Anthropology of money
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Banking basics
A recap of a few things you’d think financial professionals ought to know
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Imagine an anthropological history of money that traces from outright arms-length barter to trade of goods against private promissory notes to the creation of bilateral indebtedness to the centralisation of promissory instruments through private intermediaries (i.e., banks) to the standardisation of promissory instruments against abstract units of value to the creation of currencies by central government agencies.
Not sure it really matters how historically accurate it is as long as it is plausible — each stage in the evolution must stand on its own two feet as a sustainable model of sociopolitical interaction — in biological terms, it must be a viable organism in the context of its given environment. But once we've done the exercise let’s map it against the record.
Key waypoints in that transition:
Zero trust
All exchanges for equivalent value, at arm’s length with no requirements for shared values, much less ongoing obligations between the parties (beyond letting each other retreat from the exchange place with their goods without violence) will necessary expectations of further trade.[1] This is “barter between aliens” more or less. It must be barter because any form of promissory instrument or “currency” or abstract token of value implies consensus in a measurement or trust in the credit or performance of someone.
Features: no reputational component bilateral, discrete, delivery versus payment, payment in kind.
Simple community of interest
Transactions between persons known to each other in a community where there is an expectation or repeated trade and a memory of past trades, such that reputation is important. These premarket systems didn’t grow out of barter but were more like generalised reciprocal mutual contributions, relying on social memory. Participants “put in” and could “take out” according to their contribution. An important thing here is that these “social debts” were not exact, were not financialised and could never be exactly discharged. This was a key advantage: the residual unarticulated mutual indebtedness helped bind the community together. There was never a time where a participant could say “my debt is fully discharged; I owe you nothing”.[2]
On the other hand, the community trust meant there was no need for barter-style “delivery versus payment”, but rather one made withdrawals and deliveries into the communal pool “on account”. Reputation management was still important.
Features: fundamental reputational component, largely bilateral, accretive, delivery on account, payment in kind, non-interest bearing, not financialised.
Units of account
As communities grew more complex and multilateral it became harder to track mutual obligations. This involved (i) writing them down, and (ii) articulating their value against a community-recognised standard. These would function as abstract articulations of value (not units of exchange).
Staple commodities were a pretty good first choice for that community value system: heads of cattle and quantities of grain had well-understood, readily ascertainable use values, but their exchange values varied with supply and demand and could be dragged up or down as a result of weather events, crop failures, disease, war and so on. This made them less satisfactory as yardsticks of abstract value in the market.[3]
A stable store of value
An ideal commodity “yardstick” would not fluctuate in this way. Its supply would be unusually stable — in that producing more of it would cost more than its prevailing exchange worth — while on the demand side, it would not be depleted by consumption or wastage: it wouldn’t rust, rot, waste away or be eaten. It would be intrinsically precious — valuable in itself, just to be held.[4]
It would therefore hold a constant value, minimally exposed to supply or demand shocks. This would be a good measure of the exchange value of commodities that were vulnerable to supply and demand.
This is a pretty neat trick to pull off: a commodity in high demand but having no particular use. What sort of magical compound is like this?
Gold, in a nutshell.
Gold and silver — the first “precious metals” — had no intrinsic utility, except as jewellery, and that was a kind of “non-destructive editing” of the commodity that could reversed by melting it back into ingots.
Now the value of goods exchanged in the marketplace — and the credit and debt arrangements arising from their exchange — could be recorded by reference to a stable measure of value: a “notional”, or hypothetical, quantity of gold or silver. No actual metal was involved in the exchange: it was simply an abstract measurement scale. Participants delivered or acquired commodities in the market against an update in the record, often maintained by a trusted central institution like a temple, of their nominal value in gold. This sense of tabulation was the first step in the financialisation of this community indebtedness: now one’s contributions and withdrawals from the community could be exactly quantified and memorialised.
The community trust built from rolling undischarged social indebtedness in the community was replaced by the long term benefits of a reputation for cooperation (iterated prisoners’ dilemma). Those known and trusted to honour their commitments were more likely to gain access to further goods “on account” in bilateral arrangements.
The physical marketplace where traders of all goods gathered in a single location formative of early forms of transferrable credit. It strikes me that the need to “monetise” abstract receivables of manufactured goods to acquire more materials to manufacture more goods for sale is a key driver of an economy in its early stages.
Even today the velocity at which we can recycle receivables (or promissory instruments not only reduces our reliance on (and cost of) debt funding, but maximises the return of our receivable assets by converting them into cash that can be invested in productive capital.
As such we can explain most bank activities as optimising the funding of their lending activities. Capital is stationary if held in cash — this is like being indebted to yourself, so you slowly lose value because your capital is not engaged — moves slowly if deployed against simple interest bearing instruments (or non interest bearing ones like trade receivables) and mines best if converted into cash and reinvested.
Two thoughts: first, the drag of physical cash is not really a problem of malign central/reserve banking creating inflation by printing money, but more a function of its disengagement from the productive economy (physical cash is an “anti asset”).
Second, the cryptocurrency maximalist view that you can therefore take capital out of the “capitalist strip-mine” in the form of bitcoin and not suffer this loss of value is mistaken.
- ↑ Game theory trade-off works (is not a single round prisoners’ dilemma) because there is no possibility of defection: it is delivery versus payment.
- ↑ David Graeber illustrates the point by reference to a modern family: the children would never repay their debts to their parents, and say, “therefore I owe you nothing and need never see you again.”
- ↑ The metaphor is appropriate: a yardstick is a classic example of an abstract measurement not subject to supply and demand shocks!
- ↑ There is an interesting analogue here with intellectual property which, likewise, is not wasted or consumed when it is given away.