Most of us have an idea of how money came to be. It goes something like this: People wanted to exchange goods for other goods, but it was difficult to coordinate. So they started exchanging goods for money, and money for goods. This tells us that money is a medium of exchange. It’s a nice and simple story. The problem is that it may not be true. We may be understanding money entirely wrong.
The above story assumes that first there was a market, and then people introduced money to make the market work better. But some people find this hard to believe. Those who subscribe to the Chartalist school of thought give a different history. Before money was used in markets, they say, it was used in primitive criminal justice systems. Money started as—and still is—a record of debt. It is a way to keep track of what one person owes another. There’s anthropological evidence to back up this view. Work by Innes, and Wray suggest that the origins of money are more like this:
In a pre-market, feudal society, there was usually a system to maintain justice in the community. If someone committed a crime, the authority, let’s call him the king, would decide that the criminal owed a fine to the victim. The fine could be a cow, a sheep, three chickens, depending on the crime. Until that cow was brought forward, the criminal was indebted to the victim. The king would record the criminal’s outstanding debt.
This system changed over time. Rather than paying fines to the victim, criminals were ordered to pay fines to the king. This way, resources were being moved to the king, who could coordinate their use for the benefit of the community as a whole. This was useful for the King, and for the development of the society. But the amount of resources coming from a criminal here and there was not impressive. The system had to be expanded to draw more resources to the kingdom.
To expand the system, the king created debt-records of his own. You can think of them as pieces of papers that say King-Owes-You. Next, he went to his citizens and demanded they give him the resources he wanted. If a citizen gave their cow to the king, the king would give the citizen some of his King-Owes-You papers. Now, a cow seems more useful than a piece of paper, so it seems silly that a citizen would agree to this. But the king had thought of a solution. To make sure everyone would want his King-Owes-You papers, he created a use for them.
He proclaimed that every so often, all citizens had to come forward to the kingdom. Each citizen would be in big trouble, unless they could provide little pieces of paper that showed the king still owed them. In that case, the king would let the citizen go, and not owe them any longer. The citizen would be free to go off and acquire more King-Owes-You papers, to make sure he would be safe the next time, too. This way, all the citizens needed King-Owes-You papers to stay out of trouble. That made King-Owes-You papers widely accepted, and consequently, also a useful medium of exchange. This lead to the rise of markets.
This same pattern can be observed in more recent history. Matthew Forstater and Farley Grubb find that when European colonizers arrived in the New World, they wanted to get the local population to work. But when they offered them to work for a wage, the locals —who never saw a coin before— didn’t see the point. So then the Europeans decided that every hut had to pay them a certain amount of coins every so often in order to stay out of trouble. Now, having to make sure they could pay their tax to the authorities, working for a wage seemed like a good idea.
Not much has changed since then. Money can still be understood as a debt-record, or an IOU. In the US, we have dollars. Dollars are created by our version of a king: the government. We can understand them to be pieces of paper that say USGovernment-Owes-You. Just like the King in our story uses King-Owes-You papers to pay for resources, the US government uses dollars to pay for things that citizens provide. Rather than a cow, US citizens may supply a road, and receive dollars from the government as compensation. This means that now that they built a road, the government owes them. This is good for those citizens, because when it’s tax day, that’s what they need. They give the government their dollars (which show the government still owed them) and in exchange, the government doesn’t put them in jail.
Originally published on The Minskys