Sunday, 20 October 2013

The Origins of Money

This blog partly comes from my reading in preparation for an economics reading group in Birmingham, UK. If you live around the Birmingham area and are interested in joining us then leave a message and I will give you details of the gathering.

Positive Money's book (2012) starts with a chapter on the history of money. In the chapter, they relate two histories. These are the textbook history and the historical reality.

The textbook history assumes that barter preceded the creation of a token of exchange or value (money). Money in this context removed the limitation that both parties had to have what the other party wanted. It also removed the time restriction in the sense that both parties didn't have to have the goods available at the same time. Money supposedly removed the difficulties of the barter system.

The historical reality perspective takes a different line of reasoning. It is argued that historically, people gave goods freely with the caveat or expectation that the receiver would return the favour in the future. To some extent, this practice is still seen in some tribal communities and family units.

The concept of a unit of account for the debts and credits grew out of these exchanges possibly when it was perceived that there was a failure to uphold the obligation or that people felt that they were not receiving what they expected from the system.

My interpretation is that we became protective of what is or was ours and sought to ensure that we gained equivalent in value in return for what we gave away. At some point in the system, we lost a certain amount of concern for the needs of others and our ability to meet those needs and turned to a system of protecting our assets even at the expense of others whose needs might be greater than our own.

The difficulty that we have with any historical interpretation is that we are tainted by our own cultural heritage and to some extent, we read into the evidence values from our culture and not necessarily those of the culture that we are seeking to learn about. All our observations are influenced by our perceptions and it is difficult to cast these off. To some extent, it is easier to see evidence as supporting our perceived theories when they could in fact be pointing to something quite different.

If we take the understanding of historians then the development of a credit system wasn't last in the development sequence. In fact, it seems that the development was possibly in the reverse sequence with the development of a system of credit (virtual money) first, followed by coins (money) with barter being a by-product of the use of coinage.

As I reflect on this development and wonder about the notions of plenty and scarcity, I am wondering when there was a shift from a notion that there was enough to satisfy everyone's needs (plenty) to a notion of limited resources or resource exploitation that needed to be hoarded or protected for personal advantage.

As I turn to look at the section on the history of banking, there seems a lot of uncertainty about the original origins. However there seems to be evidence of debt bearing loans dating back to Mesopotamia but there seems to have been times when these faded in and out of existence.

It seems initially in England that money was in medieval times under the authority of the sovereign. However, goldsmiths began to function in a role of exchanging coinage and then the distribution of notes as a promise to pay. These promissory notes became the means of exchange with the coinage being left with the goldsmiths or banks.

The consequence through a number of historical events was a shift away from sovereign money to money based on the promissory note where there were more promissory notes in circulation than actual coinage produced. In the process, the crown or its representative the government of the day also lost control of the creation of the money supply and the ability to have first use.

Although this history is interesting, we need to explore the way the current banking system operates in order to understand why it is no longer fit for purpose. However, the history shows that alternatives have existed and that to some extent the current system may have grown more by accident than design and that maybe self-interest has taken over from a concern for the welfare of others.

Reference:

Andrew Jacksom and Ben Dyson (2012) Modernising Money: Why our monetary system is broken and how it can be fixed. London: Positive Money.

1 comment:

Dick Rodgers said...

thanks Errol. Good stuff. Dick