Anyone who takes even a few minutes to think about it can figure out how money evolved: it began in primitive barter societies where people exchanged what they had for what they needed. But this was too limiting, as I might not always have the thing that you need. So, gradually, people began to use other things--cowrie shells, salt, silver, or gold--as a sort of proxy that allowed for an organized, large-scale barter system.
Gradually, we became comfortable with this medium of exchange, so we continued to make it more abstract. Gold became bank notes backed by gold, which became checks, which became credit cards, which eventually became a system of computerized credits and debits many levels removed from the basic barter economy that they represent. But at the core of money there still lies an exchange of valuable goods and services between people, facilitated by a monetary apparatus.
This history of money is intuitive, well-documented, frequently taught, and, according to Martin, completely wrong. And he makes a very strong case that we should stop thinking about money that way.
The problem with the standard narrative is that it treats money as a unit of value rather than as a technology for social exchange. If money has some kind of inherent value--even an inherent value that has been abstracted many times since the days of exchanging chickens for strawberries--then the essential problem of monetary policy is how to create an environment in which the "true value" of money can be expressed. But if money is essentially a facilitator of social exchange, then the essential problem of monetary policy is deciding what kind of society we want to b
This all goes back to the early barter economies, where the standard narrative of money affixes its inherent value. As it turns out, there never actually were barter economies. People have always traded this for that, of course, but we have no evidence that such exchanges were ever the basis of an economic or social system. This is just the economist’s version of the mythical “state of nature” where everybody interacted without any kind of social organization.
But there has never been an original state of nature either. We can go all the way back to chimps and bonobos, and there is always a social organization. And the social organization is always based on promises, obligations, and reciprocal duties. And it is these that are, in Martin's revisionist narrative, the real origin of money.
In pre-monetary societies (which was pretty much every society before the Greek and Ionian city states starting around the 6th century BCE) obligations and promises were structured differently, but they still existed, and people kept track of them (indeed, some anthropologists believe that keeping track of such things drove much of our cognitive evolution--see Robin Dunbar's Grooming, Gossip, and the Evolution of Language). These obligations and responsibilities often took the form of religious sacrifices (which had the effect of redistributing foodstuffs through the cultic center), marital settlements, and reciprocal duties in hierarchical relationships.
When obligations and reciprocal responsibilities become “debts,” and are accounted for in a systematic way, they can be monetized and exchanged. Money is a way to organize social responsibilities in a large society by converting those responsibilities into units that can be tracked and exchanged. For money to exist, then, there must be three things present in a society:
1) The idea of a “universally accepted unit of value,” which means that anything that someone promises to do for, or give to someone else can be assigned a value of X number of units; 2) The ability to keep track of who owes what to who; and 3) The ability to transfer obligations with the confidence that the promises embedded in them will be always be honored.
Martin's history of money begins in about 600 BCE, when the highly developed accounting systems of the Fertile Crescent (Babylon and Persia) came into contact with the nascent Greek concept of universal value. This is why the first coins that we know about trace back to the Ionian kingdom of Lydia in about 590 BCE. Lydia (in Modern Turkey) was situated in between the Greek and Persian worlds, and the two most famous Lydians in history--Croesus and Midas--are probably also the two most famous cautionary tales in history about the dangers of a money economy.
What this means in practice is that the things we consider the most abstract about money are the things that have always been there. Money has always been a promise to pay something that could be recorded and transferred. This aspect of money existed before gold coins, or anything else, became the most common way to do the recording and the transferring. And these tokens have never been necessary to the essential function of money (which is why about 90% of the "money" in the United States, and 97% in the United Kingdom, exists as nothing more than computerized accounting entries). It is the promises, not the exchange tokens, that make money. And it is faith that the promises will be fulfilled, not a certain amount of gold, that gives money its value.
This need for confidence is probably the most important difference between Martin's narrative of money and the "standard version" that I began this review with. The standard version assumes that money has always represented some innate, natural value--either the value of the gold or silver it is composed of, or the value of the gold or silver that backs it, or the value of the goods or services that were once traded by barter. The new narrative rejects this origin of money and, by doing so, rejects nearly all of the assumptions of most modern monetary theories and policies. As Martin himself puts it, paraphrasing the 19th century economist Walter Bagehot:
If money is in essence transferable credit—rather than a commodity medium of exchange, as the academic economists insisted—then fundamentally different factors explain the economy’s demand for it. Meeting demand for commodities is a simple matter of ensuring a sufficient supply on the market. When it comes to transferable credit, however, volume alone is not enough: the creditworthiness of the issuer and the liquidity of the liability come into play. And both these factors are determined not technologically or physically but by the general levels of trust and confidence. (198)
These different ways of understanding money have profound consequences for governments and policymakers. As long as money has inherent value, then the job of policymakers is to simply create the conditions in which the actual value of money can be expressed. But if money is primarily an extension of personal obligations that we have to each other, backed by the confidence that these obligations can be exchanged and honored, then the job of economic policy is to create trust and confidence. These are fundamentally different ways of understanding, not just money, but the role of government.
What ultimately emerges from Martin's analysis is a sort of historical competition between these two very different ways to view money: money as a thing that represents value, and money as a technology that organizes social interactions. The differences are profound. Under the former view, for example, the cause of poverty is that people do not produce anything of value. Under the latter view, the main cause of poverty is that people don't have money.
In Martin's narrative, the two views dueled for about 300 years, with the second view always being articulated by somebody, but the first view winning out because it was more philosophically compatible with the values of the Enlightenment. Over time, though, the tendency of money economies to accumulate debt lead to the growth of a largely unregulated debt management industry that collapsed in 2008 and vaporized trillions of dollars, forcing governments to bail out financial industries that had emerged in the shadows of their monetary policy and thereby combining the worst aspects of both command and laissez faire economies by socializing risk while privatizing profits.
In effect, what happened in the events leading up to the crash of '08 was that the banking industry was treating money as negotiable obligation, while governments and regulators were treating it as something with inherent value. To put this another way, money was acting like the thing that it is, and governments were treating it like the thing it was supposed to be. The only way out of the trap, he suggests, is to flip the lens and acknowledge that money is a social and political construction that organizes social relationships and not a abstract reflection of something called "real value."
I found Martin’s arguments very compelling, and I was impressed by his handling of the sorts of texts not normally associated with economics: Homer and Aristophanes, Dickens and Shakespeare, Cicero and Caesar--they all give us hints about how money worked at certain times in history, and he is as comfortable with them as he is with Adam Smith and Karl Marx.
But where I found Money: The Unauthorized Biography the most compelling was in its author’s ability to balance a sterile (if essential) discussion of monetary policy with a deep understanding of the social relationships that make money, well, money. He helped me grasp, in a way that I never had, the fact that money is essentially a mechanism for social interaction between actual human beings and that many of the problems that we associate with it are actually problems with the way we interact with each other.