Was money created to overcome barter?

By Reynold F. Nesiba
Professor of Economics
Augustana College – Sioux Falls, South Dakota

This past May, marked the one hundredth anniversary of A. Mitchell Innes’s (1913) publication of a paper titled, “What is Money?” in The Banking Law Journal.  In it, this British diplomat, then living in the US, reviewed the history and usage of money and its forms in credit and coinage.  On both historical and logical grounds, he asserts that the “modern science of political economy” rests on a series of assumptions regarding money and credit that are “false.”  One of the most important of these assumptions is the belief that “under primitive conditions men lived and live by barter.”  Who should we blame for this false assumption?  According to Innes, it is Adam Smith (1776), the father of economics, who in turn rests his arguments on the words of Homer, Aristotle, and those writing about their travels to the New World.

Perhaps one reason Innes’s work has been so widely ignored is because his critique cuts too deeply.  For economists to incorporate his insights would require a wholesale rethinking of where money and credit comes from, how it works, and how it influences the economic processes of production and distribution.  That said, his work on money received attention and was cited immediately after his first publication in 1913 and a second in 1914.  Even John Maynard Keynes had favorable things to say about it.  But then his work was ignored for almost 75 years until the 1990s when some Post-Keynesian monetary theorists brought it back to light (Wray and Bell 2004, p.12). Recent academic work in economics (Bell 2000, Wray 1998, Ingham 2004, see Nesiba 2013 for a review) and anthropology (Graeber 2010), demonstrate that the process of rethinking is underway.  Regardless of this recent research, economists and principles of economics texts continue to tell the Smithian or traditional story of money and credit and ignore the insights of Innes.

Over most of my 18 years of teaching at Augustana College in Sioux Falls, South Dakota, I too have perpetuated this error by repeating the traditional story of money.  It goes something like this.  In a barter economy, as in the (chronologically vague) days of old, goods were traded (in a geographically ambiguous location) for other goods without the use of money.  Without money trade is only possible if there is a double coincidence of wants.  If one person raises and sells potatoes and the other makes shoes, they will only engage in exchange if the one selling shoes wants potatoes and the one selling potatoes wants a new pair of shoes.  Even if they each have a surplus of the good they wish to sell, no trade will occur since the potential buyer lacks anything needed by the seller.  They are at an impasse.

Adam Smith (1776, 25-36) explains how money arose to resolve this economic conundrum with these words.

In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.

So for Smith over time (and in every place and time) eventually a specific commodity—perhaps gold or silver—arises to serve as a money-thing that can be used to purchase other goods and services.  Economists refer to this monetary function as a medium of exchange.

Over time, economists have come to define money as anything that fulfills the four functions of money.  In addition to serving as a medium of exchange, money can also serve as a way to postpone purchases by serving as a store of value.  As long as a currency is not experiencing rapid inflation, holding wealth in money form allows us to delay purchases for a sunny or rainy day.  Money can also be used to pay debts as a means of payment to fulfill our contractual obligations to other individuals, firms, lenders, or governmental entities.  And perhaps most importantly, money serves as a way of keeping score as a unit of account.  It is in this last function that money is not a “thing,” like a coin, but instead serves instead as a point system or standard of measurement by which sales, debts, and payments can be accounted.  Just as an inch or a centimeter can be used to measure length, a dollar or euro as a unit of account can be used to measure value without actually being a money-thing.

Now for Smith, the most important function of money is to serve as a medium of exchange.  Because once this is established his apocryphal story expands.  As a medium of exchange money facilitates trade, encourages greater specialization and productivity, reduces transactions costs, and allows for the further flowering of capitalism.  It also serves as the beginning of the banking system.  As metals become the preferred medium of exchange, banks are created to store and manage these wealth holdings.  The coining of metal by state governments facilitates this process by standardizing weights and degrees of alloyed purity.  The bankers than issue receipts describing the amount of gold stored or deposited on its premises.  Over time, bankers realize that these gold receipts are circulating as money.  They also realize that only a fraction of their holdings are called for on any given day.  Thus they can make loans at interest and issue gold receipts far in excess of their actual holdings.  This emergence of credit further greases the wheels of capitalist exchange, savings, and investment.  However, in the overall economy, money only affects prices and not the process of actual physical production.

This standard story has been repeated in uncountable numbers of articles and textbooks.  And it is this story that Innes challenged 100 years ago.  Innes asserts that the barter story that emerged from Smith contradicts both the logic and the historical record.  In terms of logic, Smith’s story is simply not convincing.  For example, if you grew up in a small town in the western US in the 1970s, you might remember that you could go to the grocery store, pick up groceries, and simply sign a slip a paper acknowledging your receipt of the groceries.  The same could be done in Smith’s hypothetical example.  If the shoe seller or potato seller were trustworthy, the shoe seller could simply create a record of the shoes purchased on credit by the potato seller/shoe buyer and their value in some agreed upon unit of account.  This is not barter and it is not a purchase using a medium of exchange.  Instead it is (p. 391) “the exchange of a commodity for a credit.”  And it is far easier that the use of a medium of exchange.

Is there no anthropological evidence of a society based on barter trade? In his recent book David Graeber (2010) asserts that there is not.  Graeber claims that Stanley Jevons’s book in 1871 “took his examples straight from Smith, with Indians swapping venison for elk and beaver hides, and made no use of actual descriptions of Indian life…” (p. 29) Similarly “around that same time, missionaries, adventures, and colonial administrators were fanning out across the world, many bringing copies of Smith’s book with them, expecting to find the land of barter.  No one ever did.”  To make his point as clear as possible, Graeber (p. 29) quotes from Caroline Humphrey’s Cambridge University dissertation as the definitive anthropological work on barter.  Her statement is as clear as it is emphatic. “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests there has never been such a thing.”  Innes knew this 100 years ago, yet the myth persists.

So if there has never been a land of barter, where did we get money and credit?  Innes (p. 397) argues that systems of credit pre-date coins by over a thousand years.  “The earliest known coins of the western world are those of ancient Greece, the oldest of which, belonging to the settlements on the coast of Asia Minor, date from the sixth or seventh centuries B.C.”  In contrast, the law of debt goes back to at least the Code of Hammurabi in Babylonia 2000 years B.C.  Innes saw that the foundation of society and thereby of credit was that promises or obligations were and are viewed as sacred.  In all societies (p. 391) the breaking of the pledged word, or the refusal to carry out an obligation is held equally disgraceful.”  He goes on to explain how wooden tally sticks and clay shubati tablets were used to track credits/purchases and debits/sales long before the existence of coins.  And that one could repay a debt by returning a credit of the same amount to the lender.  In fact, village fairs were convened so that those holding the debts of others could match credits and debits together and thereby clear their accounts.  Over time others showed up to buy and sell other goods and services or to cater to those in this most basic business of banking.

