

Shelling Out: The Origins of Money (2002) - ironchief
http://szabo.best.vwh.net/shell.html

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nhaehnle
The article talks a lot about one origin story of money, namely the one
revolving around barter: roughly speaking, when there are N types of goods,
you don't want to keep track of an NxN matrix of relative values of those
goods; instead, you want to select a very small number of goods with
properties that make them useful to act as a common denomination.

There's obvious truth to that origin story, but it is also seriously lacking
and arguably leads to a lot of misconceptions about our modern _credit-based_
monetary systems.

Consider, for example, that societies in the timeframes the article talks at
length about (basically, before agriculture) were tiny and most likely rather
"communist" in their internal organization. All that stuff about barter is
only relevant for the interactions between different tribes.

So what happened when humans settled down and developed agriculture? That's
where the second origin story of money comes from.

For the first time, people had to keep track of who owned what, and who owed
what, _internally in a large group_ (cf. Dunbar's number). And they did that
by _inventing writing, number systems, and contracts_. A lot of the features
of modern societies co-developed (rather slowly by modern standards) in those
early agrarian cultures, including systems of taxation and credit, and
including our modern forms of money.

The story then basically goes like this: When you as the king raise an army,
you have to compensate your soldiers somehow. Initially, this certainly
happens by letting them plunder and keep the spoils of war. But with a
standing army - which you need as the society develops - that is no longer an
option. So you mint coins which you hand out to your soldiers, at the same
time telling your subjects that they have to sell their goods for those
coins.[0] As compensation, taxes can be paid using those coins, thus creating
the modern cycle of: state creates money to pay employees, employees buy goods
from producers using money, producers return the money to the state.

Note that you don't have to use coins - using shiny metal things is largely a
psychological trick. In England, wooden sticks (tally sticks) were used for
the same purpose for a long time.

[0] Most likely, people were familiar with shiny coin-like objects as art and
jewelry, and certainly those objects were valuable. Paying soldiers with coins
is a neat psychological hack to piggyback on the pre-existing meme of "this
type of thing is valuable". (Note that throughout a lot of history, coins were
worth significantly more than their metal content!)

~~~
loganmhb
Excellent reply -- a small but important (and elegant, I think) proviso is
that in the king-minting-coins scenario, it's not actually necessary to
require that citizens exchange goods for the coins; requiring them to pay
taxes in the coins accomplishes that on its own, if the only initial source of
coins is from the soldiers. Their utility in paying taxes (which, because
everyone has to pay taxes, extends to general utility as a medium of exchange)
explains the difference in value between the coin itself and the metal
content. (I recall a lot of interesting anthropological research on this in
David Graeber's book, Debt: the First 5000 Years.)

There are some surprisingly direct debt->currency relationships that persist
today; for example, the Bank of England, iirc, retains the ability to print
money because it loaned £2 million in silver to the crown in 1697 or something
like that (no guarantees on sums and dates) -- in other words, British
currency is literally commodified debt owed by the crown (which is presumably
the most trustworthy party in terms of ability to pay) to the Bank of England,
which the bank has the power to distribute.

~~~
runeks
> Excellent reply -- a small but important (and elegant, I think) proviso is
> that in the king-minting-coins scenario, it's not actually necessary to
> require that citizens exchange goods for the coins; requiring them to pay
> taxes in the coins accomplishes that on its own, if the only initial source
> of coins is from the soldiers.

Historically, another piece of legislation usually followed governments trying
to force their money into circulation: the concept of "legal tender". A
currency having "legal tender" status means that all debts are payable in this
currency, even those incurred in a different currency/money (eg. gold).

For example, in the US in 1862, government-issued currency was given legal
tender status, to finance the Civil War. This act forced gold creditors
(people who were owed gold) to accept payment in this government-issued
currency:
[https://en.wikipedia.org/wiki/Legal_Tender_Cases#Legal_Tende...](https://en.wikipedia.org/wiki/Legal_Tender_Cases#Legal_Tender_Act_of_1862_and_ensuing_litigation)

This essentially destroys the credit market for competing currencies. All
debts can be paid in government-issued currency, and few creditors wished to
lend out gold, only to be paid back in paper notes, albeit government-issued.

As far as I can see, free currency competition requires both:

1) The ability to choose the numeraire (eg. Japanese Yen, Euros, Dollars,
gold, silver) yourself when reporting your taxes, and paying taxes _in_ the
chosen numeraire.

For example, say I hold an amount of US Dollars, and my chosen numeraire is
gold, then if the gold price (XAUUSD=X) falls, and I buy gold using these
dollars, I need to pay taxes on a capital gain, as the gold price of these
dollars has gone up since I purchased them ("gold price of dollars" is the
inverse of the "dollar price of gold" (the latter being XAUUSD=X)).

2) The abolition of legal tender law. Legal tender law interferes with the
credit markets of competing currencies, by declaring that debts incurred in
any currency/money, can be extinguished using government-issued legal tender
currency.

So, in short, requiring capital gain taxes to be paid using government-
approved currency as the numeraire disincentivizes people from _hoarding_
competing currency, while legal tender law disincentivizes people from
_lending out_ competing currency. Both these activities are needed for any
type of money to function as money.

~~~
nhaehnle
You provide some interesting thoughts.

As for 1: This is not practically possible, and/or forces the government to
artificially fix exchange rates between currencies, which would defeat the
whole point.

Why? Because huge parts of the law deals with absolute monetary terms.
Gasoline taxes, for example, are typically a fixed amount per litre. Tax
exemptions are usually of the form "no tax below $X amount of $currency".
Going beyond tax law, you have the same issue with fines. Reasonable people
can prefer this kind of absolute amounts in certain areas of the law, but this
forces the government to either "pick a winner" (i.e. settle on one currency
it uses in its legal texts) or to artificially fix exchange rates (by giving
the amounts in all existing currencies).

This pretty much means that currency competition cannot exist.

The much more important point is this though: Currency competition does not
serve a useful purpose. It only adds friction to the everyday economy.
(Removing this kind of friction is a big reason why the Euro is still pretty
popular with many people despite the macroeconomic mess it has lead to.)

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o_____________o
On this subject, I strongly recommend watching an illustrated documentary
called "Money As Debt":

[https://www.youtube.com/watch?v=jqvKjsIxT_8](https://www.youtube.com/watch?v=jqvKjsIxT_8)

~~~
marcell
The tone/editing takes away from this video's credibility, but if you look
past that and watch with healthy skepticism (for lack of a better word), there
is a lot to be learned.

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mksndz
See
[https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years](https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years)

