch. 2004. Creating Economic Order. Bethesda: CDL Press.Hudson, Michael. 2000. Reconstructing the origins of interest-bearing debt and the logic of clean slates. In

Hudson, M. and M. Van De Mieroop, (eds.), Debt and Economic Renewal in the Ancient Near East, 7-58.Bethesda, Maryland: CDL Press.

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________. 2004b. The archaeology of money: debt versus barter theories of moneys origins. In Wray, L.R. (ed.),Credit and State Theories of Money: The contributions of A. Mitchell Innes , 99-127. Cheltenham, EdwardElgar, 99-127.

Ingham, Geoffrey. 2000. Babylonian madness: On the historical and sociological origins of money. In Smithin, J.(ed.), What Is Money, 16-41. London: Routledge.

________. 2004. The emergence of capitalist credit money. In Wray, L.R. (ed), Credit and State Theories of Money:the contributions of A. Mitchell Innes, 173-222. Cheltenham, Edward Elgar.

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Macmillan.Knapp, Georg F. 1924. The State Theory of Money. Partially reprinted by Augustus M. Kelley, 1973.Kraay, Colin M. 1964. Hoards, small change and the origin of coinage.Journal of Hellenic Studies, 84: 76-91.Kregel, Jan A. 1998. The Past and Future of Banks. Quaderni di Ricerche, No. 21. Rome: Ente Luigi Einaudi.Kurke, Leslie. 1999. Coins, Bodies, Games, and Gold. Princeton: Princeton University Press.

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i ric Tymoigne is Ph.D. Candidate at the University of Missouri Kansas City. L. Randall Wray is Professor of Economics at the University of Missouri Kansas City.ii See also Grierson (1977, p. 16) and Keynes (1930 (1976), p. 3; 1982, p. 252)iii Of course not all acknowledgements of debt are monetary in nature, i.e. do not respect the following characteristics. One may, for example, give toanother person a piece of rock 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 thatsomeone owes someone else something. In this sense, the famous stone-money, does not seem to qualify as a monetary debt instrument.iv Early coins do not have any value in terms of unit of account written on them. They have names (like gros tournois, penny, or dime) but this doesnot tell anything about the unit of account. A full description requires the statement of the unit of account: a penny of 2 pence or a gros of 4 deniers,etc. (Grierson, 1975, p. 88).v See Heinsohn and Steiger (1983, 2000) for the importance of private property for the history of money.vi Admittedly, the view expounded by Innes is controversial and perhaps too extreme. What is important and surely correct, however, is his recognition ofthe 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 Mexicoat the time of the conquest.vii 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 whenthe basis of money is supposed to be precious metal.viii It is often asserted that coins were invented to facilitate long distance trade. The evidence, however, is against the earliest coins having been used tofacilitate trade of such a kind, for the contents of hoards points overwhelmingly to their local circulation. (Grierson, 1977, p. 10)ix Grierson (1977, p. 10) also advances this thesis.x Crawford (1970, p. 46) suggests that [c]oinage was probably invented in order that a large number of state payments might be made in a convenientform 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 [] [o]nce issued,coinage was demanded back by the state in payment of taxes.xi The 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 thecourt.xii This poses the interesting question of the origins of the word bank. As Kregel (1998, pp. 15ff.) notes: It is generally believed that the English wordbank is derived from the Italian banco, which is thought to derive from the bench or long table used by money changer []. The similarity between thetwo words is misleading, and most probably mistaken. Rather, the historical evidence suggests that the origin of the English bank comes from theGerman banck. This is the German equivalent of the Italian monte, which means a mound or a store where things are kept for future use. [] Themodern English equivalent would be fund, which is the name used in England for the public debts of the English sovereign.xiii

That is, even most private transactions took place on credit rather than through use of coin as a medium of exchange. McIntosh (1988, p. 561) notes in astudy 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, thebalances could go uncollected for years. When the parties chose to settle on an amicable basis, they normally named auditors who totaled allcurrent unpaid debts or deliveries and determined the sum which had to be paid to clear the slate.

xiv 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 ofcirculation. (Boyer-Xambeu et al., 1994, 209).xv 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 kings

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 oflaws that effectively eliminated circulation of bank notes issued by rivals). See Wray (1990).

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