There are a variety of reasons why this matters for monetary theory and macroeconomic policy.  But let me leave you with just one.  From the Smithian story, it was gold and silver that backed the issuance of a paper currency.  However, if Innes is right, the banking system never worked in that way.  In Innes’s world, money is and always has been a token representing a socially constructed debit-credit relationship. A stamped coin, $20 bill, or tax refund check is an asset—a credit— to those who hold it and a liability—a debit—for the government who issues it.  When the federal government spends, perhaps by directly depositing a Social Security recipient’s check into her account, a special kind of credit is created.  This credit—a new “debt” of the federal government—satisfies all four functions that are used to define money.  It serves as a medium of exchange, store of value, means of payment, and a unit of account.  But what gives this money value?  The money is valuable because it is the only token acceptable for the payment of taxes.  And when those taxes are paid, the money that had been spent into existence is extinguished. Thus, it is through federal government spending that money enters the economy and through taxation that it is destroyed.  This is where Innes’s 100- year-old insights lead.  If these ideas are hold up under academic scrutiny, are further disseminated, and become the basis of how we understand money and credit, an entirely new paradigm will need to emerge in the study of monetary economics.

This article was originally published as a feature article in the Western Social Science Association (WSSA) Fall 2013 newsletter.  It is reprinted here with their permission.

Works Cited

Bell, S. (2000): Do taxes and bonds finance government spending?, in: Journal of Economic Issues, 34(3), 603-620.

Graeber, D. (2010): Debt: The First 5000 Years, Brooklyn, NY: Melville House Publishing.

Ingham, G. (2004): The Nature of Money, Cambridge: Polity Press.

Innes, A.M. (1913, May): What is money?, in: Banking Law Journal, 377-408.

Nesiba, R.F.  (2013, May): “Do Institutionalists and Post-Keynesians Share a Common Approach to Modern Monetary Theory (MMT)?  European Journal of Economics and Economic Policies: Intervention, Vol. 10 No. 1, 2013, pp. 44–60.

Smith, A.  (1776):  An Inquiry into the Wealth of Nations. The Cannan Edition, New York: Modern Library, 1937.

Wray, L.R. (1998): Understanding Modern Money: The Key to Full Employment and Price Stability, Northampton, MA: Edward Elgar.

Wray, L.R. and S. Bell (2004): In Credit and State Theories of Money: the contributions of A. Mitchell Innes, Cheltenham, Edward Elgar, L.R. Wray editor.


70 Responses to Was money created to overcome barter?

  1. “Is there no anthropological evidence of a society based on barter trade?”

    Yes, there is. If you visit the ruins of pre-Columbian communities in the American Southwest, you find evidence of trade but not of money. The traders from far away societies brought things that they knew the other society needed, to trade for things that they wanted but didn’t have. Certain places became centers of trade, where people from many places could bring the goods they produced to trade for what was produced elsewhere. Many of the ruins contain unique types of flint and other materials that are indigenous only to places far away, and could only have been brought there by humans. Without a central government, the various native communities had no means of issuing money, most especially not money that would be accepted in far away communities, as well as no need for it within their own communities, due to the nature of their social order.

    It seems, then, historically accurate that trade did take place in primitive societies by means of barter. Perhaps not in Western Europe or the Middle East, but it did take place.

    ” From the Smithian story, it was gold and silver that backed the issuance of a paper currency. However, if Innes is right, the banking system never worked in that way.”

    Perhaps my impression is wrong, but in 19th Century America didn’t private banks issue their own currency, representing a claim on the gold and/or silver held in their vaults? And did not “bank runs” occur periodically when banks issued more paper currency than their customers were willing to hold? It seems the banking system did “work that way”, when the government allowed it to do so.

    Neither of these historical facts speak to the origin of money in Europe and the Middle East, but they do shed some light on the nature of the original need for money in primitive societies, and the evolution of money in more modern times.

    • John, you’re right about the private currencies (RE:bank notes) that were used pre-Federal Reserve. Lately I’ve been mulling over the notion that this is still the case. Bank deposits are still private currencies, how can they be anything but? There must be something to account for the reality that the Govt is the only institution with the legal authority to create the national currency. If anyone could make US dollars, they would quickly lose their value (think Continentals during the Revolutionary War and the Brits counterfeiting enough of them to seriously harm the Colonies economy and thus war effort). The difference now is that the Govt has validated all these private bank currencies by allowing them to denominate themselves in the Govt’s unit of account and essentially guaranteeing their value. I believe that this is the mechanism by which all these private currencies are able to clear at par, which makes them essentially perfect substitutes. Think about it, if there were no Central Bank and clearing system, would a bank deposit from my local community bank be “worth” as much as a Bank of America bank note? In a way, this is similar to credit cards. A credit card is only as good as the number of places that accept it. So Visa is a better form of money then say Discover (or a smaller CC company, however I can’t think of one at the moment).

      • I don’t think the commercial banks’ issue private currencies. They issue negotiable liabilities that are redeemable into the currency the Fed issues. It’s no different in principle than the ability you and I have to issue negotiable IOUs. Those liabilities are debts of the bank, and so a bank can’t just issue them willy-nilly. Bank deposits under 250 K are guaranteed by the FDIC, but with the banks’ assets as collateral. If a bank fails, the government can seize it, sell its assets, and keep the portion of the proceeds needed to reimburse the public for costs. Or it can decide to advance credit to the bank to keep it afloat.

        • Sure Dan, now we are parsing technicalities. The practical difference between a national currency and a negotiable bank liability to regular people is negligible. Both clear at par with each other, they are perfect substitutes, like I said. Banks can’t create national currency and Govt can’t create bank deposits (those computer spreadsheets at the bank are the banks property). This was THE innovation of central banking that changed the system from what it was pre FRA of 1913 into what we have today. This is why I contend that private bank notes are essentially private currencies, with a fixed exchange rate with the national currency. And the Fed lets the amount of national currency float in order to maintain the par exchange. Just like any fixed FX currency system would have to do.

        • I just thought of another thing.

          ” It’s no different in principle than the ability you and I have to issue negotiable IOUs.”

          Exactly! You and I can issue private currencies (IOU’s), but as Wray always says, “the trick is getting your money accepted.” Bank of America has a very easy time getting its private money accepted because its a part of the central banking system and as such, the Govt has guaranteed a 1 to 1 exchange rate with US Dollars. If yours or my private currency was able to get the same kind of guarantee from the Govt, then our private currency would also become widely acceptable. So you actually made my point wonderfully, thanks for that. Its another analogy example to add to the tool box.

    • What you’re describing definitely happened (Graber also gives a few similar examples), but it’s not a full barter economy for two reasons. And this type of barter would not be predisposed to turn into a money economy. One, this type of barter only happened between communities, not within them. Individuals of different communities with low trust between them would use barter. However, internal exchange within communities was always gift economy based. Furthermore, in all the cases where we know enough to tell this type of exchange was always highily ritualized and certain types of goods were only good for ones considered to be in a similar category.

      • Why does it matter whether money originated with barter, or with governments and debt relations? And why does it matter whether ancient peoples engaged in barter and truck inside their own relatively small communities? We know that throughout the growth of civilization, there has been an attendant increase in the growth of commerce, both between communities and within communities.

        You can’t read off the function of money in a modern economy from facts about the origin of money in pre-modern economies. That’s the genetic fallacy.

        • Apparently it is crucial to MMT. Wray makes a very big deal of it. I think you’re right that there is little relation between the original forms of money and its current nature and use. I think it’s likely that money originated as a private debt between two parties, without involvement of governments or gold or central banks. Sometimes it seems like just a petty dispute between economists, closely related to the dispute about a return to the gold standard (which is not petty).

