Money: Origins to Modern Monetary Theory
There have been quite a few books written on this topic. They all have great stories and lots of interesting details. And, they all suffer from the bane of every historian and scientist, which is that the discovery of new data or insights is a constant threat which may render their work in need of revision. But even so, each tends to be a valuable step in our collective learning process.
I usually do not get too upset about bad history, provided the author was doing the best that they could given the data that was available at the time they were writing. However it was the recent book by Jacob Goldstein that nudged me to finally say something on this topic. It just struck too many nerves related to my training as a CPA, and historian. Let's just say that it has more than a couple serious errors in it.
Jacob's book really isn't a book in the sense of something it being something which he sat down and wrote in a structured way. Rather, it is very clear from the informality of the language and the needless mistakes, that it is almost certainly a collection of transcriptions excerpted from his Planet Money segments, podcasts, and other talks. The language is grammatically awful, and it has some mistakes in it that it just shouldn't, given how recent it is.
Historians must also struggle trying to sort out the relationship, if any, among trends, conditions, and specific events. It can often be daunting if not impossible to determine when one event or condition had a causation relationship with another, as differentiated when there was merely a correlation or coincidental relationship between the two, with no significant influence; or when one created enabling but not causative conditions for the other; or when some sort of feedback loop developed with each impacting the other. It is common for historians and readers of history to see the wrong attributes in a relationship due to bias or incomplete data. And even when a great deal of certainty about relationships among historical data points exists, it is wise to retain a bit of skepticism such that new data can be properly added to our understanding.
My friends will tell you that I'm sometimes a bit like James Michener in that it feels like I start many stories with the dinosaurs. This effort will be no different. I strongly believe that in order to understand the way money works today, one has to start with the basics of how and why it was invented, how it soon became something else, and how very recent it has been that most people started using money. This latter point is what I think most people will find the most startling.
The notion of money being used by most people to facilitate buying things is only a couple centuries old at the very most. Prior to that, it was this rather peculiar thing that only involved a very tiny percentage of humanity. Even after people in a barter or shared labor society start to receive a little money from the monetized societies around them, that money has typically been used infrequently and sparingly, if at all. The anthropologists and sociologists who have tackled the history and evolution of money have typically gotten things right when it comes to these boundary layers between monetized and non-monetized societies. And some, such as Jack Weatherford, the distinguished professor emeritus at Macalester College, have done an outstanding job of describing the role of commodities in the transition to a mostly monetized society. But these authors have tended to miss the things an accountant or an economist would notice, while the typical scholar steeped in financial topics has often missed the cultural anthropology. It is my belief that the perceptions of the accountant or financial analyst and those of the anthropologist or sociologist will provide the most accurate insight into the history and nature of money when these several perspectives are combined in a more comprehensive synthesis.
There is a six volume magnum opus published in 2019 that covers most of the topic exceptionally well. It is the work of over fifty contributing authors and was edited by Professor Bill Maurer, who is as of this writing, the Dean of the School of Social Sciences at the University of California, Irvine. But that work has unfortunately been experienced by very few people. It is only available in text from, and even the paperback edition commands a hefty $175. from Amazon. But even that work starts about 4,000 years after what I think is the right place to begin the story of money and misses a few items which I think are important. So where to begin?
Let me suggest that the concept of money became a necessary invention once human societies achieved certain technological milestones in what we typically call the late Neolithic. And for that, I can think of no better place to begin than with the proto-Sumerians of the Pre-Pottery Neolithic A or B periods at the southeastern end of what historians call the Fertile Crescent.
Having started with a harsh critique of one book, let me now praise another, which I think in many ways should be read or heard before digging into the history of money and monetary systems. That is the 1998 "Guns, Germs, and Steel: The Fates of Human Societies" by Jared Diamond. Normally I would provide a link to the first hardcover edition here, but they are all super expensive collectors items. It is available in an unabridged audio edition on CDs, as well as in paperback, a revised and illustrated hard cover edition, and an new recording available on Kindle or from Audible. I cannot recommend the abridged editions. I give this book a super rave review even though some new insights have been gained in the 35 years since its first publication. For example Diamond's dates for the first population of the Americas have proven to be too conservative, although his reasoning and demands for proof of early dates were spot on. What he did not anticipate was that his demand for appropriate evidence would eventually be met, which is a serious risk to all historians. Also, his history of the development of writing all but misses the economic aspects; but even today, his comments on this topic come closer than anything else I have found in print.
