The Origin of Money

A few weeks ago a blogger at CNBC discussed the relative merits of Austrian monetary theory in comparison to modern monetary theory (MMT). The issue at stake is the origins of money: Austrians highlight the fact money comes into existence as the medium of exchange, while MMT points to governments requiring people to pay taxes with money.

The author admits both have merit, and calls for some sort of reconciliation between the two. Specifically:

“The Austrian theory has never adequately explained how the government got control of money. Mises and others talk about the government monopolizing coinage but this still doesn’t explain why government money retains its role as the medium of exchange.”

Obviously, the author has not read Rothbard’s What Has the Government Done to Our Money? As he demonstrates, the government not only monopolizes the mint, they pass legal tender laws. So not only do governments demand taxes be paid in money, they require that all transactions can be paid in the monopoly money. So a bank might print its own money, but people can always pay in the government’s money.

On MMT:

“The MMT explains how the government can foist whatever currency it wants on a people, including fiat money. But it doesn’t go far enough in explaining why people accumulate currency far beyond their possible needs to extinguish tax obligations. The tax obligation story doesn’t at all explain why money has a particular exchange value.”

I agree with the author here. A government cannot simply foist a money on people. Imagine gold is becoming money in a community, but the government decides to demand  sofas as taxes. People would buy sofas to pay off the tax, but still use the naturally developing money in other situations.

The government might further pass a legal tender law, forcing people to except sofas as payment. In this scenario, the legal tender law would likely simply be ignored by people, or else the government would have to take drastic measures to enforce the law.

Simply put, money evolves naturally on the market as Mises describes, and this natural process imposes limitations on the government’s monopolization. As further evidence, look at the well documented case of cigarettes being used as money (medium of exchange) in prisons.

So the two theories are not incompatible. Austrian monetary theory does not ignore the effects government monopolization. In fact, Rothbard has meticulously chronicled the progression from private community money to fiat government paper money.

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6 Responses to The Origin of Money

  1. Unlearningecon January 26, 2012 at 12:29 pm #

    David Graeber buried the notion of money arising spontaneously via barter in his new book ‘Debt: The first 5000 Years’. The prison example only applies because inmates have had prior experience of money – something similar happened in the former USSR. However, when people have not experienced money it rarely arises as a medium of exchange and debt is almost always the form it takes.

    • krlatham January 30, 2012 at 10:33 pm #

      Graeber’s position does not unseat Menger’s theory. Menger’s point is that barter exchange is a fleeting phenomenon. Just because it logically precedes indirect exchange does not mean it had to exist for long periods of time without indirect exchange. So of course there is no evidence of large barter economies. Graeber fails convince me that advanced debt systems developed into money as a unit of account without reference to barter prices. Graeber’s emphasis on Mesopotamian temple and palace complexes in arbitrarily fixing a unit of account without reference to barter, while possible, leaves out the much simpler possibility that people could ignore these arbitrary units and use indirect exchange instead.
      Robert Murphy has a fuller critique here:
      http://mises.org/daily/5598

      • Vilhelmo August 15, 2013 at 7:33 am #

        krlatham – “Graeber fails convince me that advanced debt systems developed into money as a unit of account without reference to barter prices”

        Bronze Age Mesopotamian silver money was valued & maintained, by fiat, as equal to a gur of barley. It was acquired, refined, standardized, issued, valued, set as the unit of account by the temples & palaces (public sector).

        “The essential point to recognize is that the early monetary system was a more complex phenomenon than the monetary commodity itself. Its major initial application was to facilitate settlement of the debts that ensued from Mesopotamia’s specialization of production as between the large institutions and families on the land. The debts owed by traders to the temples and palaces for commercial advances were part of this system, as were rent debts.” – Michael Hudson

        “‘Money’ was more than a commodity; it was the overall schedule of price equivalencies, created along with weights and measures to form a system of interlocking parts able to coordinate resource flows and denominate debts owed to the public institutions.” – Michael Hudson

  2. Unlearningecon February 1, 2012 at 5:33 am #

    That critique is pathetic – Murphy hadn’t even read the full interview, let alone the actual book! What you’re basically doing in denying historical evidence on the basis of ‘logic’. When this happens in normal science people tend to favour the evidence. Your argument basically amounts to personal incredulity – how can people have used debt when barter is much easier in my head??

    Sure, you can say that just because no instances of barter have been spotted, it doesn’t prove it didn’t happen. Just like I can say that just because no instances of aliens coming and introducing money have been spotted, doesn’t prove it doesn’t happen. The burden of proof lies on the person who is claiming that a process or event took place – you are reasoning like a creationist (no surprises there as Murphy actually is one).

    Graeber responded to Murphy and Murphy basically concede the point. For a full review of the Murphy-Graeber debate, see here: http://socialdemocracy21stcentury.blogspot.com/2012/01/david-graeber-versus-robert-murphy.html

    • krlatham February 6, 2012 at 4:50 pm #

      I’m still unsure how why one good was chosen as a unit of account. Even if debt precedes money in certain communities, and people are paying each other back across time but still in basic barter, we’ve gotten nowhere new. I’m interested in hearing why 1 good was chosen as a unit of account over other goods, especially if that story includes some sort of indirect exchange (even across time). I understand Graeber is making a less strict claim than what Murphy attacked, but I’m not sure the point he makes differentiating between unit of account and medium of exchange is accurate. I have ordered Graeber’s book to find out in more detail.

  3. Lord Keynes February 6, 2012 at 11:07 pm #

    “Simply put, money evolves naturally on the market as Mises describes, and this natural process imposes limitations on the government’s monopolization. As further evidence, look at the well documented case of cigarettes being used as money (medium of exchange) in prisons.”

    The cigarette money emerging in WWII POW camps is worthless as evidence for the historical origin of money. because the people in question were already perfectly familiar with money and a price system.

    http://socialdemocracy21stcentury.blogspot.com.au/2012/01/david-graeber-versus-robert-murphy.html

    The Austrians are also just grossly ignorant of historical evidence, where we see strong evidence that money as a unit of account emerged by design in ancient Egypt and Mesopotamia in temple institutions – huge, collectivist, planning entities, from weight units:

    http://socialdemocracy21stcentury.blogspot.com.au/2012/01/origins-of-money.html

    http://socialdemocracy21stcentury.blogspot.com.au/2012/01/mises-on-origin-of-money.html

    http://socialdemocracy21stcentury.blogspot.com.au/2012/01/menger-on-origin-of-money.html

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