This lecture covers the development of money in response to the needs of complex economies. It begins with a discussion of gift economies. It then examines the factors that led to the growth of commodity economies. Find out how we came to use money, rather than goods, for commerce.
Gift or Debt Economy
Meet Stan the hunter. Stan has killed a deer. He would be hard-pressed to eat an entire deer on his own, so when Stan catches game, he shares it with his tribe. In this way, food is not wasted. Stan's sharing also serves as a sort of insurance. Even if Stan has no luck hunting tomorrow, it is likely someone else in his tribe will. That tribesman will share his meat with Stan, since Stan has shared his meat with him.
This system is called a gift, or debt, economy. Stan gives the gift of food to his tribesmen in their time of need, and they return the favor. This gift economy is most likely the oldest form of economics and probably dates back to our time as hunter-gatherers. Yet the gift economy can do more than just prevent waste and provide food insurance for nomadic hunters. It also facilitates the division of labor for settled farmers.
In a gift or debt economy, people give gifts in order to receive favors in the future
Meet Jack the farmer and Jill the seamstress. Jack raises pigs. Jill makes clothes. Because Jack raises pigs, he often needs new clothes. However, Jack does not have the time to make his own clothes, so Jack has made an informal arrangement with Jill. Jack gives Jill a nice cut of meat every time he slaughters a pig, and Jill makes clothes for Jack when he needs them. This is a more complex form of the gift economy. Jack gives Jill the gifts of pork chops, which put her in his debt. Jill pays off her debt by giving Jack the gift of clothing. Jack has similar arrangements with the other members of his village. He regularly gives food to the Ed the potter, Ted the blacksmith, and Fred the weaver.
This way, Jack doesn't have to carry around pork chops with him when he goes shopping. It also keeps Jack's friends from having to accept a fresh pork chop every time Jack wants something. People give Jack what he needs, not in direct exchange for food, but out of their debt to him. Finally, the gift economy keeps Jill from having to figure out how many pork chops a sweater is worth.
Thus we have seen the benefits of a gift economy. In its earliest form, it keeps food from being wasted and it provides a sort of food insurance. In more complex agricultural societies, gift economies enabled the division of labor by allowing each member of a society enjoy the fruits of everyone else's labor, while allowing them to focus on their own task. Finally, gift economies create bonds of obligation that hold a society together. The gift economy system works great with friends and neighbors - people you're going to see every day and who cannot forget their debt to you. Yet when villages start growing into towns, it becomes increasingly difficult to know everyone. A gift economy cannot work between strangers because there is no guarantee that the stranger will repay the debt with a gift of his own. So how are strangers supposed to trade with one another?
Bartering in a Commodity Economy
One solution is bartering. Tom the stranger could trade Jill the seamstress something for a shirt. Yet for this to work Tom must have something that Jill wants that is of similar value to the shirt. This is called a coincidence of wants, and it is a hard thing to come by. There is no guarantee that Tom the stranger will have anything that Jill the seamstress wants, and even if he does, there is the problem of value.
Say Jill wants Tom's knife. Well, Tom's knife is worth twice as much as Jill's shirt. So what is Tom to do? Cut the knife in half? Then it's no longer a knife, just a chunk of iron, which is worthless to Jill. It looks like this deal is going nowhere. But wait! Jill does need iron for sewing needles. Even though Jill can't turn a lump of iron into a needle, Ted the blacksmith can, and he always needs more iron.
Tom can give Jill an otherwise worthless lump of iron in exchange for a shirt. Jill can then take that iron to Ted the blacksmith. Ted can use some of the iron to make Jill's needles and keep the rest of the iron in exchange for his work. This system is called a commodity economy. Though different crafts require different goods, most of these crafts require at least a little bit of metal. Thus metal becomes a basic commodity for trade.
In a commodity economy, something that is of value to many people is traded for other goods
Ingots and Shekels
And indeed, lumps of metal called ingots are the first form of currency. Instead of trading in finished goods, like knives, which not everyone might want, people begin trading in the metal itself. By working with a raw material like iron, a buyer can give a seamstress the makings of a bunch of needles, a warrior the makings of a new sword, and a farmer the makings of a new scythe - all with one commodity.