Diamond wrote his book with a mega-trends view of our history, and it is in that spirit that I am attempting to add the economic and monetary part of the story of how we got to where we are, and explain a bit about exactly where it is that we are at the moment. And where we are is standing on the threshold of one of those major periods of transition in the human adventure. It's a great time to be alive and see these changes beginning.
As I said above, until quite recently, money for everyone was not the way economics worked anyplace on the planet. But, that is not because there weren't some valiant efforts to monetize the whole of humanity. There were in fact a few brief and very interesting exceptions to the absence of money from the lives of the ordinary person. One was during the Five Dynasties period in China, and pretty much confined to the city of Hongzhou (aka Xifu). Also, during the period of Roman domination of Europe and the Mediterranean. Because the legions were paid in what evolved into coinage, money tended to be used wherever the legions had a significant presence. But other than that, the idea of "money for everyone" really didn't start to take root until the great urbanization shift which began with the Industrial Revolution.
Then there is all of the nonsense going around these days about Modern Monetary Theory (MMT). Sorry - no links here, as I can't find a short description out there worth referencing - but there are some good books, if not good reads on bits and pieces of the topic.
MMT has to be the most misunderstood and misrepresented topic I've heard people talk about recently. It is at least as misunderstood as such hot topics as global warming (sorry - that's what passes for my sense of humor). Both conservative detractors and progressive advocates of MMT seen to totally miss what MMT is. Both seem to confuse theory with proposed policy applications and with some of the ideas that are implied by the economic model suggested by MMT. This is particularly sad because humanity is facing some serious challenges which can become a little less daunting if we collectively develop a better understand money, economics, and how to apply them, and the MMT model of how things work has some powerful insights. The reality of MMT is neither liberal nor conservative. It is just money and opportunity.
I strongly believe that to really understand this stuff we need to go all the way back to the time of hunter-gatherer societies and dig into how and why they evolved into people with markets and a blend of the three basic types of economies: tribal, barter, and monetized.
Oh, you thought I was going to say something like communist, capitalist, and slavery or some such? No, but we'll touch on those too, as that whole business of communism and capitalism as being at odds with each other is actually kind of funny when one digs into the details. As we'll see, modern conservatives are some of the biggest proponents of some of the things Marx got so terribly wrong, and many progressives don't seem to understand how markets work. I'm showing my age a bit here, but Art Linkletter would have had a lot of fun filming some episodes for his show "People are Funny" with some of the nonsense one hears these days about money, taxes, MMT, and long odds gambling that is presented as though it is an investment strategy.
The history of money is filled with human foibles and silliness, and some not so pleasant things as well. It's also filled with some amazing brilliancies and is arguably the single greatest invention in the history of humanity. Money enables us to store our productive output for future use, and the nature of that use and exactly what it looks like is totally without shape or substance until we tap into it. Money is as close to magic as anything there is. We are the only creature on this planet that can store our productive output in a manner that is adaptable to the unknown needs in our future. That is an astounding accomplishment.
The study of history is not quite a science, but when done well, it uses scientific thinking and is dependent on the sciences to gather new data and improve our understanding of things past that got us to where we are. It is the hope of historians, beyond their insatiable curiosity about how we got to where we are, that by improving our understanding of our journey thus far, that we will gain some insights that enable us to create a better future for ourselves.
Science has three main pillars: theory, testing, and skepticism. Theory, or the construction of a model that seems to best account for all available data, and doing so in the simplest manner possible (Occam's Razor, aka the KISS principle) is our starting point. History shares this with science, although human bias tends to push Occam around a bit, and be too generous or harsh depending on our many biases of perspective. Skepticism is also a key part of the work of the historian. We must always allow for new data and insights to require an adjustment of our understanding of things past. And if we are studious and open minded, we will discover new things which require us to modify what we think we already know. It is good to be less than perfectly certain about most things.
