An abstract, social innovation

Money is a profound and extraordinary social innovation. Like language, it is abstract and social, with physical aspects (currency in the case of money, and spoken or written in the case of language). In essence, though, a money system and a language are abstract social tools.

History tells us money has been essential to groups of people functioning in community. Families and very small sharing communities can get by without money. But for at least the last 5,000 years, with a few exceptions, people have been living in larger societies that developed in significant part as a result of having something they used as money.

Why money?

How did we end up using money when we make exchanges? Let’s take a brief look at the history of money. Keep in mind the Sufi story of the blind men and the elephant. Money evolved with roots in at least four aspects of human nature:

  1. We compare and measure;
  2. We give and take;
  3. We have a sense of equity and fairness;
  4. We live in communities with some form of government.

We developed units of measure and wealth that eventually became quantifiable standards to satisfy these aspects of our nature.

These units of measure and treasure emerged as money from:

  • IOUs – an account of exchange that requires relationship, trust or authority;
  • Indirect barter – tangible tokens with their own commodity value in the marketplace, no relationship or trust required; and
  • Tokens and symbols of power.

A measure

Humans are built to measure and compare; it is fundamental to how we learn and think. We also have a built-in sense of fairness and equity. This led to the standardization of our methods of measure, including money, our medium of exchange. We went from, “I’ll take an arm’s length of fabric,” to “I’ll take a yard of fabric.” We went from being simply indebted for a kindness – “I owe you one, friend” – to owing a unit of a specific thing. I owe you one cow. I owe you two bushels of wheat. I owe you one gold sovereign. I owe you $1. Just as early measures of physical distance began with a reference to a body part – a foot or an arms-length, the measures of wealth began with a reference to some physical commodity – a day’s portion of grain, a cow, a measure of precious metal. Measures have evolved over time to represent an abstract concept of measure. Our minds build up files of reference that give the abstract measure meaning.

In early large cultures a central religious or political power collected tribute from its citizens. As cultures grew larger, the tribute requirements became more specific. A payment or tribute of one cow to an overlord was a one-time offering, and hence, not money by definition. However, as tribute was standardized in larger communities, becoming what we now call taxes, the unit of demand became a standard measure of value. Because this unit could be used to pay one’s tribute or tax to the temple or government, it had a secondary value in the marketplace. A cow or a coin that could be used to pay one’s taxes was valuable to everyone who needed to pay taxes.

At some point people began using a certificate of ownership to the unit of measure (a portion of wheat or cow), as a medium of exchange in the marketplace, becoming money. Serving as a measure is one part of the path to money. When a token is designated for paying one’s required measure of dues or taxes to government it is called, legal tender. When a token is broadly used for exchanges within a community, and used to pay one’s measure of contribution without the formal structure of a law, tax, or fee it is called, common tender.

Money can come into being as a standard measure of wealth or value.


Informal personal IOUs have probably been a part of life in every community throughout history. People promised to do things in the future for others and we kept track – in our heads, until relationships grew too complex or too many. Then quantification and writing emerged. “Lend me your billy goat in late winter and I’ll give you a kid in the summer.” “Give me a bushel of wheat seed in spring, and I’ll give you back two bushels of wheat in the fall.”

The earliest known written IOUs are clay tablets used in Mesopotamia over 5,000 years ago. They were property receipts and accounts of promises or pledges. Some examples by conjecture:

PROPERTY RECEIPT: You have deposited 100 bushels of wheat in the community storage silo and can take out 80 bushels of wheat over the next winter. (PS. I’m taking a share of your wheat for storing and protecting it for you.) The King.

PROMISE: In recognition of your 12-hour day working on building the new temple, here is a token for a daily ration of rice. The Temple Authority.

PLEDGE: You have given me ten yards of beautiful fabric you have woven, which I will carry to the Big Town and exchange for an assortment of exotic spices (less my commission). I give you my cow in pledge. If I fail to come back with your goodies, you can keep my cow. Trader Joe.

People are creative, and probably as soon as someone had an IOU from someone else, they found they could exchange the IOU for another good or service. This transferable use of the IOU itself as a means of exchange is, even today, called the monetizing of debt (or credit). In order for these IOUs to become money, people had to trust the party issuing the IOU would be good for the debt, no matter who called to collect it. This requires an agreement broader than individual-to-individual; it generally requires a community wide agreement of trustworthiness of some sort. This agreement of trust and transferable value is what distinguishes money from an ordinary IOU.

Money can come into being as a record of an IOU.

Indirect barter – tangible marketplace value

As people traveled great distances for trade and conquest, making exchanges required a means that did not depend on trust, local authority or previous relationship. If you were traveling a very long distance to trade with strangers, you would take the most durable, highest value for size, tradable commodity. Precious metals, which were used for weapons, utensils and decoration throughout the world, were good choices for bartering with distant strangers – as were salt and spices. You could carry a durable item of high value in relation to its size.

In the same way an IOU could be monetized (turned into money) and used by a local population for making exchanges between people not named by the IOU, these pieces of metal or other commodities were passed around as a medium of exchange by people who did not really want to use the metal themselves, becoming a form of money. This is the monetizing of a commodity.

As bits of metal came into broader use, it became important to quickly judge the quantity and quality of the bit of metal that one was exchanging. Coins developed as a way to give a literal stamp of authenticity, quality and quantity, making their use as money easier for everyone. Gold, silver, and copper are the primary commodities with a sustained use as money.