          • John-

            There have always been Govts and there will always be govts. Creating institutional structures and hierarchies (forming govts) are truly the means by which human civilization has evolved. There is no reality in which “the govt” aka the people didnt organize. Small groups of nomadic hunter-gatherers hundreds of thousands of years ago just as certainly had social group organization and structure as we do today. Read about any aboriginal peoples alive today, tribes in the amazon that have only recently been discovered for example, all still have what can be classified as Govts.

            • I didn’t say the two parties had no government (defined as broadly as you have done), but that the government or governments were not involved in the transaction, i.e. by issuing a currency or demanding taxes, or even by enforcing the terms of the transaction. Sure, there was a social order, perhaps a family head or even a tribal chief, but I’m saying that the creation of the first money could have occurred without their involvement, and certainly without the level of involvement seen today.

            • Yes, imho basically right, Auburn. Bank deposits are private currencies that trade at par – usually – with the US dollar. But they aren’t perfect substitutes. While modern banks always accept state money at par, whether there are legal tender laws or not, if the bank is in trouble, bank money, bank liabilities are not always accepted at par. In other words, banks have much greater trouble creating national currency than the government does in creating bank deposits. That’s why banks work hard to corrupt the government, their regulators – but the government never works hard to corrupt the banks. Even grasping that last concept is hard for a modern. FDIC insurance is limited, for example. In modern economies, a government bails out its banks sometimes. A nation’s banks don’t bail out the government. The government’s money is at the top of the pyramid. This is because modern states are fiscally stronger than modern banks. And some modern states are bigger than others; the big ones being the ones who can issue reserve currencies, who can sometimes (pretend to) “bail out” smaller countries. Even the biggest bank is like a banana republic compared to the whole USA.

              You can read off the function of money in modern economies from facts about the origin of money. The most important things haven’t changed since 3000 BC – and long before. And some things were simpler and clearer and better understood back then. One might as well say that using research on banking practices in 1995, today in 2013 is committing a genetic fallacy. Wray, Hudson, Kelton, Ingham, Forstater, Henry, Keynes, Mitchell-Innes etc have all had “Babylonian madness” and their thought and teaching is all the better for it.

    • Seems to me part of this story you tell Golfer could be explained as the difference between exchanges with people you know well and people you dont. The markets you describe could be viewed more as foreign trade I think. People passing through with goods who want something for them. The need for something other than credit probably lies with the fact that they might not be back again or simply dont trust the other party enough to issue a credit. Undoubtedly one expects more form someone you dont know than form someone you know. I m not sure this undermines the lack of barter story though because the overwhelming number of transactions were with people you did know and live near, and those were much more germaine to the money story than the equivalent of international trade.

      • I agree. But these societies didn’t have money, and didn’t need it. As explained above, their internal culture was one of gift, not of trade and credit. The tribe operated more like a family than like a corporation. In ancient Europe, how would they have handled such external trade? Did they have a common currency, or accept each others’ currencies? That seems doubtful.

        In any event, the claim that “barter never existed” is at least an overstatement, without all these qualifications.

        And, in the end, what difference does it make? Whatever they did in ancient times, it has no relevance to today’s monetary systems.

    • What you describe are not barter economies but Gift Economies.

  2. While this is a very valid exposition, and Innes is probably very correct in his hypothesis, this still does not justify the assumption that “money” is only validated because it is needed to pay taxes. The reason why government created “money” is accepted is because; people have confidence that it can, and will, act as a medium of exchange. Once they lose that confidence, that particular species of “money” has no value, and is of no use to society. While your other three functions of money do apply in an accounting sense, they are meaningless if the “money” is not acceptable as a medium of exchange. To say that a government only issues a currency so they can enforce a tax regime on society, just doesn’t wash. In an idealistic sense, governments are delegated to perform a “public purpose,” and among those “responsibilities” is the creation of a legitimate, and valid, medium of exchange as a public service. The reason for creating an acceptable medium of exchange is to facilitate trade within the society, and to the extent that that medium is deemed valuable by others outside of the society, it can also be used for “international” trade. The imposition of a tax regime has nothing to do with a government fulfilling their responsibility to create a medium of exchange for their nation.

    • The notion of taxes imbuing a national currency with a baseline value is beyond reproach. Think about it this way. If Bank of America operated its own currency without the guarantees of the Fed that give it par value with the US Dollar, and the Govt refused to accept B of A notes in exchange for a reduction in tax liability. Then you would have a whole foreign exchange market between the B of A notes and the US Dollars in order to satisfy the legal need to pay taxes, in just the same way that an expat living in the EuroZone must exchange Euros for dollars if they owe taxes back home.

      Leaving aside analogies and hypotheticals, all the proof we need is the reality all around us. Just consider the infinitesimally small number of transactions conducted in foreign currencies within any large developed nation’s domestic economies. There is no fundamental logistical reason why Euro’s cant be used to exchange goods and services here in the States, but why would people use them? Euros are a medium of exchange, Euros are a store of value etc. But you still have to convert them into dollars in order to pay your property taxes, water bills, income and payroll taxes, purchases services and pay fees or fines from the local, state and Federal Govts. So basically, the “market” has determined that this additional step is wasteful and unnecessary, thus we have the reality of our state based currencies.

      • There are also legal tender laws. The dollar is legal tender in Panama, and so you can use it legally to discharge any debt and pay any bill you have in Panama.

      • We are on slightly different tacks here Auburn – I am not disputing that taxes have to be paid in the nation’s currency – what I an trying to say is setting up a tax regime is not the reason for creating the national currency. The currency is created to facilitate trade, and having a single, uniform and acceptable “ticket” to help in the exchange of goods and services, is preferable to having a multitude of different “tickets” – or tokens – or bits of precious metals – or foreign currencies. However, the national “ticket” will only work as long as the people have confidence in its universal acceptance within the nation. Where it to lose that confidence, as a result of hyperinflation, for example, then trade would revert to some other species, such as cigarettes, or cans of fuel, or a loaf of bread. One of the principle reasons a government of a monetary sovereign nation imposes, and supports a tax regime, is the control it gives the government over the people. The continuing use of the government budget process by a monetary sovereign nation with its own fiat currency, is a monumental confidence trick played on a gullible public. The Government has gotten away with this trick, because most people have been brainwashed into equating the government budget with an ordinary household budget. As explained by Warren Mosler and MMT, this cannot apply in the case of a monetary sovereign nation. In truth, there is no need for a monetary sovereign nation to impose any taxes at all, unless it chooses to use taxes to control an overheated economy or as a means of subjugating the people.

        • While you argue that hyperinflation can cause a lack of confidence, what actually gives confidence in the currency? What other mechanism causes the widespread use of the dollar within the US? Why don’t people use some other, foreign currency?

          • Perhaps the more interesting question is what causes the widespread use of the dollar outside the US (where it cannot be used to pay taxes) and why people in some nations prefer dollars to their own currency?

            • I can think of a few reasons.

              If one’s own currency is not a “major” currency, traded on FX and easily convertible, then the cost of converting it to dollars or Euro for international transactions can be very high. Better to have some income in dollars if one is to be obliged to spend dollars.

