/ 15 March 2022

Virtual money has been around for centuries

Cryptocurrency Companies Photo Illustrations
Representation of Bitcoin and other cryptocurrencies are seen in this illustration photo taken in Krakow, Poland on February 16, 2022. (Photo illustration by Jakub Porzycki/NurPhoto via Getty Images)

A country involved in a war must first make a fiscal killing before it can make a military killing. It was perhaps in light of this adage that the Ukrainian government recently took the decision to raise capital by accepting cryptocurrency donations. Similar attempts to raise virtual capital are taking place in Moscow, evidenced by the Bank of Russia starting the development of its own cryptocurrency — the digital ruble. Ultimately, both sides seem intent on financing their war machines with cryptocurrency. In light of this unusual consensus, it is surely worth investigating how money evolved to the virtual realm. 

The traditional story of money always begins with a fantasy world of barter. “To see that society benefits from a medium of exchange”, writes David Begg in his book titled Economics, “imagine a barter economy”. “Imagine,” writes Harry King in his textbook titled Economics: Study Guide, “you have roosters, but you want roses.” One could multiply examples endlessly. Just about every economics textbook employed today sets out the origin of money in the same (imaginary) way, but is this orthodox story true? Did the evolution of money really begin with barter? 

The problem with the traditional story of money is that there’s simply no evidence that bartering ever happened; and there is enormous amount of evidence suggesting that it did not happen at all. For countless centuries, explorers have been trying to find this fabled land of barter — none with success. Perhaps the biggest blow to the traditional account of monetary history is the definitive anthropological work on barter, by Caroline Humphrey of Cambridge University. She made the piercing conclusion in her ground-breaking article Barter and Economic Disintegration that: “No example of a barter economy from which money emerged has ever existed.” 

There is good reason to believe that barter is not an ancient phenomenon at all, but has only really become widespread in modern times. Certainly in most of the cases we know about, it takes place between people who are familiar with the use of money but, for one reason or another, don’t have a lot of it around. Elaborate barter systems often crop up in the wake of the collapse of national economies: most recently in Russia in the 1990s and in Argentina around 2002, when rubles in the first case, and dollars in the second, effectively disappeared. It should also be noted that face-to-face bartering is still done today. In the US alone there are more than 1 000 sophisticated barter exchanges that facilitate barter trade.  

Not only does traditional monetary history assert that money began with barter; it would have us further believe that credit is a modern financial device, and that, before credit was discovered, all purchases were paid for in cash. However, a careful investigation of history shows that the reverse is true; credit preceded cash.

The most compelling evidence for this suggestion came with the translation, first of Egyptian hieroglyphics, and then of Mesopotamian cuneiform. These texts not only pushed back scholars’ knowledge of written history to roughly 3500 BC, they also revealed that credit systems actually preceded the invention of coinage by thousands of years. 

The vast majority of cuneiform documents are financial in nature, providing us a clear view of the Mesopotamian economy. The basic monetary unit in Sumeria, which was a part of ancient Mesopotamia, was the silver shekel. One shekel’s weight in silver was established as the equivalent of a bushel of barley. The silver shekel did not, however, circulate very much. Most of it just sat around in carefully guarded temple and palace treasuries. The lack of silver circulation was due to the fact that merchants (who sometimes worked for the temples, and sometimes operated independently) did much of their dealings on credit. While debts owed to the merchants were calculated in silver, peasants who owed money to the temple or palace appear to have settled their debts mostly in barley, which is why fixing the ratio of silver to barley was so important.

At this point, just about every aspect of the conventional story of the origins of money lies in ruins. Rarely has an historical theory been so absolutely and systematically refuted. The standard account of monetary history is actually back to front. We did not begin with barter, discover money, and then eventually develop credit systems. It happened precisely the other way around. What we now call virtual money, or credit, came first.