Most economics courses still teach a version of monetary history that was first postulated by Adam Smith in the mid-1700s. Smith argued that, with the division of labour, people would have accrued surplus commodities, which in turn necessitated trade. Consequentially, in order to exchange goods, people had to barter, so the story goes.
However, it wasn’t always possible to find a person who wanted what you had and had what you wanted, the so called “double coincidence of chance”. Consequently, people hoarded precious commodities that they believed everybody would accept, so Smith argued, which gave rise to what we know today as money.
This version of monetary history continues to influence current economic theory, especially in the neoliberal tradition. It is from this presupposition that economists paint a picture of the economy as a giant system of barter. In this system, money is simply a tool to facilitate trade, while people are rational actors seeking material advantage. Importantly, it is by this reductive examination of human interaction that economists present economics as a science governed by natural laws.
The problem, as Caroline Humphrey (an anthropology professor at Cambridge) observed, is that “no example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing”.
Anthropologists, such as David Graeber, have demonstrated that, prior to the existence of money, societies were radically different and based upon structures that precluded barter in the sense it’s typically understood today (“I’ll give you three pigs for that bracelet”). Instead, contemporary anthropologists argue that societies without money were characterized by a very complex system of non-enumerated credits and debts. In these economies, community members might have gifted one another items, expecting to be compensated sometime in the future.
There is no evidence, though, that this led to a system of measuring goods proportionally to one another, as implied by the conventional story of barter. On the contrary, through the use of debts, favours and gifts, people were able to circumvent the double coincidence of chance. As such, there was no need to hoard precious commodities and develop enumerated currencies. It is important to note that, in the barter theory of the origin of money, coinage already existed. Therefore, barter cannot account for the emergence of money (in the discussions of Smith and also the exchange of cigarettes in prisoner of war camps).
Economies developed from complex social relationships based upon debts, credits and gifts. Money did not develop spontaneously through trade but via an institutionalisation of debt in the form of banks. The earliest documented banking operated in ancient Sumeria, in the form of credits recorded on clay tablets. As Richard Werner writes, this “is not some rudimentary Stone Age conception [of banking], but the very same type of banking transactions that modern banks engage in: deposit banking, unsecured and secured loan operations, bank transfers, giro settlement of debts, bill discounting and foreign exchange”.
The story that emerges from scrutinising the myth of barter suggests that it is these complex debt relationships that eventually developed into private or public banking institutions. Such institutions were usually associated with authority, power, class and religion. Coinage seems to appear from this nexus as an anonymous token of ‘trust inscribed,’ as Niall Ferguson termed it. However, there is no simple account of the history of money for the very good reason that it was most probably a convoluted and convergent process.
Why then, in the face of good evidence, is this myth still widely taught? Perhaps it is because the myth of barter provides economists with a simple explanation for a complicated phenomenon and, therefore, a convenient way to establish a very specific and reductive view of humanity.