              If one’s own country is not politically stable, one never knows what may happen to the currency in case of a change of government. One might hoard dollars as “insurance”.

              At least in the movies, drug deals, especially large international ones, are done using a suitcase full of cash, always in $US. Perhaps the drug lords are willing to give a better exchange rate than the banks, and so people collect dollars in order to trade to them to criminals for the local currency.

              In Mexico, stores often accept dollars from American tourists at an exchange rate worse (for the customer) than the bank. They make money on the currency exchange as well as the sale. They may not want the dollars, per se, but they accept them because their prices in dollars are higher than their prices in pesos.

              Aside from any advantage to accepting dollars, people around the world have confidence in it because it is the world reserve currency, and so they know that they can always exchange it for goods or services or for another currency. That enables them to accept dollars simply as a convenience for their American tourist customers, and they may even give a slightly more favorable exchange rate (a form of discount) in order to attract that business.

              I think it is all (and the reserve currency status as well) based on the perception of the dollar as “strong” and “safe”, not just in terms of the exchange rate but because of US political stability, military strength, economic strength, and international political influence.

              But I think that in a place like Hong Kong they might accept Euro or Yen or Sterling just as readily as dollars, for many of the same reasons. Most other currencies, not so much.

          • As Dan pointed out, the fact that a currency is legal tender is probably the principle source of confidence, but when a government stuffs it up by creating money outside of any connection to the production/consumption capacity of the nation, that’s when confidence is shattered. If another currency were to become universally accepted, akin to the US dollar’s reserve currency status, and the US dollar lost it’s value, then people would, very likely, be happy to use that foreign currency to facilitate trade. People trade goods and services because they want those things, that don’t trade for the purpose of accumulating dollars to pay the tax, although that happens to be an enforced by-product of the stupidity of the current monetary system.

  3. Its’ the other way around. See Graeber.

  4. Golferjohn, Innes himself said that credit preceded coins by over a thousand years… Coins are just one embodiment of money, credit is another and the main one.

    Being the proud owner of a farm at the edges of civilisation in Brazil, I can speak from first hand experience here, and barter does not exist, even when it superficially looks like it. As soon as you look closer, it is credit. For more details, I have a short article on my blog, but this is the distilled idea.

    Innes was a true genius, hopefully he will be recognised as such widely soon… Until then, there shalt be much gnashing of the teeth!

  5. @guggzie: as you tell us, “in an idealistic sense”.The state is a real institutional structure lets not fool ourselves. Stop perpetuating harmful myths.

    • I see nothing”harmful” in trying to improve a flawed system Rich. The only way I know to achieve improvement, or to arrive at a better solution, is to have a concept of what that better system might involve. The last time I looked it up, that is what defines “idealism”. Admittedly, very few schemes, if any, ever achieve an “ideal” state, but we need a vision of what we would like to achieve if we are ever to attempt going down that path. The more people who follow that route, and offer ideas towards achieving a better system, the more chance there is of reaching a satisfactory goal.
      Do you have a better idea for the purpose of having a government than the one I suggested above, or are you simply willing to accept the corruption of the present system and say “That’s the best we are going to get,so, shut up and just accept it?”

  6. Great stuff!

    Wikipedia fleshes out some of these arguments, and I thought this was instructive:

    Barter is characterized in Adam Smith’s “The Wealth of Nations” by a disparaging vocabulary: “higgling, haggling, swapping, dickering.” It has also been characterized as negative reciprocity, or “selfish profiteering.”[5] By placing barter as the original “state of nature”, Smith is thus asserting that self-interest and greed are at the centre of all successive forms of economic exchange.


    Here’s how Peter Turchin puts it in War and Peace and War:

    During the twentieth century, the ideas of Mandeville, Smith, and many others have been developed and systematized into what is now known as “the theory of raitonal choice.” The core of the theory is the postulate that people — “agents” — behave in such a way as to maximize their “utility function.” In principle, the utility funciton could be almost anything, but in practice almost all applications of the theory in the mainstream economics equate utility with material self-interest. In the most basic version, the utility is simply the dollar amount that an agent expects to get as a result of a certain action. The agent then should perform the action that yeilds the greatest payoff — this is what “maximizing utility” means. Agents that behave in ways that maximize their utility function are “rational.”

    A great deal of recent research, however, shows that most people hardly, if ever, behave “rationally.” Just a couple of days ago, for instance, Rajiv Sethi posted this on his blog:

    If there’s a message in all this, it is that markets aggregate not just information, but also fundamentally irreconcilable perspectives. Prices, as John Kay puts it, “are the product of a clash between competing narratives about the world.” …. What makes markets appear invincible is not the perfect aggregation of information that is sometimes attributed to them, but the sheer unpredictability of persuasion, exhortation, and social influence that can give rise to major shifts in the distribution of narratives.

    This is one of what are litterally hundreds if not thousands of publicaitons flooding the literature over the past few years which show how infrequently people behave “rationally,” a la Adam Smith.

    John Gray calls classical and neoclassical economics our “ruling mythology.” And he’s absolutely right, since classical and neoclassical economics are now being demonstrated to be based on a partial truth at best, with that partial truth encapsulating a very, very small piece of reality.

    • “perfect aggregation of information”

      There is no such thing in the real world, according to classical economics. “Perfect information” is a theoretical idea, not a statement about the real world. Very few real world markets approach the ideal, but when one comes close, it behaves very much as classical economics says it does.

  7. “In principle, the utility funciton could be almost anything”

    In practice, it is anything a person wishes. Not “almost”. It’s a very personal thing. Just because you think it is irrational doesn’t make it so. There are markets because people have different ideas about utility. They place different values on things.

  8. John Phin has written Commonsense Currency and in it he discusses the double barter theory of money. It makes the most sense because of the constant confusion when credit and metalism collide. Double barter introduces a commodity held as universal and divisible value into the barter transaction. Horses are not divisible into bushels of wheat but horses can be bartered for silver and silver for bushels of wheat. Credit was introduced as money when receipts were exchanged in lieu of actual goods. Trade dollars, discs of a known fineness and weight of silver were frequently used to settle trade imbalances. Occasionally they were considered legal tender, and sometimes not. The most important quality of money is that it be convenient, letters of credit for bankers and fine silver coins for traders. Gold for capitalists and silver for farmers. Phin even mentions coining the deficit, back in 1894! Commodity backed fiat money seems to have satisfied those that used credit markers and and those that were wedded to bullion. Various money schemes evolved to satisfy the requirements of the users. No money scheme is perfect.

