Anthropology of money

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I thought it might be interesting to contrive a mythical history of money from its status of non-existence to the present day. This might help understand what this mysterious thing called money is, how it works, where it came from, and where it might be going next.

As you know, JC is a first-rate windbag but no kind of economist, much less an anthropologist, so this will not be an anatomically-correct social history of commerce or civilisation, but rather an exercise in imagining how money arose and why it has the unusual qualities it does.

It doesn’t matter that this story is not perfectly accurate — the details of how we got to where we are vary greatly depending on where you start from, after all — as long as every step is legally and economically plausible.

One rule of evolution by natural selection is that each stage in an organism’s evolution must be viable in its own right: it must function and be fully fit for the environment in which it emerges. So it must be for the stages of the evolution of money. Each stage must be viable in its own right.

We will start with the outlying scenario that is disconnected from the rest: exchange of goods between “hostiles” where there is no community of trust or interest at all. This is barter, and it gets economists and anthropologists quite worked up.

From there we will look at the evolution of resource sharing within trusted communities, and how money arose out of that. As we will see, money only makes sense between communities with a significant degree of interdependence, shared interests and values.

A key theme we will return to is that money profoundly, inescapably, inevitably represents indebtedness.

Barter: the zero trust environment

The first difficulty in barter is to find two persons whose disposable possessions mutually suit each other's wants. There may be many people wanting, and many possessing those things wanted; but to allow of an act of barter, there must be a double coincidence, which will rarely happen. A hunter having returned from a successful chase has plenty of game, and may want arms and ammunition to renew the chase. But those who have arms may happen to be well supplied with game, so that no direct exchange is possible.

— Stanley Jevons, Money and the Mechanism of Exchange

How would you trade with a “hostile”? A person you’d trust no further than you could throw? There could be no money or credit in any bargain: there would be no consensus on the value of any currency nor any trust in a promise to pay it.

Nor, for the same reason, could any services be involved: services take time and imply a level of trust and interdependence. Hostiles do not trade services.

It must therefore be an outright exchange of goods, fully and finally settled on the spot: the original “spot transaction”.

Once settled, neither side has any further obligations beyond assuring the other’s unmolested retreat from the trading post to safety with her new goods.

This is “barter between aliens”, more or less. It is unwieldy, and its conditions for success — a “double-coincidence of wants”, as Stanley Jevons put it — is rare even “in the wild”. This is why “ongoing barter arrangements” would be intrinsically unstable — they would quickly mutate into a community of trust where credit, currency or convenience would recommend a better way of doing business, as described below. We should not be surprised there is little in the anthropological record to suggest sustained “barter economies”.

Simple community of interest

Transactions between persons within a community where they share interests, language, an expectation of repeat business and a memory of past business, are a very different proposition.

Much more useful is an arrangement with no such “double coincidence”: I want sheepskins and have arrowheads; you have sheepskins but don’t want my arrowheads, we can go ahead as long as we can somehow sort out what you need in return elsewhere in the community, or you trust my promise to make it up to you later.

These premarket systems didn’t grow out of barter but were more like generalised reciprocal mutual contributions, relying on social memory between in-groups. Participants “put in” and could “take out” according to their acknowledged contribution. These “social debts” were not exact: they could not be quantified — how do you compare arrowheads with sheepskins? What value is the loan of a tool? — and therefore were never exactly discharged. There was a residual ongoing mutual interdependence.

The nature of this mutual interdependence is indebtedness. Not the financialised, fully-accounted-for, monetarily fixed and time-bound indebtedness we are used to today, but “social indebtedness”, whose point was to remain always partially undischarged.

Community members would draw from the pool against an acknowledgement that they were bound to put something of broadly equivalent value back. It wasn’t unitised in any way, yet, but that was the underlying relationship. There was an early role for pillars of the community — priests, elders and chiefs — to oversee and enforce these community values.

A major advantage of this residual social indebtedness was its role in binding the community together. Participants could never say “my debt to you is fully discharged; I owe you nothing”.

If financial indebtedness is, in James Carse’s terms, a “finite game” — time-bound and rule-bound and scheduled to definitively end — then social indebtedness is an “infinite game”: it has no rules, no timeframe and it stretches out indefinitely into the future. The name of the game is to keep the arrangement going. To ensure that, participants are incentivised to trust each other, act in good faith and leave something on the table.

There was no need for encapsulated, barter-style “delivery versus payment” business. Rather, members of the community could contribute or withdraw from community resources “on account”, recorded in the general social memory. People talk: reputation was paramount. The community operated on credit.

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 it became harder to keep track of these mutual obligations. The central pillars of the community began to write them down, articulating their value against a community-recognised standard. These would function as abstract articulations of value (not units of exchange).

This took that hitherto nebulous social indebtedness and, literally, put a number on it. This was broadly a convenience to remove friction in transactions, tamp down arguments, and speed up the system. People did not expect to fully and finally settle their debts, but it helped to know, centrally, who owed what to whom.

So what was that “community-recognised standard”? An abstract number would be weird — what is a “one” worth? — so it should be a number of “somethings”, having an agreed stable value. But what “something”?

Staple commodities were a good first choice for that something: everyone understood the “use” value of an ox, an ass or a barrel of grain and it rarely changed. But their “exchange” value could be dragged up or down as weather, crop failures, disease, war and so on affected supply and demand. This made consumable commodities less satisfactory yardsticks of abstract value.

A stable store of value

An ideal “yardstick” would not fluctuate in this way. Supply would be unusually stable — producing more of it would have to cost more than its current exchange value, so no one would bother — 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, without having any other use.

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: what kind of commodity was in high demand but had 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.

At first, no actual metal was involved in the exchange: it was simply an abstract measurement scale, a “yardstick”. 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. You did not need to leave anything on the table.