Metal is not the only thing everyone needs, though. And there will always be people who do not need metal at all. Yet there is something everyone needs, and that is food. It is no surprise, then, that the earliest named form of currency, the Sumerian shekel, was originally a unit of weight for measuring barley.
The original shekel was probably a bag of grain of set weight, which people used to trade. Yet walking around with sacks of perishable grain proved inconvenient, whereas metal was portable, durable, and easily divided. Moreover, the value of grain fluctuates with the seasons. Grain is cheapest after harvest, and most precious in the spring, whereas metals retain their value over time. Over the years, the sacks of barley came to be replaced with ingots of metal, considered to be worth as much as a shekel of barley, and the name shekel transferred from the barley to the lump of metal.
Early Currency and CounterfeitersCommodity economies
Weight is a difficult thing to determine accurately without a scale, and a scale was a very precise, and thus rather expensive, tool for the age. Yet even if everyone had scales to measure the weights of ingots, they would have a difficult time ascertaining their purity. No sooner had people begun accepting lumps of gold as payment then some clever counterfeiters began coating lumps of lead with a thin layer of gold, or mixing precious metal with common ones to make ingots of impure alloys.
It would take a pair of Greek inventions - the touchstone and the measurement of volume by immersion in water - for a person to be able to measure purity at home. Until then, to facilitate trade, a way had to be found to guarantee the purity and weight of metal ingots. Trade is the lifeblood of a civilization, and without confidence in a commodity, trade would have been limited to gift economies between friends and neighbors.
Such transactions have two major limitations from the perspective of a ruler. First, gift economies do not bring goods into the civilization; they only move them around within a small group. Also, gift economies do not lend themselves to systematic taxation. With Jim paying his taxes in pigs, Fred paying them in baskets, and Jill paying them in clothes, the royal treasury will end up looking like a flea market.
To solve this problem, kings, priests and other leaders begin marking commodities with seals guaranteeing their weight and purity. This is the first official sort of money: bags or ingots of a commodity with a seal stating their quality and their weight. Such seals depended on people's fear of authority, either divine or secular, to keep them from debasing the currency.
The First Coins in Society
From sealed ingots, it was just a short leap to standardized coinage. Around 700 BCE, coins seem to have been invented independently in a lot of places, from the Aegean region to India to China. With coinage, merchants could function without carrying around weights and measures, and trade quickly accelerated.
The first coins were invented independently around 700 BCE in places such as China and India
Coins would continue to be the main form of currency for millennia. Their unique form reassured traders of their purity and also guaranteed their weight. Metal coins were just as durable as ingots, but more portable, and unlike hefty ingots, coins were already divided into useful denominations.
Yet coins had their own limitations. A coin economy is still very much a commodity economy. That is to say that the value of the coin lay in the metal - the commodity - that it was made of. The problem is that someone might cut bits of a coin off and still use it to buy something with its full purchasing power. This is where we get the term 'to cut corners.' To counter this, authorities made their coins round, but this did not prevent people from shaving a bit of gold off the edge.
Another problem with coins was that a civilization that traded precious metals for other commodities would soon find itself running low on precious metals. This problem would contribute to the collapse of the Roman economy. They took their gold and silver and traded it for silk and spices, and soon ran out of gold and silver.
Finally, no one would mistake a brass ingot for a gold ingot, but someone might confuse a brass coin for a gold one. Clever counterfeiters could replicate minting stamps to make brass coins look like gold ones, and thereby undermine confidence in the currency. The problems of coins would continue to plague Western civilization until the introduction of paper money, or fiat currency, from China around the 13th century of the Common Era. But that is a story for another lecture.
Suffice to say that money went through some interesting developments in the ancient world. Humans probably started out trading debts in gift economies, both as hunter-gatherers and as settled agriculturalists. With the growth of towns, gift economies gave way to commodity economies, in which a variety of products were assigned values relative to a common basic material - probably food at first; later, metals.
As early as 3000 BCE, authorities realized that the value, weight and purity of commodities were so important to trade that they needed to be regulated. Those authorities guaranteed the purity and weight of commodities with seals. Around 700 BCE, metal ingots with seals refined into coins, which would serve as the default currency in the West for about 2000 years. That is, essentially, the history of money in the West up to the introduction of paper money from China in the 13th century.