  9. Y’all need to read some economic history. For reals. The first media of exchange were not coins but quotidian commodities of varying degrees of effectiveness based on their characteristics for durability, divisibility, ease of authentication, &c. They emerged, it appears, from barter economies just as Smith suggested … millions or at least tens of thousands of years ago, not the blink of the eye suggested here. Barter gets too costly at about 10 traded goods and services and early hominids certainly had that many: sex, fire, and sundry stone tools, bone tools, vegetable foods, animal foods, not to mention clothing, shelter, and perhaps even distilled water. So our first media of exchange were things like teeth, shells, and so forth, not coins. The most common medium of exchange in a given time and place may have served as a unit of account in credit transactions but most likely pre-dated them because it is very difficult to conceive of credit without a unit of account. Barter by bookkeeping is possible but probably not with the technology set available until the invention of sophisticated recordkeeping c. 5-8k years ago but even then it would not improve on barter by much, if anything, as the benefits of being able to reciprocate in the future were probably offset by the added costs of recordkeeping and defaults. In other words, money — commodities that served as media of exchange and became units of account or in other words ways of reckoning value — almost certainly pre-dated credit.
    In any event, as others have pointed out, it isn’t clear what the MMT crowd is driving at here. Fiat money, government money, is a very new phenomenon even by historical standards. What our prehistoric and early historical ancestors did or did not do seems of very little relevance.

    • Why then do anthropologists describe hunter-gatherer societies as all having Gift Economies?
      Why have anthropologists after more than a century of searching have yet to find any example or evidence of barter economies?

      • Can anybody suggest a good introduction to gift economies and the work done in this area? I’m not familiar with the concepts or the anthropological work.

  10. Pingback: Was Money Created to Overcome Barter? « naked capitalism

  11. My problem with Mr. Innes’s essay is that I have no idea where he got his material. There are no references, no bibliography, and perhaps two or three references to somebody else’s work, but not by the name of the work or full name of the author. I only look at the first paragraph of the essay above – Adam Smith based his arguments on some named sources. Mr. Innes used (unreferenced) historical information and logical argument. Perhaps the reason Mr. Innes’s work was ignored is that his assumptions don’t match history?

    Barter has certainly existed throughout history when some other medium of exchange hasn’t existed – look at Columbus trading in the New World or the “purchase” of Manhattan for cloth, beads, etc. On the other hand, I agree that barter was not the sole means of exchange in primitive societies over a long period of time. The obvious problems of barter mean that some other means of exchange develops quickly. The wide variety and prevalence of “primitive money” shows that the concept of money has appeared in many if not most parts of the world. The fact that methods of tracking credit existed before coins does not mean they predate money, merely that they predate a particular form of money. Since human trade developed long before written history, any arguments of exactly how these developed are educated guesses using the highly incomplete information we have available to us today.

    In terms of money only having value as backed by governments, there is some truth to this through history and especially in today’s fiat money systems. Yet money obviously has value even though not needed for taxes — travel to most of the world and dollars are happily accepted and often preferred to the local currency. Obviously, something other than the need to pay taxes (in the local currency) motivates this acceptance of dollars. The widespread use of Maria Theresa thalers in many areas of the world (from the first coins in the 1740s at least through the 1960s) also provides an example of money with no government backing.

    The “money is a liability of the government” view is valid, and is largely true of today’s money. Yet denying that money has been backed by gold and silver in the past also ignores reality. When I read material like the essay above or chapter 3 (history of money) of L. Randall Wray’s Understanding Modern Money, I see an ideological argument trying to deny the role of gold and silver as a basis for money throughout history.

    On the other hand, when I read some “hard money” advocates I see a similar denial of the role of credit in the history of money. Both theories of money are true to varying extents through history. Denying one or the other because it doesn’t fit one’s particular economic philosophy doesn’t promote honest scholarship.

    • Barter has certainly existed throughout history when some other medium of exchange hasn’t existed – look at Columbus trading in the New World or the “purchase” of Manhattan for cloth, beads, etc. On the other hand, I agree that barter was not the sole means of exchange in primitive societies over a long period of time. The obvious problems of barter mean that some other means of exchange develops quickly.

      I think this belies common misconceptions about ancient economies.

      For ~90% of human history we lived in hunter-gatherer bands with what are called “Gift Economies”.
      Distribution required no “medium” to facilitate exchange.
      Barter was never more than a rarity, occurring between strangers & between those for whom no relationship exists.
      The problems of barter, even if encountered regularly, did NOT lead to the development of any another means of exchange.
      They are problems that only exist when there is no relationship between parties, a situation uncharacteristic of normal economic life.
      Distribution/exchange intra-group as well as trade inter-group occurred within an existing web of social relations based on trust & fostered through the processes of reciprocity & redistribution.
      Credit systems developed not out of barter but from these Gift Economies.
      Monetary systems also did NOT develop from barter but from Credit systems.

      I am in no way an expert on this or any other issue.

  12. joe bongiovanni

    The failure of Mitchell-Innes’ proclamation that ‘money is debt’ that culminates in modern money theory is its ignorance of over 2500 years of documented history that money was issued within major global-state empires without there being any associated debt over the period.
    Bankers had not yet created double-entry bookkeeping.
    Money was a sovereign state’s issuing system for exchange media.
    Such was true with the Colonies.
    Thus money-as-debt really stems from the banker-school theories about money and ignores the currency school teachings based on the sovereign-money (without debt) principle.
    Aristotle’s contribution is primarily in his definition of what money is – “Money exists not by nature, but by law.”
    Money is thus a legal social construct, mindful of public purpose needs.
    Any attempt to address the purpose of modern money must early-on consider Nobelist (Chemistry) Dr, Frederick Soddy’s scientific money views in his publication “The Role of Money”.
    Soddy advances his scientific ideas based on Aristotle’s historic definition and on the Currency-school historic teachings of the prerogative of sovereign governments to create money without creating debt.
    He warns strongly that we will end up right here if we fail to adopt these monetary system principles.
    Thus proving Mitchell-Innes an unsound foundation for MMT’s new money school.
    MMTs techings can be readily brought in line with the currency-teachings by abandoning M-Innes; pro-banker ideology of money systems.
    Simply read the Preface of Soddy’s book.

    • You don’t have to have double-entry bookkeeping or banks to have debt. If a government requires people to surrender some goods or services to the government, and offers some kind of tax receipt, token or physical proof that that obligation has been discharged, and if those receipts are exchangeable, then you have a debt-based monetary system. The government creates tax debts by fiat, and the money that is exchanged consists in tax credits.

      • joe bongiovanni

        “You don’t have to have double-entry bookkeeping or banks to have debt.”
        Only if you’re working in some abstract, historical system.
        And only if the debt is not a ‘monetized’ financial transaction, as ALL legal debts are today.
        My unquestioned point is that the ‘money-is-debt’ school of Innes and beyond belies the fact for 2500 years, states issued coinage money without any debt associated.
        Thus money CANNOT BE debt.
        And, if this is a 2,500 yer old truism, then THAT money-is-debt’ needs a better foundation than Innes effort on behalf of the bankers a hundred years ago.
        It is plainly incorrect, yet plays a pretty vital role in explaining MMT.

        • Money is debt as debt between two people/legal entities, nothing to do with government deficits and bonds and more modern re-uses of the word debt…

          Money on a physical level has many embodiments (gold coins, copper coins, paper notes, bonds, bank account ledgers, mortgages), on a conceptual level it is always debt.

          The fact that it is two things at the same time could be confusing if we don’t think about it as levels of the same construct.