Again, to labour the point: when you delivered goods, you received credit in nominal bits of precious metal. You could “spend” these accumulated credits on acquiring goods. The credits themselves stood for the non-satisfaction of the buyer’s obligations under that transaction. The credits reflected indebtedness.

The centralised marketplace

As the centralised tabulation system caught on it enabled faster and more sophisticated transactions, brought more and more people into the market — which emerged into a physical meeting place in the town. Eventually, the central system became a victim of its own success: the “temple ledger” struggled to effectively track and manage every single trading record between market participants. Merchants wished to transact with many different traders throughout the day. they needed something quicker still.

Precious metals were malleable, easy to unitise and convenient to carry. They embodied the abstract unit of account in a portable, immediately verifiable form. To save recording transactions in a central ledger, merchants started to exchange actual weighed bits of metal directly in return for goods. This worked well and in their stash of coins, merchants could readily see how much credit they had at any time, but created certain problems and presented certain opportunities:

The key problems were the frictional costs of weighing and verifying metal purity and managing the potential for fraud through clipping coins and adulterating metal. At this stage, the metals were not symbolic of anything, but actual amounts of a commodity exchanged in discharge of a contract.

The key opportunities they could represent indebtedness and were easily tradable, which presented an opportunity for traders with a good supply of materials but, as yet, no metal to trade for goods and tools: they could borrow metal against the value of their material supplies.

What about war

The historically-minded among you will have clocked the peaceful, free-trading, libertardian model JC has drawn and will rightly be chafing against it. It was not all snowflakes and unicorns back in the day. There was problematic behaviour. Nor were inter-tribal relations based exclusively on a general agreement on tariffs and trade. For most of human history, and almost certainly for more of it as it unfurls, pace Francis Fukuyama — communities spent a lot of time fighting, defending their territories from each others’ aggressions. This was hard to do in an uncoordinated way, and those societies that acquired a central “Leviathan” — whether by outright domination, divine rights or the proceedings of an anarcho-syndicalist commune taking it in turns to act as sort of executive officer for the week — to take care of that business were better able to defend, and prosecute, the collective interest and keep the peace within it. If you could maintain a standing army you could keep folks straight in the market: and the state was soon involved in arbitrating disputes, standardising weights and measures, enforcing contacts and eventually minting coins with guaranteed weight and purity and penalising those who would debase or counterfeit the king’s currency. And the king had quite a bit of it, too: citizens contributed a portion of their personal capital and resources to the “crown” in return for its protection. The state became a significant owner of capital in its own right. The king’s currency became the standard. It acquired a symbolic value greater than its intrinsic value — precious metal didn't really have an intrinsic value remember — and we had a fully functioning first currency.

The cost of money

With a currency we have created a new tradable quasi-commodity and this has implications for its return. Remember its role here: cash on hand represents valuable capital you have given away. It denotes something owed to you that you do not have it is an abstract receipt.

Within the central ledger of the market, remember, a credit to your name of that stable representation of value — it was not yet a “store” of value; that only arrived later with metal coinage — represents an amount you do not have. You got it in return for the productive capital you have given away. To be sure, it has value: it represents a potential capital investment in productive assets, but as long as you hold it in your purse and don’t spend it, it is capital unengaged and it earns no return. We should not be surprised that, over time, compared with productive capital, its relative value declines.

This challenges the idea of currency as a “stable store of value”, but plainly the rate of wastage is unavoidable and predictable. Cash is a “wasting asset”. You should not want to hold any more than you have to.

Happily, cash it is also a transferable, negotiable item: in the market, it trades like a commodity. So, if one trader has an excess of cash it does not wish to invest, other traders may be prepared to buy that cash, against a return representing that predictable nominal capital investment, so they can use it.

Now, in a single currency market, “buying” cash in the spot market is nonsensical — why would you pay a dollar for a dollar? — so such a transaction must “settle” in the future: you give me the cash I want now, and I will pay you for it later, plus an uplift representing your capital return over that period. You could analyse this as a “forward sale”, since you have no legal claims over the cash once you have given it to me, and what I pay you for it is, theoretically, a discrete sum, but in common parlance we call that a loan: I let you have cash for a time, you give it back, and you pay me some “interest”.

For the loan to make sense, the interest should (i) broadly offset the wastage of the cash asset throughout the loan (ii) act as an “insurance premium” against the remote risk you cannot pay back the cash at maturity and (iii) give me a little extra for my trouble.

There was an alternative business of taking money from people with an excess, so you could lend it to people who needed it. The economics here were the same, only the little extra in (iii) was a negative sum from the proposed interest rate.

A class of market participants arose who were dedicated to sourcing “deposits” from those who had an excess, and aggregating and lending them to those who had too few. These businesses we know as banks.

Capital

We can also see that any capital that is disengaged from the market is a drag on productivity. Over a time period there will be a portion of currency sitting unused in this way.

In the “unit of account” phase there was a lot of this kind of wasteage. With the arrival of transferable currency this reduced, but merchats would still hold coin in their wallets (and not in a bank). With electronic banking, we carry less and less hard currency, and (in theory) our economy becomes more efficient.

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.

Caption text

Trade type	Trust level	Laterality	Final settlement	Indebtedness	Interest	Accounting	Game style
Barter	Zero	Bilateral	On exchange	None	N/A	N/A	Finite
Community of interest	High	Multilateral	None	Social	N/A	N/A	Infinite
Units of account	High	Multilateral	On account	Social	None	Centralised	Infinite
Stable store of value	Medium	Multilateral	Medium	On account	Financial	Centralised	Infinite
Coinage	Bilateral	Medium	On exchange	None	None	Decentralised	Finite