We all need money, and we all know it. Without money life as we know it would be impossible, and we all know why. We've all been taught how and why money originated in human societies; as a universal means of exchange and measure of proportional values. Only problem is that all that we've learned about the origin of money is probably wrong...
source: YouTube
So, why have we invented money? We all, and almost all economists, adhere to the explanation popularized by Adam Smith. In this explanation people, in a world without money, would barter in order to obtain the goods they wanted or needed. I have a spare cow and need some bread and eggs, so I would have to find someone who wants, or is in need of a cow and has the bread and eggs to give in return for that cow. Or maybe, if he has the eggs and the bread, but doesn't want the cow, I could first trade the cow with someone else for something he does want in exchange for the eggs and bread. You can see how such a system of barter gets convoluted very quickly.
The popular theory on the invention of money says that, in order to avoid the problems with barter, people started to stockpile goods that are known to be widely accepted (widely wanted and / or needed) in exchange for the surplus goods one has to offer. We can still observe this trend today, in prisons for example, where cigarettes become a substitute for money. The phrase "worth one's salt" means "worth one's wages". The Latin word "salarium" (which is where we get the English term salary) means "salt money". Although there is some debate as to whether the soldiers were actually paid with rations of salt, from which they could then trade for other items, or if they used salarium to make their purchases of salt, it indicates that goods that are almost universally tradable are the precursors of money.
This commonsense understanding of the origin of money is flawed however, as it is the result of inverse reasoning; you start with a conclusion and work backwards to identify the evidence that supports it. If we use a more scientific approach and base our conclusions on actual observations in the real world, we would conclude that the barter-based origin of money is most probably not true. The main refutation of Smith's account on the origin of money comes from the field of anthropology:
But various anthropologists have pointed out that this barter economy has never been witnessed as researchers have traveled to undeveloped parts of the globe. “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money,” wrote the Cambridge anthropology professor Caroline Humphrey in a 1985 paper. “All available ethnography suggests that there never has been such a thing.”
source: The Atlantic - The Myth of the Barter Economy
There are a couple of easy to understand circumstances indicating that early economies were not based on barter as described by economists at all. First and foremost, "trading" took place within small to medium sized, tightly knit communities where everyone knew everyone. In the past long distance trade was a risky and dangerous undertaking, limited to a small group of specialized merchants. And they did not need money, because they didn't go on long dangerous trips carrying a plethora of goods, merely hoping they'd be able to trade them; instead they journeyed to places and peoples that were sure to need the goods and had the goods the merchants wanted in return:
As I remarked above, occasional, irregular exchange between strangers will not generate a money system—since irregular, occasional exchange will not produce any kind of system. In ancient times, if you do see regular exchange between strangers, it’s because there are specific goods that each side knows they want or need. One has to bear in mind that under ancient conditions, long-distance trade was extremely dangerous. You don’t cross mountains, deserts, and oceans, risking death in a dozen different ways, so as to show up with a collection of goods you think someone might want, in order to see if they happen to have something you might want too. You show up because you know there are people who have always wanted woolens and who have always had lapis lazuli.
source: David Graeber - On the invention of money
Within small communities money wasn't needed because those people weren't concerned with the actual value of the traded goods and services, as much as they were concerned with maintaining good relationships. Those communities had different forms of gift economies and systems of informal credit. Status in those communities rose according to how much one was willing to give, instead of our modern notion of status rising according to how much one's able to extract from others. One would never ask for anything directly, but instead make a comment like: "that's a mighty beautiful pig you have there neighbor!" The neighbor would then feign the pig's wothlessness and an unwillingness to part with the animal: "this stupid animal is worthless, look you can see the ribs through its ugly skin. But my wife likes it very much, so I'm stuck with it..." When the pig finally did change hands, it would be clear to all parties that the recipient now owes the "vendor" a favor that is to be cashed in sometime in the future: that's the informal system of credit in action.
If not from barter, how did money originate? The most plausible explanation is that money was conceived as a measure of fixed values in large administrative systems, such as temples or palaces, and, even more likely, as a measure of fixed values in legal systems:
If someone makes an inadequate return you will merely mock him as a cheapskate. If you do so when he is drunk and he responds by poking your eye out, you are much more likely to demand exact compensation. And that is, again, exactly what we find. Anthropology is full of examples of societies without markets or money, but with elaborate systems of penalties for various forms of injuries or slights. And it is when someone has killed your brother, or severed your finger, that one is most likely to stickle, and say, “The law says 27 heifers of the finest quality and if they’re not of the finest quality, this means war!” It’s also the situation where there is most likely to be a need to establish proportional values: if the culprit does not have heifers, but wishes to substitute silver plates, the victim is very likely to insist that the equivalent be exact. (There is a reason the word ‘pay’ comes from a root that means ‘to pacify’.)
source: David Graeber - On the invention of money
The conventional sequence of barter first, then money followed by credit, is completely turned on its head when we observe human behavior in the real world. And I believe most economists know this to be true, as do the anthropologists who've done the actual fieldwork. The question then becomes why this myth about the origins of money is still taught in economics textbooks and so fervently defended by many economists. Well, for one, economists maintain that economics is a science that describes how humans actually behave, and the "barter question" cuts to the heart of that assertion. The above summarized alternative view on the origins of money is yet another refutation of the "Homo Economicus" that is the subject of modern economics. It is also an account of actual history and anthropological findings that begs the question: is economics perhaps prescriptive, a way of informing us how we should behave? According to the beneficiaries of the current socioeconomic status quo of course.
Make up your own mind. Below are the main sources I used for this article, including a Cato Institute rebuttal titled "The Myth of the Myth of Barter", and a rebuttal to the rebuttal titled "The Myth of the Myth of the Myth of Barter and the Return of the Armchair Ethnologists". The below linked video is a good place to start if you don't like to read (why are you here then? ;-)).
sources:
The Myth of the Barter Economy
The Myth of the Myth of Barter
The Myth of the Myth of the Myth of Barter and the Return of the Armchair Ethnologists
On the invention of money
How The Barter Myth Harms Us
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