          • joe bongiovanni

            Thanks, Viorel
            After explaining again that for 2500 years dynasties and states issued their “money” without issuing any debt, HOWEVER debt was construed throughout the period, it is here explained that “money is debt as debt between two peoples/entities”.
            Sorry, again, but money is not debt, or for 2,500 years we would have had ‘debt’, which we didn’t. So money cannot “BE” debt.
            Rather it is the ‘debt between two peoples/entities” that is money-tized in the unit of issue. This requires that the borrower PAY and the lender RECEIVE the repayment of the “debt between two people/entities” IN THE MONEY OF ISSUE.
            Today, under the bankers’ money system, private bankers CREATE and issue all THAT WHICH serves as money by creating a debt –between peoples and entities. Again, that does not and cannot make money debt. Money is not debt. Money is what is used to pay debt. That the transaction happens around a double-entried ledger is a matter of some alchemy, with questionable morality and legality afoot.
            Once we fully understand our money and currency system, there is no reason we could not create money – without issuing debt – through our monopoly-issuing money power just as the Spartans did, without debt. Into circulation, where it never becomes a debt and remains perpetually as the exchange settlement media for all commerce. That’s how the money system should work.
            One wonders what would have happened had Mitchell-Innes not penned the bankers’ school teaching of money as debt.

  13. Bringing up Mitchell Innes’s paper again led me to look at one source he mentions early on regarding Adam Smith’s claim of cod used as money — Thomas Smith’s 1832 “Essay on Currency and Banking”. From the first dozen or so pages, I’d recommend it (available through Google Books).

    On the discussion of money originating from barter, credit, or some other scheme, I have to agree with Dan Kervick — what’s the big deal?

    So again, why do some MMT proponents seem dedicated to “proving” that money only developed out of credit and that “hard money” (e.g. based on the exact gold/silver value) never existed? Though “hard money” is one I see multiple interpretations of in this blog. L. Randall Wray argues there’s no such thing while I’ve seen others use “hard money” or “gold standard” to discount anything economic before 1971 which they don’t feel fits their argument.

  14. Don’t overlook Leopold’s Congo economy. The labor-money-tax system was created for one purpose only, to force the natives to gather rubber vines, vines with no useful native purpose. Money was not a convenience for them, it enslaved them. Leopold bragged he was “civilizing” the natives.

    • This type of example is one thing which bothered me when reading chapter 3 (history of money) of L. Randall Wray’s Understanding Modern Money. All of his examples of the “introduction” of money to tribal societies were examples of forced labor — the colonial government needs native labor, so the natives are forced to pay a “tax” which can only be paid via a tax.

      What Mr. Wray doesn’t talk about is that money already existed in many (if not all) of these areas, but it was in a different form. On the island of Yap large stone wheels were used as money. Since the German officials didn’t have any, they “claimed” (stole) the most valuable stones and demanded labor to give them back. Similarly in colonial Africa taxes were imposed, payable using a medium only available from the colonial employers. This is both a thinly disguised method of forced labor and interesting in the context of this discussion because the taxes definitely required payment in a physical medium (e.g. the correct silver coin), not some equivalent value of other goods since the real purpose was to get people to work.

      After reading this section I was left with the impression that the MMT theory of money is intimately tied to coercive state power — taxes drive money, yet taxes are ultimately the way to force labor or goods from people. Not compatible with a free society.

      • Yes, all government is coercive. That is what “sovereign” means. You must obey the government, or go to jail.

        The colonial powers you mention probably did establish taxes in order to coerce essentially slave labor, rather than to simply give value to its currency so that it could spend to supply its needs without coercion. But in a modern society with a well-established currency, there is no need for such behavior. Any level of taxation, however innocuous, is sufficient to maintain the value of the currency, and the monetarily sovereign government can then create and spend that currency in voluntary transactions within a free society. It’s different when the people who labor for the government’s money do it because they want the government’s money, not like the Yaps or Africans who had no need for it, and were forced to turn over essentially the entire product of their labor in order to avoid punishment.

      • The big deal is that it is impossible to understand money by making a category mistake. Money is credit/debt, a relationship. Bank money and state money, all human money ever, are ultimately the same kind of critter. No more different from each other ultimately than the UK pound is from the US dollar. Gold, commodities, barter refer to physical things. Quite different.

        The idea of “gold as hard money”, that money can ultimately “based on the exact gold/silver value” gets things backwards. It has never happened, ever, as Mitchell-Innes says. In a “hard money”, “gold/commodity standard” era, there is always some state somewhere which is backing the gold by its valuable fiat money. Not vice versa. During WWII, the USA had a hard time coping with enormous inflows of gold. If it is 1940- where do you, Mr. Rich Guy, keep your gold? In Europe? Not a very bright idea. At times like 1945, even when the gold standard was not entirely dead, it becomes obvious to everyone that as Abba Lerner said – Gold is valuable because you can get dollars for it. Dollars aren’t valuable because you can gold for them.

        What is the non-monetary value of gold? The pure shininess value, the industrial value? The value it would have based on industrial and jewelry use, that it would have if it hadn’t been used to “back” (actually, “be backed by”) currency? One way to see that it would be much lower than its current “value” is by asking the question: Of all commodities in the world, which is in greatest supply compared to its uses? Which commodities has the greatest stores? One guess. Hint: these supplies are stored in Central Banks throughout the world. What would happen to this overpriced commodity if they simultaneously dumped all these supplies, which are doing no good to these Central Banks?

        Using “hard money” or “gold standard” to discount things that happened before 1971 is usually a bad argument. It is just pardonable laziness. It is possible to understand things – better – in the light of MMT/Keynes/creditary/Mitchell-Innes economics. But it is a bit more work. It is like doing arithmetic and algebra with Roman numerals. A pain in the ***. 1971 made things simpler, made things more clearly what they always were, with out the shininess complication blinding people.

        • Yes, you can’t understand today’s money by making a category mistake. But if, in the distant past, before state money, people traded goods by exchanging physical things that they did not consume, things that acted as medium of exchange and store of value … so what? That’s not how we do it today. It is of no relevance.

        • Money is certainly credit/debt, but historically is has also been physical things. The Code of Hammurabi was quoted above to show that the concept of debt predated coinage. Yet it also describes payments to be made in certain situations. These payments are in units of “minas” of silver or gold or “shekels” of silver (the three I found in a quick scan). The mina and shekel were originally a weight, and by referencing both a mina of silver and mina of gold appear to still be a weight at this time. Thus, the monetary value is quoted in the value of gold / silver, not in some arbitrary credit value.

          I mentioned the Maria Theresa Thaler in an earlier comment. It circulated widely without state backing. Look at the reasons why the United States minted the Trade Dollar — US silver dollars had a slightly lower silver content that Mexican dollars (8 real or 1 Peso pieces). US silver dollars were not accepted as readily as the Mexican coins because of the lower silver content. So the US minted the Trade Dollar which had a slightly higher silver content than the Mexican dollar. Trade through much of the world dependent more on the nature of the coin (silver/gold content) than what the particular issuing government said the coin was worth. And trade in these areas was in specie, not in bank notes, letters of credit, etc.

          So one can find examples in history where money is full bodied — its value is based solely on its precious metal content. More commonly money is denominated in some unit and a coin’s value is not exactly the metal value. There are also examples in history where the value of money has no relationship to the underlying value of the medium.

