The economy, trade and systems of exchange

Two old, elongated wooden sticks, marked with notches and inscriptions. — Medieval tally sticks, held by the museums of the City of Winchester. Winchester City Council Museums, CC BY-SA 2.0, source

To obtain what they do not have, humans have devised many means. Only one of them is called “buying”.

What money is for

The economy is the way in which a human group produces what it needs, distributes it among its members, and decides what is worth doing. Every society settles these three questions, with or without money.

Where money exists, it performs three distinct roles, and it is worth keeping them apart, because an object can perform one without the others.

It is used to compare. Without money, you have to ask how many sacks of wheat a goat is worth, how many pots a sack of wheat is worth, and so on for every pair. With it, everything comes down to a single scale. The gain is enormous, and yet it is the least spectacular of the three roles.
It is used to exchange. It spares you the need to find someone who owns exactly what you want and who wants exactly what you have.
It is used to store. You can keep it for later, which is impossible with milk or fish.¹

Textbooks often add a fourth, the one that most concerns this page: it is used to defer. It makes it possible to agree today on a payment that will take place in a year’s time — and therefore to lend, to borrow, to go into debt. Without a common unit recognised in advance, a promise expressed in figures makes no sense.

The third role, storing, explains the form that money took for millennia. It needed to be a durable object, hard to imitate, easy to carry, and divisible without losing its value. Metals meet these conditions; shells, salt, livestock or copper bars have met them elsewhere.

But the value of a currency does not come from the material it is made of. A banknote is worth nothing in itself. A gold coin was worth barely more than its metal. What gives a currency its value is that everyone is convinced that others will accept it — a shared trust, usually guaranteed by an authority that mints, prints or records.²

That is why the real subject of this page is not money, but what makes exchange possible between people who do not know one another. Money is one answer to this problem. It is neither the first nor the only one.

The story that is usually told

It is simple and widespread.

In the beginning, it is said, people exchanged one object for another: three fish for a pot. This is called barter. But barter is inconvenient: you have to find someone who wants precisely those fish and who has precisely a pot. Money was then supposedly invented to solve this difficulty.

This story has an author and a date. It was written in 1776 by a Scottish scholar, Adam Smith, in a book on the wealth of nations. He was not recounting what he had seen: he was imagining what must have happened.³

Since then, the question has been studied. A Cambridge anthropologist, Caroline Humphrey, made a close study of barter among a Himalayan people, the Lhomi. Her conclusion, in 1985: no society living solely by barter has ever been described, still less a currency that emerged from one.⁴

This does not mean that barter does not exist. It does, but mainly between people who do not know one another, or among people who are used to money but find themselves without it. Within a group, something else happens.

What really happens: people give, and people owe

On the northwest coast of North America, among the Kwakwaka’wakw, the Haida and their neighbours, there is a ceremony founded on giving: the potlatch. It marks a marriage, the passing on of a title, the naming of a child.

Whoever gives a great deal rises in rank. Whoever receives must give in turn. It is neither trade nor charity, but a system, with its own rules.

One fact shows that this was not mere folklore. The government of Canada banned it. The law came into force on 1 January 1885, and it would not be repealed until 1951. For sixty-six years, taking part in a potlatch was an offence. People were arrested, sometimes for dancing.⁵

So a state judged this form of exchange threatening enough to outlaw it.

The story is, however, more complex than “the settlers against the others”: a significant number of Indigenous people themselves asked for the ban. The law was poorly enforced, partly because it was poorly drafted.⁶

The potlatch survived in secret. Today, it is once again held openly, and it has been growing since the 1970s. Among the Haida, it serves as the foundation of law.

Remembering what is owed

Giving and owing require keeping track of what is owed. The oldest known written texts, in Mesopotamia, are neither poems nor laws: they are, for the most part, accounts. They record quantities and debts.⁷

Debt was no light matter. In Mesopotamia, a family that could not repay gave up its fields, then its members. In Athens, before the reforms of Solon, the poor farmed the land of the rich in return for a share of the harvest; anyone who did not pay could be seized and end up enslaved along with their family.⁸

Kings sometimes wiped the slate clean. The debt tablets were then handed back to be broken, those who were working to repay were freed, and land was returned. The edict of a king of Babylon named Ammisaduqa is the only one whose text has come down to us almost complete. It even anticipates the tricks designed to get round it.⁹

Two clarifications are needed, because this is where the fine story ends.

These edicts did not free everyone. People bought as slaves, often women captured in war, were not freed: they were returned to their former owners. What was restored was the previous situation, not everyone’s freedom.¹⁰

It had to be done again several times — a sign that the problem had not been solved.

Trusting someone you do not know

This is the real problem of trade, and it is this problem that money solves.

