The standard academic introductions to economics spend no time discussing the invention of credit. They usually have the conventional summaries about the uses of money - store of value, et. al. - but there is literally nothing about the invention of promises to do and to pay. In one way, that is completely understandable. People live their economic lives in a world of futures; they measure even their savings by what the hoards will earn; evn in Rousseau's world of pure nature, financial promises would be made. Given those facts, it makes sense that economic textbooks do not spend any time discussing the invention of credit; IOUs have always been part of human interaction itself.

But, if credit's origins do not need to be part of the history of economics, surely the invention of legal tender deserves at least some small attention. Coinage is usually given at least a few paragraphs, but there are rarely any discussions of how the law came to be the method that defined what would be the financial unit of account. Hayek, at the very end of his life, complained that money had been literally hijacked by the state, that people should be free to use whatever money they choose. Even his theoretical opponents agree; current "mainstream" economic theory begins with the assumption that there is no need to give state money any special legal status; in the natural world of credit people can buy and sell using whatever coinage they want, as the success of BitCoin has proven. And yet, the IRS insists on being paid only in dollars, by check or credit card or wire transfer. (One of the wonderful ironies of the current age is that actual money - currency printed by the Treasury for the Federal Reserve Bank - is NOT an acceptable means of tax payment.)

Legal tender - officially enforced money - only exists because some exchanges are not and never have been voluntary. Hayek's assumption that money developed as a means of payment to clear private debts is bad history. The archaeological record shows that the earliest money coinages survive from the Greek city states that traded with one another in the Aegean Sea in the 7th century B.C.E. The first known coin, the Lydian Lion, (formed from electrum - a naturally occurring alloy of gold and silver) can be dated to 610-600 B.C.E. It was minted by the tyrant Alyattes in Sardis. Every money hoard discovered by archaeologists in that region has been found in sites that were government treasuries, not private merchants. The German historical school's standard story (the one used by all the textbooks) is that people invented money as a "store of value". No. Tyrants, monarchs, emperors and - eventually - democracies all created money as a means of collecting taxes.

Why? Well, for one thing, the governments could do what the people who control governments always want them to do - keep crooked books and fiddle with the tax rates and preferences . The taxpayers would have to use drachmas, and the state would define what a drachma was. The standard historical theory for "inflation" is that when people with the power of the state stretched their credit beyond its limit, the state would increase its "money supply" by changing what a drachma was. The more realistic assumption is that coinage as legal tender was manipulated from the moment of its invention. Tyrants did not have to wait around to discover that they could "manage" their economies by "tightening" and "loosening" public credit. Even the U.S. Constitution takes it for granted that the Federal government will charge a fee for making its own money. Needless to say, this "money" thing caught on. Within two centuries every part of the Mediterranean world had its official money.

As Hayek so beautifully points out, free human exchange creates its own systems that work even though they defy logic. When confronted with the demand for tax payments in "money", people did what they always do - they started trading. The money market was born. As every black market in the world confirms, there is the official price for currency and then there is the market price. If you owed tax to Necho II, you could save some of its cost through arbitrage among the coins minted by Aegina, Samos and Miletus. (The Egyptian Pharaohs used all 3 as their official money.)

The academics have it backwards. "Money" was never a store of value and never the primary mechanism through which human exchange developed. It was how the state paid for and exercised its own power through war.





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1 Comment so far

  1. MJ Kelly on June 7, 2017 12:44 am

    I believe this is the school of thought known as “chartalism”. Following this logic, alternative instruments such as bitcoin can never be “money” unless the state decides so. Which then opens up the definition of what bitcoin might actually be - a commodity? A collectible like “Beanie Babies” from the 1980’s? A digital “bubble card”?


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