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:
Barter: 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 — a zero-trust system — but were more like generalised reciprocal mutual contributions, relying on social memory between in-groups. There was a significant gap to bridge between the “hostile” conditions in which barter operated and the social community conditions having enough trust to rely on mutual promises.
Here, 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, and could not be, exactly quantified — how do you directly compare the value of arrowheads and sheepskins? — and therefore could never be exactly discharged. there was a residual ongoing mutual interdependence.
Take a moment to observe the nature of this mutual interdependence: it is indebtedness. Not the financialised, fully-accounted-for, monetarily fixed and time-bound indebtedness we are used to in the markets today, but social indebtedness, whose point was not to be discharged, but to be ongoing. Debt in the sense that you draw from the pool against an acknowledgement that you are bound to put something off broadly equivalent value back. It isn’t unitised in any way, yet, but that is the underlying relationship.
The key advantage of this residual social indebtedness was its role in binding the community together. There was never a time where a participant could say “my debt to you is fully discharged; I owe you nothing”.[2] If financial indebtedness is, in James Carse’s terms, a “finite game”, social indebtedness is an infinite game: its point is to keep the arrangement going.
This growing background of community trust meant there was no need for encapsulated, barter-style “delivery versus payment” trades. 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.
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).
Now we are taking that sense of abstract, ineffable community obligation and, literally, putting a number on it. This we can add and subtract — but this is broadly a convenience to remove friction in transactions, to tamp down arguments, and speed the system up. People don't expect to fully and finally settle their debts, but it is helpful to centrally know what they are.
A number in the abstract would be weird — what is a “one” worth? — a number of somethings, having an agreed stable value would work better.. But what?
Staple commodities were a good first choice for that community value system: everyone understands the “use” value of an ox or a barrel of grain — 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 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 as a physical meeting place in the town. Eventually, it became a victim of its own success: the central temple ledger struggled to effectively track and manage multilateral trading records between market participants who wished to transact with many different traders throughout the day.
Malleable metals were easy to unitise and convenient to carry in person and could embody 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.
This sets up the natural role for state power to emerge in standardizing currency, as the state can:
Standardize weights and measures Stamp/mint coins with guaranteed weight/purity Enforce penalties for debasement or counterfeiting Create a unified currency area within its territory
The cost of money
With currency we have created a new tradable quasi commodity and this has implications for its return. 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 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, against productive assets, it declines in relative value.
This itself is a challenge to the idea of currency as a “stable store of value” but it is unavoidable and predictable. Cash is a “wasting asset”.
But it is a transferable, negotiable item: in the market it has all the qualities of a tradable commodity (it isn’t an asset so much as an anti-asset). So if one trader is accumulating excess cash that it does not wish to invest, other traders may be prepared to buy that cash, against a return representing capital investment, so they can use it.
In a single currency market, “buying” cash is a contradiction in terms — it is self-defeating — so the transaction must “settle” in the future: you give me the cash now, and I will return it later, plus an uplift representing your capital return. This is best explained 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 over the period of the loan (ii) act as 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 who had 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 that came out of the proposed interest rate.
A class of market participants arose who were dedicated to sourcing “deposits QQ 1” from this who had an excess, and aggregating and lending them to those who had too few. These businesses we know as banks.
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.
| 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 |
- ↑ 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.