Between strangers, metal has to be weighed, checked to ensure it has not been adulterated, argued over. The coin settles the question at a stroke: a weight of metal, an official mark that guarantees that weight. You can then count instead of weigh, and put your scales away.

This invention was not made just once. Specialists consider that the first coins were minted in three regions of the world: China, Lydia — in Anatolia — and India. Three different techniques: three solutions to the same problem.¹¹

In Lydia, pieces of an alloy of gold and silver were stamped. In India, sheets of silver were cut into small pieces, punch-marked with five small symbols. In China, coins in the shape of spades were cast.¹²

And the workshop has been found. At Guanzhuang, in Henan, archaeologists excavated a bronze foundry, found coin moulds there and carbon-dated it: it began minting coins between 640 and 550 BCE. It is the oldest minting workshop in the world whose date is securely established.¹³

Two details are worth noting. First, the foundry had existed for a century and a half before it turned to coins: it made ritual vessels, weapons, tools. No workshop was built to invent money; it was an existing workshop that took it up.¹⁴

Second, the moulds found are almost all identical, made using a measuring instrument. So this was not an isolated experiment: it was controlled mass production. From the outset, what matters is not the coin, but the fact that they are all alike.¹⁵

Paper, more delicate than it seems

In Sichuan, China, iron coins were used. A thousand coins weighed about a dozen kilograms, and four times as many were needed to buy a piece of silk. Trading while carrying one’s money was impossible.

Merchant houses then began issuing paper receipts: you deposited your coins in one place, took away a piece of paper, and could settle your purchase elsewhere without carrying the metal. Sixteen of the largest joined forces so that these papers would be uniform and recognised.

Then several of these houses issued more paper than they held in coin. They could no longer pay out. They went bankrupt, and trade in the region was thrown into disorder.

It was at this point, in 1023, that the state took over the business: it relaunched the notes and opened offices where they could be exchanged for coins. The world’s first paper money was therefore born not of a brilliant idea, but of a bankruptcy. Later, the state itself would print too much of it.¹⁶

One point still holds true today: a banknote is not a piece of paper that replaces coins. It is a piece of paper to which someone attaches a promise. The whole question is whether you believe that promise.

A shell is not a curiosity

Books often show curious currencies: shells, salt, iron bars. The image is appealing.

One of them deserves close examination. The cowrie is a small shell gathered in the Maldives, in the Indian Ocean. It served as currency in West Africa for centuries.¹⁷

This was no village currency. European merchants shipped them to West Africa by the boatload: more than ten billion shells for the Dutch and the English alone, before the end of the eighteenth century (the years 1700 to 1799). The historians who have studied this trade call the cowrie “the shell money of the slave trade”.

In other words: these shells were used to buy human beings.

A currency is never just a picturesque object. You must always ask what it was used to buy.

Arranging to meet

To exchange, people have to be in the same place on the same day. This detail gave rise to calendars.

Among the Igbo, in southeastern Nigeria, the week has four days, and these days are market days.¹⁸

Neighbouring villages do not hold their market on the same day: they share out the four days of the cycle among themselves. There is thus a market somewhere every day, and traders keep moving without ever stopping.

Here, the calendar does not come from the sky. It follows neither the Sun nor the Moon: it follows trade. This four-day week still exists, alongside the seven-day week.

And taxation

A state that wants to levy taxes needs the population to have the currency in which it levies them.

In several African colonies, European administrations introduced a tax on dwellings (such as the British Hut Tax), which had to be paid in colonial currency. Many families did not have this currency and had no use for it. To obtain it, they had to go and work for a wage: in the mines, on a plantation, on a building site.¹⁹

Historians still debate how effective this system really was. What is certain is that it was deliberate.²⁰

Today

In Kenya, in 2007, a mobile phone operator launched M-Pesa, a service that makes it possible to send money by text message, without a bank account. Within a few years, the great majority of Kenyan households were using it.²¹

The country soon had more than twenty thousand points where money could be deposited and withdrawn. And these points are not banks but grocery shops, petrol stations and mobile phone shops.²²

Two things must be distinguished. The technology was developed by a British company. But it was in Kenya, and nowhere else, that it became a mass practice. The origin of an invention and the place where it takes root are two different questions.

At the end of this long road, this is what remains: people send each other money without seeing one another, trusting the local grocer and a company. Trust and a written record — exactly what this page began with.

Note 1

First, money serves as a medium of exchange […] Second, money must serve as a store of value. Third, money serves as a unit of account […] Finally, another function of money is that it must serve as a standard of deferred payment.

Greenlaw, Steven A. and Shapiro, David, Principles of Economics, OpenStax, chapitre “Defining Money by Its Functions”