Using precious metals for money is distinctly different from using IOUs. Gold, silver, and copper are tangible tokens that have a commodity value in the marketplace. It does not require a trust relationship; traders can establish weight and purity independently. This makes its use more like barter in that each party can independently establish the value of their side of the exchange. For example, using gold coins is essentially indirect barter, and every exchange carries two layers of value calculation: the values of the actual items to be exchanged, and the value of gold in the open marketplace. Although individuals making the exchange may appear to have more freedom and independence in establishing value for the exchange, in fact, they are constrained and manipulated by the broader market value of the commodity, and those who control it (Chapter 4.28).

Money can come into being as a commodity.

Symbol and pillar of power

It is human nature to organize into communities and to establish some form of governance. For communities to prosper there must be some way to resolve conflicts and to decide how resources will be distributed. Over the past few thousand years we’ve tended toward larger and larger communities under one government. All around the world, beginning about 2,500 BCE, we shifted into an age of empires. How did these big empires control such large territories when travel and communication took so long? Big armies were – and continue to be – the primary means. But how do big armies get paid over vast territories?

The age of empires coincides with the timeframe in which precious metals became a form of standardized money in widespread use. Consistently, the prerogative for coining gold belonged to the priests of these empires, and silver and copper to the civil authorities, or to provincial governors. For rulers, stamping coins with their own image was a means of announcing and establishing their authority, and by assuming this money-creation privilege they maintained their power. Coins were an informative symbol that would be widely broadcast, and a means of exercising power. The authority with the power to create money could spend the coins into widespread use, and demand some of them back in the form of taxation.

Money historian Alexander Del Mar presents considerable evidence that the stamp of the ruler on the coins was more important than a weight, which often varied over time and distance, or a commodity value for the coins. For example, the 5th Caliph of the Umayyad, Abd al-Malik Ibn Marwan, made a deal with the Byzantine Empire under Justinian II to pay a tribute of 1,000 gold solidi or dinars per annum for ten years. For the first six years al-Malik paid with gold coins he had minted to copy those of the Byzantine Empire. In 695 AD, he struck coins with his own image and sent them to Rome for tribute, whereupon, Justinian declared war. It wasn’t about the actual value of the gold, it was about the power it represented. Usurping that power was considered an act of war.1

Money can come into being as a token, symbol and pillar of power.


A measure, an IOU, indirect barter and power symbol have all played a role in the development of money as we know it today. Most money has been a hybrid. For example, the earliest forms of metal money were measured as debts of grain or cattle and even bore the names, bushel and cow. And, for at least the past 700 years, nearly all widely used gold systems of money have really been IOU based systems, with only a fraction of real gold in reserve.

Nearly all money in widespread use has been established by the authority of some form of governance – whether that be a dictator or a cooperative common agreement.

Economists tell a story

Foggy mists of time and the baby of barter

Economic textbooks often tell a story of a mythical community of people using barter. The people in this mythical community figure out it is difficult to find the right exchanges with barter, and so they choose a common commodity such as cattle and grain as a form of money. Through marketplace competition, metal wins as the best commodity to use for all exchanges because metal is durable and has a high value to size ratio. The story says that true money is born as a commodity in the marketplace of free trade. Here’s an example of this story:

Money and the payment system have evolved over time. The earliest forms of money were commodities, such as cattle and grain, that came to be used as means of payment and stores of value, two properties that effectively define money. Over time, precious metals, specifically silver and gold, became dominant forms of payment. — Federal Reserve Governor Laurence H. Meyer, 20012

Unfortunately, Governor Meyer and far too many of his colleagues are over simplifying and have an incomplete view of money. The earliest forms of money were not commodities; they were receipts for commodities. Communities rarely passed around a cow or a bushel of wheat to facilitate exchanges; they passed around a receipt or IOU for cattle and grain – or some form of information about current ownership. Or they simply kept accounts of giving and taking, settling balances at some point in time with a standardized measure of value. The early forms of metal money carried the names of quantities of grain or cattle because they were an effort to standardize value and were receipt money in a form readily carried and preserved. Some early forms of money were divisible by 30 or 60, representing chits for daily portions of food. The standardizing was done by an authority, such as a wealthy person, a religious leader, or a governing power, not in the marketplace.

These early receipt-IOU moneys were about relationship, authority and trustworthiness. Metal was chosen for the receipt because it was more durable than a clay tablet or a piece of parchment, but early materials used for the receipts were not valuable in and of themselves. This metal receipt got its value, not because it was a commodity, but primarily from the receipt, promise, IOU it represented, and from the agreement of people to use it as a medium of exchange. (For example, 20 pieces of metal money = 1/2 cow.) For thousands of years the religious or political leader established that agreement.

Over time, metal used for coins shifted from metal of little value to metal of greater value in the commodity market, becoming a hybrid of receipt and commodity money (Chapter 4.28). As the connection to other commodities like grain and cattle receded into the past, the metal coins became true commodity money – money with a value in the commodity market as well as a value as money. It was no longer a receipt for something else. However, the historical record of variable weight coins suggests that up until the Middle Ages, the stamp of authority on a coin was more important than its weight.

Governor Meyer and many economists are also wrong that over time, precious metals, specifically silver and gold, became dominant forms of payment. The use of receipts and accounts for precious metal- measured money has nearly always been a far more widespread and dominant form of money, than the coins themselves. Today, coins are purely for convenience, because they cost more to produce than their defined value, and all forms of cash represent about 3 percent of the global supply of money – at most.

A failure to understand the true nature of money is a serious handicap in someone governing or teaching about our money system – as our current situation shows. When reading any economist or monetary theorist, note their story of the origin of money because this will be the foundation upon which they build their theories of what money is and how it works.

We’ll pick up our history in the next section with kinds of money.

 PrevMoney Fundamentals 3.15