In his seminal work The Wealth of Nation, Adam Smith told a story of how barter is inefficient, and how money was invented to make barter more efficient.
To move us from direct exchange to indirect exchange.
Direct exchange is where the man with the cow and the person with 30 chickens do a direct trade.
But what if the man who wants the 30 chickens doesn’t have a cow? Doesn’t have ANYTHING the man with the 30 chickens wants.
Then the direct exchange trade can’t happen.
The solution to this is money. Money allows for easy indirect exchange. The man with the cow trades it to someone else for 30 pieces of silver. He then gives the 30 pieces of silver in exchange for the 30 chickens.
Sounds reasonable, right? In 1776, this was considered to be a correct description of how many came into existence, because it made sense.
The only problem with this narrative, is in the years since, archaeologists have found zero evidence this actually ever occurred, and much evidence that what did occur is quite different.
How Did Neolithic Societies Conduct Commerce?
The main thing to keep in mind here is that Neolithic societies were (by our standards) very simple. A significant difference between now and then is people rarely if ever traveled.
Someone would live a long life and die very near to where they were born. In their entire life they may never travel more than 5 miles away.
This appears to have created a high degree of trust between neighbors. You got to know them really well, because they were the only people you would know, and you would know them forever.
This high degree of trust resulted in a system of commerce based on promises and credits. Promises and credits in an economic sense means debts.
To illustrate, in the above example, the man with 30 chickens would simply give them to his neighbor who didn’t have a cow.
Because his neighbor needed 30 chickens (or however many) and would pay him back in equivalent value later.
This worked, because neither the creditor nor the debtor were going anywhere.
This informal system of trust, promises, and credits was in fact the original form of money that human beings ever used.
And it worked. In cultures all around the world. It appears not only to be the dominate story of how commerce was conducted in early human societies, it seems to be THE story.
Why didn’t this last forever?
Human interactions grew larger and more complex. Villages formed into groups of villages. Groups of villages formed into kingdoms.
Now you have travel.
People would travel to other regions within the Kingdom (still not very far by modern standards).
And especially, you had armies that traveled.
The King had issues with neighboring Kings. Sometimes those issues led to disagreements. Sometimes those disagreements led to war.
Armies were conscripted to war on neighboring armies raised by other kings.
The King needed the army to be fed and otherwise provisioned, and preferably without having to raise an army of logistics people to do so.
Money, and forced taxation.
The King now decrees that: A) Silver is now money, and B) He owns all the silver.
The King pays government employees in silver coins, and requires EVERYONE in the Kingdom to pay him taxes.
If you don’t pay your taxes, the King punishes you. The punishments for not paying taxes were often severe.
This immediately creates demand for silver coins, as everyone has a tax bill to pay.
Now, everyone has a desire to provide something to the soldiers, as that is where they get the money (silver coins) they need to pay their taxes.
In summary, money came into existence, by the state, in order to provision the state with what it thought it needed. Taxes are what makes money valuable.
The man in the video below is Warren Mosler, who is credited with first seeing how modern economies ACTUALLY work. Remarkably (or perhaps not), modern economies work the same way early economies did, and it took a non economist bond trader to figure it out.