          If money is defined by its four uses, then commodity money has existed regardless of Mitchell Innes or somebody else providing examples to the contrary. Alternately, if you wish to define money as solely a credit / debt relationship, then we’re in agreement and we’ll need to find a new term to define commodity [insert new term here].

          • It is important to realize that there are levels here, and we are mixing up the levels. Money, like a few other concepts, has various levels – 1. physical 2. logical 3. accounting 4. conceptual.
            Conceptually, money is debt, as per the insight of Hammurabi and Mitchell-Innes. Physically, it can be printed on paper, printed on clay tablets, printed on gold, printed on computer memory. They are different levels and never to be mixed, otherwise great confusion will arise, as the long history of comments to this post demonstrates…

            You can think of gold as another kind of paper, and the gold standard ended because the govts were restricted in making the physical money, they ran out of “paper” so to say.

            The main thing that money in physical form has to do is to prevent forgery. Gold is hard to forge, and in the days of old that was the most convenient way to prevent forgery. Same for silver.

            A guy who understood money more than his contemporaries was John Law, the story of his days at the court of the king of France makes for some instructive reading.

          • ThomasW:Money is certainly credit/debt, but historically is has also been physical things. Nope, never.

            golfer1john :But if, in the distant past, before state money, people traded goods by exchanging physical things that they did not consume, things that acted as medium of exchange and store of value … so what? That’s not how we do it today. It is of no relevance. There is no evidence that any people ever did things that way. There is no medium of exchange, and there never has been. People have always used credit. Some evidence for it – ancient tallies – is 40,000 years old. What people think of as a medium of exchange is always the money-thing, a token of credit that is used to represent the credit that is transferred /created.

            As Viorel perceptively, importantly, notes above (and several times before IIRC): barter does not exist, even when it superficially looks like it. As soon as you look closer, it is credit. You can analyze barter transactions as credit transactions. And that is always what they always really are when you look closely enough at them. You can’t do the reverse.

            Thomas W:So one can find examples in history where money is full bodied — its value is based solely on its precious metal content. Fine. You’re missing the point above – (and others, see below)- what is the value of the precious metal content based on? States, societies, credit. Always. People don’t eat gold and silver. They’re useful as monetary metals precisely because they have little use. Before weights of silver were used as money-things, weights of grain were, as Mitchell-Innes and others have described. Redeemable in things which are naturally valuable to humans. But lousy for money because of the variability of harvests, and their value to rodents too.

            A gold standard, a full-bodied coin, a Maria Theresa Thaler is a state or a society, a community backing the worthless quantity or coin of gold or silver with its intrinsically valuable fiat money, its intrinsically valuable credit and trust. Not vice versa. Commodity money never existed. Was never used anywhere. The flat earth theory existed. But the earth was never flat. Commodity money theorizing looks at the same phenomena as good monetary economists – but does not see them correctly.

            Georg Simmel’s The Philosophy of Money (p.190, 2011 Routledge classics edn) on how “metallic money involves credit”:

            It has been argued against this theory that metallic money involves credit, that credit creates a liability, whereas metallic money payment liquidates any liability; but this argument overlooks the fact that liquidation of the individual’s liability may still involve an obligation for the community. The liquidation of every private obligation by money means that the community now assumes this obligation to the creditor.”

            See Geoffrey Ingham’s ‘Money is a Social Relation’ from Review of Social Economy for more quotes and analysis. Many of the surrounding passages & pages of Simmel deserve quotation here too.

            • ” There is no evidence that any people ever did things that way.”

              You’re missing my point. Starting a sentence with “if” implies no assumption of evidence.

              If people used tally sticks before there was state money, so what? That’s not how we do it today. It is of no relevance.

              • If people used tally sticks before there was state money, so what? That’s not how we do it today. It is of no relevance.

                Yes, I missed your point a bit. But …. : No, it IS how we do it today. So it IS of great relevance. “Modern” state money is a tally stick. Famously, tally sticks are historically attested as used in England as state money for centuries, until a couple hundred years ago, and also as representing private credit.
                My point is that there is no way that human beings have ever conducted their economic activities which is irrelevant. Thinking that there is makes things more complicated than they really are. Sees confusing and entirely illusory distinctions between the present and the past, and cuts off a major, major source of understanding.

                “The past is never dead. It’s not even past.”

                On Viorel’s point: We never did it with a “medium of exchange”. Geoffrey Gardiner highlights this as one of the most important (and difficult) points in Mitchell-Innes – that M-I highlights himself. We always did it with keyboards = tally sticks. (The concept “barter” is wrong – and anthropologists studying barter realize this.) Viorel makes important points – better and clearer than the academics IMHO.

                What is usually called a barter transaction, often “foreign exchange” between distant parties suspicious of each other, is just ( a few) credit-debt transactions – that are (quickly) completely settled. In that respect unlike a monetary transaction in a monetary economy, where one party remains holding money, which “still involves an obligation for the community”.

                • My understanding of tally sticks is that they represented private debts, not state money. The state was not involved, at least to start. Perhaps the king got involved later, and accepted tallies in payment of tax, before he figured out that he could be monetarily sovereign. Still quite different from modern state money.

                  And in the Americas, man did trade without credit, without tally sticks, and without money or debt. They brought goods, on foot, over long distances, that they knew were desired by others, to places where they could get things they desired. There may well have been intermediate transactions: I have flint, and want blankets, but the tribe that makes blankets already has flint but wants baskets, and the tribe that makes baskets wants flint. As Smith said, it gets complicated pretty fast, but these were subsistence economies without a lot of goods or complications.

                  But it doesn’t matter. That’s not how we do it today.

                  • Hunter-gatherer & other small scale traditional societies have what are called “Gift Economies” & did not use barter for domestic exchange or foreign trade.

            • “barter does not exist, even when it superficially looks like it. As soon as you look closer, it is credit. You can analyze barter transactions as credit transactions.”

              You’re losing me with this one. Maybe you can give me an example. Analyze this transaction as credit:

              I offer you a Phil Mickelson autograph for your Pete Rose baseball card, and you accept.

              • Hi, golferjohn

                three very detailed examples here:


                I could bring you a hundred more, each of them would have been categorized by a visiting anthropologist who did not know the full details as barter. A villager says “I gave my neighbour four goats for his cow”. Perfect barter would be written in the notebook of the anthropologist, and duly published as such, and being verified first hand truth. On closer inquiry, he would have probably found out that the cow had a calf, so it was not available until the calf was weaned, three weeks later, and the goats in reality were only needed at the other guy’s wedding, and only two of them, and the other two were still too small, so they needed to be kept in the pasture for a bit longer. So the transaction is not immediate. So in the meantime we have credit/debt transactions, where what is really rolling the transaction is the other guy’s ability to pay later, and the belief of others that he will do so.

                And as for your example of trading baseball cards, yes I traded stamps too as a kid, did not quite do it since, and there was always a smug aftermath with my mates where I boasted how much the other guy did not quite know the value of what he surrendered and how clever I was to make the swap. Did not do it since though, and I do not know anyone who does it for real either, even in the thick of the Brazilian sertao… What I am trying to say is that swaps like that are more like a ritual of collecting rather than a meaningful and spread out economic activity.