This business of bias is forever a problem with history and its interpretation. This is especially true when new data and insights require a significant modification to how we have understood the past. People tend to grow strong attachments to the stories of history as they were understood decades earlier. Letting go of stories and interpretations that need to be revised can be hard. This too is something historians and all of us share with the sciences. The insights into the workings of these biases in the sciences is the subject of Thomas Kuhn's seminal work "The Structure of Scientific Revolutions." For anyone who has not read this work, I cannot recommend it strongly enough. There is a reason why it is the single most cited scientific study of the 20th century.
For a more general understanding of how our brains work with respect to biases and other issues with how we perceive and interpret the world, both past and present, I strongly recommend Daniel Kahneman's "Thinking, Fast and Slow." These two books I would easily rate as being among the top five that I've read in my life. Understanding how our brains work is helpful when trying to get a handle on any topic, especially one that is as intertwined in our culture and foibles as is money.
History falls short of being a real science because of the experimentation problem. The need for rigorous and targeted testing or experimentation that the sciences require is where historical work necessarily falls short. In science, Occam's Razor and skepticism guide the selection of tests and experiments to see if the current model or theory holds up under scrutiny. Does it accurately predict the unknown? In some cases, what is known about some facet of history can indeed point us in the direction of productive research. Unfortunately, historians lack time machines and are dependent upon gaining access to evidence that has happened to survive the ages. New data in areas of focus demanded by targeted investigations that test our current models does come to light occasionally, and our understanding of things past does improve over time, provided we are able to set aside our egos and self certainty and learn from the new data. Also, new scientific methods do occasionally enable us to extract more data from surviving literature, artifacts and monuments. Alas, this is something which we are often quite reluctant to do, especially when the flow of modern money gets in the way, as is currently the case with the study of pharaonic period dates in Egypt.
As we will see, resistance to learn from new data and insights has gotten in the way of improving our understanding of how money is created and what options might exist for changing the way it is distributed (i.e. modern monetary theory or MMT). And even though the ideas presented here are hopefully a step forward from where we have been, the data supporting them is always subject to new discoveries and insights. The caution that cannot be stressed enough is that the rigorous pursuit of needed but missing data is not something we can do with anything near the thoroughness that is demanded of a true science. The study of history cannot be the rigorous science we would like it to be. This caution is not intended to as a rebuttal to the very fine works sharing the same title "In Defense of History" by Richard J. Evans and Bernard Lewis. Their defenses are good, but not impermeable.
We cannot actually go back and attend a market day in the city of Uruk 6,000 years ago and observe first hand what we think the fragments of their records and artifacts suggest. Some would even argue that there was no such market, and that the word market should be reserved for what happened once the Greeks developed their agoras. Perhaps, but as we shall see in the pages ahead, there was something, and it clearly had monetized transactions in or at whatever it was. And for thousands of years before and for hundreds of years after the development of the Greek agora, the antecedents of modern banking were thriving in many temple complexes in a great many cultures.
Finally, historians, much like all humans, often fall into the trap of inferring the motives behind various actions and statements of other people. Such inferences are truly dangerous ground, but we do it anyway. Again, bias creeps into our thinking. The simple fact is that we can seldom accurately differentiate between intention and its absence in the actions and words of others. Thus, some caution is always necessary when we say they did thus and so, and for what purpose. What we are really saying is that our best interpretation of the evidence indicates that they did thus and so, and leave it at that for now. As Robert McClusky is usually attributed as having observed: "I know you think you understand what you thought I said, but I'm not sure you realize that what you heard is not what I meant." As an aside, the professionals in the business of quote attribution have not been able to identify the true origins of this bit of wisdom about our perceptual biases, leaving it as a great example of the kind of caution that we need when delving into the past.
With that as a caution, let's begin our exploration of this thing we call money by looking at what I like to call the value problem.