The Origin of Money – 4000 B.C. – 1700 A.D.

Civilization is characterized by a monetary economy. A monetary economy is one in which indirect exchange dominated. The institution of money separates into two transactions the primitive single transaction of bartering goods directly in exchange for other goods. In the market economy, men make demands with money in exchange for a supply of goods. The supplier is primary. The demander is contingent. Settlement takes place only because the supplier of goods is willing to accept the money as a substitute for goods. The supplier of goods can hold it, the money, or he can in turn make a demand with the monetary token for goods. In this process of indirect exchange, a fundamental purpose of money is to economize scarce resources. It reduces the working capital otherwise invested by the producer in a wide array of goods for which money is an acceptable substitute. Money diminishes the storage space required for large and varied inventories held perforce by each family in a barter economy. Real money also reduces the inherent risk of other forms of indirect exchange such as potlatching, which depend upon an implied currency of invisible debt. These invisible claims were replaced by the diffusion of dependable coin or currency, riskless firm monetary claims. Coin permeated the “overcapitalized”, inefficient, barter economy and induced a mutation in the scale and character of economic institutions of pre-commercial civilization. Along with the wheel many joined parochial communities to one another enlarging the fellowship of production. In a mere four thousand years money transformed the closed economy of the tribe into the open and integrated economy of the whole world.

As with all human inventions, civilization increasingly improved upon its money. Ancient merchants found in money, above all, an article of wealth, universally acceptable storage and in exchange for which they could obtain from farmers and artisans the products of painstaking labor. Working people had good reason to accept good money. Farmers and artisans often did not want the goods in the neighborhood which others wished to exchange. Sometimes the producers did not even know exactly what they wanted in exchange for their goods – after their basic, life-giving needs were satisfied. At other times suppliers wished to sell the products of their labor but had no desire at all to purchase any other goods right away. They desired to defer repurchases; that is, perhaps unconsciously at first, they decided to save the product value of their effort and intelligence. By means of money they realized that they could produce, exchange, and save efficiently and reliably; because real money, hard coin, was one of the most marketable, valuable, and lasting articles of wealth on the market. Working people understood metallic currency. Coined wealth was stored labor. Money also enabled workers to wait before buying. Money was a concrete symbol of work with an irrevocable right to future work products. It enhanced their options, their freedom to provide for themselves as they pleased, and to lay up for their children in the future. Good money could be inherited and passed on. Money was a sacred link between work, family, past and future. It was no less than the life blood of an enduring culture. Thus money became the hemoglobin of commercial civilization.

Not every article of wealth could qualify as money. The necessary and enduring properties of real money emerged only gradually in history. Certainly, no economists created it according to an abstract design. In fact, true money evolved with the dynamic advance of social order. The first standardized and certified coins appeared in Lydia, Asia Minor, around 650 B.C. The Lydians discovered and used a natural mixture of gold and silver, called electrum. In this coin, as we shall see, centuries of commercial evolution and experimentation had bequeathed an equitable and efficient form of money. Lydian coins exhibited specific properties, uniquely suitable to perform the functions of money. They were small and made of scarce commodities; men exerted great effort and intelligence to produce them. Thus these primitive coins were very valuable to all who produced and desired them. As a store of value, they were solid and enduring. As a medium of exchange, these coins were convenient, compact, and universally acceptable. More of this kind of money could only be produced, over time, by the steady application of reasonably stable quantity of capital and labor. Thus, the coins were a useful measuring rod by which to meter out the value, or the price, of the other products of human intelligence and labor. No one from the local “Bureau of Engraving” inaugurated such a coin from purely abstract considerations. Nor was it foisted upon civilization. It was not a forced currency. Instead, after centuries of experimentation and innovation, traders and customers came freely to select these coins for their intrinsic properties which they maintained over long periods of time.

Merchants and artisans perceived that precious metal coins were easily handled. They were also divisible, immutable, storable, attractive, and easily exchanged among the merchant’s of many tongues in the Levant. Also, the test of time had proved their worth as a market institution and enhanced their marketability. Because of the enormous labor and time invested to discover and produce them, they were prized and very valuable to all. The high value of these coins, relative to their small size and light weight, made them easily tradable for large quantities of other goods. The high value-to-weight ratio also made them an ideal means of saving the value of one’s work and invention. Enterprising producers withdrew some of their working capital from costly warehouses and concentrated its amorphous value in secure coin. History showed that the value of these coins endured. In a very uncertain and risky world, merchants discovered that their purchasing power remained reasonably stable from year to year and generation to generation. Moreover, with money coins, real wealth could be stored in very little space, whereas to save other forms of real wealth required big buildings and elaborate security arrangements. But the simplest explanation for the universal acceptability of money coins by uneducated artisans lies elsewhere. Plain working people could intuitively and directly compare the production value of their own effort to the value of the effort of those who had produced the lasting money which they and their parents desired to hold for future contingencies.

Money continued to evolve and change its form as commercial civilization gradually engirdled the earth. During the modern era, merchants and bankers learned to substitute inexpensive and easily handled paper for coin. At first paper money consisted of bank notes or bill often-change, convertible or exchangeable at a constant rate into a weight of gold and silver. The monetary token had become more abstract. A certified piece of paper came to represent contractually, a certain quantity of real money – coin or bullion. The paper was suffused by means of convertibility with a monetary life of its own. It circulated in place of coins and bullion because it was even more convenient, divisible, and easily secured. Moreover, convertible paper currencies conserved still further the scarce mineral resources previously invested in the production [17th century – silversmiths and goldsmiths – fractional reserve – Bill of exchange – security liabilities of short maturity – real bills banking was the merger of the two] and circulation of precious bullion or money coins. One can see in the evolution of this commercial institution that money served as the great conservator of a civilization born of scarcity.


Kathleen M. Packard, Publisher
Ralph J. Benko, Editor

In Memoriam
Professor Jacques Rueff

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