Gift or Debt Economy

Meet Stan the hunter. Stan has killed a deer. He would be hard-pressed to eat an entire deer on his own, so when Stan catches game, he shares it with his tribe. In this way, food is not wasted. Stan's sharing also serves as a sort of insurance. Even if Stan has no luck hunting tomorrow, it is likely someone else in his tribe will. That tribesman will share his meat with Stan, since Stan has shared his meat with him.

This system is called a gift, or debt, economy. Stan gives the gift of food to his tribesmen in their time of need, and they return the favor. This gift economy is most likely the oldest form of economics and probably dates back to our time as hunter-gatherers. Yet the gift economy can do more than just prevent waste and provide food insurance for nomadic hunters. It also facilitates the division of labor for settled farmers.

In a gift or debt economy, people give gifts in order to receive favors in the future

Meet Jack the farmer and Jill the seamstress. Jack raises pigs. Jill makes clothes. Because Jack raises pigs, he often needs new clothes. However, Jack does not have the time to make his own clothes, so Jack has made an informal arrangement with Jill. Jack gives Jill a nice cut of meat every time he slaughters a pig, and Jill makes clothes for Jack when he needs them. This is a more complex form of the gift economy. Jack gives Jill the gifts of pork chops, which put her in his debt. Jill pays off her debt by giving Jack the gift of clothing. Jack has similar arrangements with the other members of his village. He regularly gives food to the Ed the potter, Ted the blacksmith, and Fred the weaver.

This way, Jack doesn't have to carry around pork chops with him when he goes shopping. It also keeps Jack's friends from having to accept a fresh pork chop every time Jack wants something. People give Jack what he needs, not in direct exchange for food, but out of their debt to him. Finally, the gift economy keeps Jill from having to figure out how many pork chops a sweater is worth.

Thus we have seen the benefits of a gift economy. In its earliest form, it keeps food from being wasted and it provides a sort of food insurance. In more complex agricultural societies, gift economies enabled the division of labor by allowing each member of a society enjoy the fruits of everyone else's labor, while allowing them to focus on their own task. Finally, gift economies create bonds of obligation that hold a society together. The gift economy system works great with friends and neighbors - people you're going to see every day and who cannot forget their debt to you. Yet when villages start growing into towns, it becomes increasingly difficult to know everyone. A gift economy cannot work between strangers because there is no guarantee that the stranger will repay the debt with a gift of his own. So how are strangers supposed to trade with one another?

Bartering in a Commodity Economy

One solution is bartering. Tom the stranger could trade Jill the seamstress something for a shirt. Yet for this to work Tom must have something that Jill wants that is of similar value to the shirt. This is called a coincidence of wants, and it is a hard thing to come by. There is no guarantee that Tom the stranger will have anything that Jill the seamstress wants, and even if he does, there is the problem of value.

Say Jill wants Tom's knife. Well, Tom's knife is worth twice as much as Jill's shirt. So what is Tom to do? Cut the knife in half? Then it's no longer a knife, just a chunk of iron, which is worthless to Jill. It looks like this deal is going nowhere. But wait! Jill does need iron for sewing needles. Even though Jill can't turn a lump of iron into a needle, Ted the blacksmith can, and he always needs more iron.

Tom can give Jill an otherwise worthless lump of iron in exchange for a shirt. Jill can then take that iron to Ted the blacksmith. Ted can use some of the iron to make Jill's needles and keep the rest of the iron in exchange for his work. This system is called a commodity economy. Though different crafts require different goods, most of these crafts require at least a little bit of metal. Thus metal becomes a basic commodity for trade.

In a commodity economy, something that is of value to many people is traded for other goods

Ingots and Shekels

And indeed, lumps of metal called ingots are the first form of currency. Instead of trading in finished goods, like knives, which not everyone might want, people begin trading in the metal itself. By working with a raw material like iron, a buyer can give a seamstress the makings of a bunch of needles, a warrior the makings of a new sword, and a farmer the makings of a new scythe - all with one commodity.

Metal is not the only thing everyone needs, though. And there will always be people who do not need metal at all. Yet there is something everyone needs, and that is food. It is no surprise, then, that the earliest named form of currency, the Sumerian shekel, was originally a unit of weight for measuring barley.

The original shekel was probably a bag of grain of set weight, which people used to trade. Yet walking around with sacks of perishable grain proved inconvenient, whereas metal was portable, durable, and easily divided. Moreover, the value of grain fluctuates with the seasons. Grain is cheapest after harvest, and most precious in the spring, whereas metals retain their value over time. Over the years, the sacks of barley came to be replaced with ingots of metal, considered to be worth as much as a shekel of barley, and the name shekel transferred from the barley to the lump of metal.

Early Currency and Counterfeiters

Weight is a difficult thing to determine accurately without a scale, and a scale was a very precise, and thus rather expensive, tool for the age. Yet even if everyone had scales to measure the weights of ingots, they would have a difficult time ascertaining their purity. No sooner had people begun accepting lumps of gold as payment then some clever counterfeiters began coating lumps of lead with a thin layer of gold, or mixing precious metal with common ones to make ingots of impure alloys.