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Did credit precede money? Maybe. Does it matter? Nope.

One hundred years ago A. Mitchell Innes rejected the standard story on the origins of money, whereby money spontaneously emerged as barter became progressively costly with the increasing division of labor and greater abundance of goods on the market. Money was the solution to the costliness of barter: a common medium of exchange was used, rather than searching for another person with the thing you wanted who also wanted the thing you wanted to trade. Today Innes’ argument is most popularly championed in David Graeber’s book Debt: The First 5,000 Years. The debate between Mengerians and Innesians has resulted in several published books and exploded onto the blogosphere where Bob Murphy (here, here, here), George Selgin (here, here), David Henderson (here), and Brad DeLong (here) attack David Graeber’s book, with responses from the proponents of Innes.

Innes argued that credit existed before a common medium of exchange and thus the Mengerian timeline of the emergence of money was out of order. The timeline for the emergence of money usually goes like this: barter, money, and then credit. But Innes and Graeber argue that barter was so rare as to be irrelevant and credit existed prior to any common medium of exchange. They also claim that credit-instruments (IOUs) were used like money, where IOUs were used to purchase goods. In their view the Mengerian story is an ahistorical account with no relevance to the facts of history and is of little-to-no use.

Perhaps the possibility of credit before a common medium of exchange is ignored in the standard account, however, that does not imply that Menger’s theory is false — maybe incomplete, but not false. Since direct exchange, i.e. barter, may be inter-temporal. Barter need not be a spot transaction reduced to a particular place and time. If the concept of inter-temporal barter is accepted, then the evidence of credit existing before a common medium of exchange creates no conflict in Menger’s account. The conclusion contra Innes is: all credit before the existence of a common medium of exchange is inter-temporal barter.

Barter is ordinarily understood as spot transactions, where two people trade two different goods at some instant and not over time. The same occurs in an economy with a common medium of exchange, except that one of the goods (money) is usually used for transactions and purchases. Credit in an economy without a common medium of exchange is simply inter-temporal barter. It is no different than credit where a common medium of exchange exists, except the prevalence of what the credit is redeemable in.

Even when there is no common medium of exchange it is reasonable to expect that people will still want to transact over time and not always in the given moment. Within communities of trust or where there is a method of enforcing contracts we can expect that Casimir promises Anastasia a part of his future grain harvest for milk that her cow just produced. Anastasia has credited milk to Casimir for a claim on his future grain harvest — a credit market has been created where Anastasia and Casimir have engaged in inter-temporal barter.

Inter-temporal barter doesn’t have claims on a common medium, but to one of a variety of goods (and maybe even services). As Innes et al. suggest, tallies or other means of recording debts and credits could have been invented as primitive economies and populations grew. Such means of recording credits and debts would bring down the transaction costs of inter-temporal barter. Conceivably such instruments of recording credits and debts could have been negotiable and exchanged for other goods.

Imagine that Anastasia has a promissory note (IOU) for a portion of Casimir’s grain harvest, but prefers apples now to a future claim on Casimir’s grain. Thaddeus prefers a future claim on grain than the apples hanging on his trees. So Anastasia offers Thaddeus the promissory note in exchange for apples. If not for the promissory note Anastasia, Casimir, and Thaddeus would have all had to meet to agree to such a transaction. Without inter-temporal barter in the form of a promissory note, Anastasia and Casimir would have never made the transaction and Anastasia wouldn’t have had the promissory note to use to barter for other goods.

The rejection of Menger based on the fact that credit existed before money is invalid. However, what Innes and Graeber argue is not entirely irrelevant. The story we tell to students and ourselves is oversimplified. We should rewrite our textbook accounts to include the possibility of credit preceding a common medium of exchange and call it inter-temporal barter.