                And it does matter whether barter existed or not, because it makes us think of money as commodity money, whereas money are at the conceptual level a relationship – a credit/debt relationship.

                • Obviously something to be delivered later involves credit. That was not the question.

                  As for stamps, or baseball cards, if the trade occurs then both parties feel they have benefited from it. It may have nothing to do with any objective measure of the relative values. We may each be giving up something of which we have several, and getting something we have none of. In fact, that is the usual motivation for any trade, including trade involving modern money. Farmers don’t sell trade corn for more corn, they trade for tractor parts.

                  Again, it doesn’t matter what was, only what is. If anyone is fooled to believe that money hasn’t evolved in the past 40,000 years, there is probably no hope.

                  • Well, I suppose I never intended to prove that kids don’t swap stamps or baseball cards. What I was trying to say is that barter does not suffer from the lack of coincidence of wants, because it always goes into credit/debt mode, where the coincidence of wants is not relevant anymore, and I don’t think anyone has felt the need to invent money to overcome this.

                    Calgacus had a very good insight, when he classified barter as credit/debt settled immediately. So when we have coincidence of wants, credit/debt gets settled immediately. When we do not have coincidence of wants, credit/debt gets settled in time.

                    There are many good reasons for the physical embodiment of money to move from people’s memory (you owe me a cow) to tally sticks to paper money and so on, but overcoming the difficulties of barter is not one of them.

                  • Hi, golfer1john

                    Yes, very good point about the apparent lack of advance in money.

                    I suppose the one (and only?) big advance in money over the last 40000 years was the invention of debt between a person and a society’s pool of labour.

                    We started with a relationship between two people (you owe me something to the value of a goat), and then we moved to a relationship between an individual and its country: “the country’s pool of labour owes me something to the value of a goat”, and here in my pocket are some government issued bits of paper that I can prove it with! This made money portable, and it was a great advance.

                    Other than that, the fact that money in its physical form morphed from silver ingots, to gold coins, to paper banknotes and to computer bits and plastic debitcards with chips in them, – this is just decoration on the cake, and not really relevant to the underlying concept of money as credit/debt.

                • Mr. Teodorescu — your examples of apparent barter which is not really barter (both in your comment here and in your web link) depend on the definition of barter.

                  A simple dictionary definition (Miriam Webster online) of barter is “to trade by exchanging one commodity for another”. Under this definition, your examples are largely barter as money is not directly involved.

                  Other definitions of barter (e.g. Wikipedia) state that the exchange must be immediate, without any delay, credit, etc. Under that definition, your examples are not barter.

                  I tend to assume the former definition of barter, while you obviously use the latter.

                  • Thank you for trying to clarify the matter in a rigorous way, ThomasW.

                    With all respect to the learned people at the Merriam Webster, the time dimension is essential here. If the exchange of physical things is not immediate, then what is exchanged in reality is the goods against someone’s promise to pay. At a later date. Which is the definition of credit/debt.

                    A thought experiment: If I turn up at your house and I say I will swap your Ferrari for my Porsche, in a moment of boredom you might say “ok, lets do it”. Is that really the same thing with “give me your Ferrari now, and in thirty days I will come back and give you my Porsche in exchange”? Will you be equally comfortable in both scenarios? Considering you never met me before?

                  • Mr. Teodorescu — Mr. Teodorescu – Again, the question is whether barter can include a credit or deferred transaction or whether barter transactions must be done immediately

                    I stopped at the local library today and polled their reference works. All of their unabridged dictionaries (Websters, Funk and Wagnalls, Random House, and Oxford English) define barter as “the exchange of goods without the use of money” or words to that effect. None of them said that barter cannot involve the concept of credit or a transaction over time. Both encyclopedias I found (Britannica online and World Book) also define barter simply as exchange or trade without money as an intermediate. In fact, Britannica defines a transaction denominated in some standard unit of exchange but done without the use of money as barter, along with transactions over time involving credit. The Wikipedia article on barter includes an illustration at the top right of a farmer paying for a yearly newspaper subscription using farm goods, obviously a credit transaction.

                    So barter is not precluded by a credit / debt relationship. And the limitation of barter (each party must have something the other wants) also still exists. Your examples in you comment above and the link you provide thus actually are barter – you are trading something you have for something somebody else has. Your agreed on “price” (what each person provides) may be based on a monetary value, but as a direct exchange of goods, even with a time separation, this is still barter.

                    As with any term, there is also a large grey area of transactions which could be considered monetary, barter, or both. The real problem in any discussion like this one is to make sure all parties give the same meaning to the words used. Otherwise it’s too easy for two people to spend hours arguing while saying the same thing.

                  • My preferred definition is:
                    Barter – the direct, spot exchange of commodities where both parties seek to maximize their utility.

                    This excludes credit & monetary transactions as well as Gift Exchange.

                    This seems to be the definition used most often by anthropologists.

                  • We do assume different definitions for “barter”. The question in terms of the original topic here (Mitchell Innes’s paper vs Adam Smith, etc) is how each of those authors would define terms like “barter” or “commodity money” and to be sure we aren’t assuming the wrong definition when analyzing their work.

          • “Trade through much of the world dependent more on the nature of the coin (silver/gold content) than what the particular issuing government said the coin was worth.”

            This raises many important points (that are beyond me):
            – A nation’s money when used domestically vs internationally
            – Domestic vs International Commodity Standards
            – trust

            Any nation will accept foreign currency at fiat value only if it believes that it will be accepted by the issuing nation in return for goods & services or if there exists some other way to get their face value.
            This depends upon trust .
            The advantage of using precious metals as debt tokens is that even in a worst case scenario where the foreign currency becomes worthless as money, any foreign “precious metal” currency that is held will at least have value as a commodity.
            The more trust deteriorates, the greater will be tendency for money’s value to approach its value as a commodity.

            Any thoughts?

            • The value of a fiat currency in foreign hands depends, I think, also on the demand for the exports of the issuing country. No matter how much there is trust, if they produce nothing the world wants (or don’t allow it to be exported) then their fiat will have little value internationally. In that situation, if they want to import, then a commodity-based currency might be necessary, or a peg to an accepted currency, backed by reserves.

            • Vilhelmo – I basically agree with your comments on money vs specie payment in foreign exchange. People accept money for goods because they know they can use that money to purchase other goods. Money has value because all (or most) members of society accept that money has value. In foreign exchange, this isn’t always true. My daughter learned that when she returned from an overseas trip with 22000 South Korean Won. I haven’t found a bank in my area of the United States which will exchange South Korean money, so she has four pieces of paper with no purchasing power as opposed to the roughly $20.00 the exchange rate would indicate.

              When the same money cannot be used by both parties in an exchange (as can happen in trade between nations) then goods must be exchanged. In this past this was in the form of gold or silver specie payments, today a few major currencies (e.g. the US dollar) serve this purpose along with financial markets which provide conversion between currencies.

              • I think it is this fluctuation in trust that Graeber is talking about when he speaks of the alternation between periods of virtual and metal money.

  15. Reynold Nesiba

    Thank you all for your thoughtful comments, commentary, and discussion. I’m really pleased that so many folks have engaged in this conversation here and in the debate thread on New Economic Perspectives.