Primitive Money

Last week, I discussed how anything can be money as long as someone is willing to accept it. This week, I will delve deeper on:

• How Barter was used in primitive markets and why we moved to Monetary systems?
• Did a collective acceptance of a monetary system simply evolve or was a royal or divine decree involved in its genesis?

The year was 1939 when Richard Radford left Cambridge University, where he was studying Economics to join the British army at the beginning of World War II. In 1942, he was captured by Nazi forces in Libya and sent to the Stalag VII-A Prisoner of War(POW) camp in Germany. During his time in the camp, Radford studied the life of prisoners, their behaviour, trades, and transactions.

The POW camp had a canteen and prisoners got a fixed amount of Prison currency(see image below) to buy supplies which were extremely limited. Hence the currency was not considered valuable and prisoners had to explore other means of acquiring goods that they needed.

The demand for goods amongst prisoners varied by nationalities and religious beliefs. The British desired tea but didn’t care much for coffee. The Sikhs would literally have any food other than beef. Prisoners of certain nationalities had greater freedom of movement within the camp as compared to others which put them at an advantage to trade desirable goods in exchange for those they didn’t. This gave rise to a thriving market and a mini economic system within the camp which initially started as a Barter system. The first few exchanges were simple like a nonsmoker giving a smoker his ration of cigarettes in exchange for chocolates. Soon, more complex exchanges evolved, and within a week or two, as the volume of trade grew, an exchange rate system came into existence. The Sikhs for example, who initially would exchange tinned beef for practically any other foodstuff, began to insist on jam and margarine as they realized that jam was particularly valuable against other items while diced carrots were worthless. Items were valued against multiple other items and ended up having inconsistent exchange rates. Prisoners with more access and smarter business acumen took advantage of the situation and started a practice of arbitrage and hoarding which resulted in an inefficient market.

Eventually, cigarettes were accepted as a standard exchange medium for all goods, and the prices of goods were being quoted in ‘Number of Cigarettes’.

“People started wandering through the bungalows calling their offers — cheese for seven(cigarettes)”¹

Exchange and Mart notice boards came up where the name, room number, wanted and offered sales, all denominated in cigarettes were advertised.

“Cigarettes became the normal currency, though, of course, barter was never extinguished”

Within the camp, Cigarettes worked as a unit of account, as a measure, and as a store of value. They had an intrinsic value, were homogeneous, reasonably durable, of convenient size for small transactions, or could be traded in packets for large transactions. Thus, cigarettes fulfilled all the functions and properties of metal and paper currency that was in circulation in the outside world. This gave rise to a Monetary system based on cigarettes.

After his release from the prison, Radford published an article titled “The Economic Organization of a P.O.W. Camp” describing his prison experiences described above in the journal Economica. In 1947 he moved to Washington to join the International Monetary Fund.

The evolution of money in the real world was much more gradual and complex. There is no written or archaeological evidence of this, but it is widely believed by classical economists that the first human trades pretty much everywhere were either ‘reciprocal commodity exchanges’ or ‘gift-exchanges’. Reciprocal commodity exchange is commonly known as Barter — Goods in exchange for other goods. Which goods qualified for barter and which qualified for gifting was a function of culture and differed across civilizations.

Commodity exchange worked in market conditions, between individuals with little or no social relations. In the words of anthropologist Chris Gregory, “Commodity exchange is an exchange of alienable objects between people who are in a state of reciprocal independence that establishes a quantitative relationship between the objects exchanged’².

The gift exchange system was much more complicated than you may think. Gift exchanges usually happened between individuals who have long-term social relationships. Important to note here that this concept of gifting does not indicate the lack of reciprocity. It is different from the Christian concept of charity or the Hindu concept of Dāna which does not require the recipient to return anything back to the giver.

Gifting was often used to extend or maintain relationships, assert societal dominance, or in case of enemies to place them in your debt. But there is always the obligation of a counter-gift or as we commonly call it, a ‘return gift’. Once again in Gregory’s words, “Gift exchange is between people who are in a state of reciprocal dependence that establishes a qualitative relationship between the transactors”. Even in our modern society, very often the deciding factor when selecting the value of a gift is driven by the ‘value’ of the relationship.

But don’t mistake gift exchanges to be limited to Birthday parties and wedding gifts. They were also used by civilizations to create a complex social hierarchy. The ceremonial exchange system of the natives of Papua New Guinea called Kula, is the most famous example as it was studied by eminent anthropologist Bronisław Malinowski in his book “Argonauts of the Western Pacific”. The items used in the Kula gifting system were fixed and were usually ornaments. There were hierarchies of gifting levels and one had to work their way up the hierarchies by participating in lower levels of gifting. Exchanges of Kula items didn’t buy you anything other than a stronger relationship and social status. The system was maintained solely by social obligations enforced by cultural values. Similar gift exchanges can be observed in ‘Koha’ system of the Maori tribes of New Zeland and the ‘Potlach’ system of native North American tribes.

Exchange systems are very difficult to scale. For a pure commodity exchange with no common medium of exchange, the value of each commodity needs to be calculated versus every other commodity in the market. Spot exchanges become difficult if you do not find the goods that you desire for exchanging, or in Economic terms, there is no ‘Double coincidence of wants’.

Gift exchanges rely on the memory of the persons in the exchange system. You need to recall the past actions of every person in the system for the system to attain equilibrium. If you forget the value of the gift received from someone a long time ago and don’t reciprocate accordingly, the system fails to work. Such inefficiencies eventually drove humankind to a Monetary system.

This is where I cannot proceed further without analyzing the work of Austrian Economist Carl Menger. Other than the Theory of Marginal Utility that is studied by all students of Economics 101, Menger’s other significant contribution was the first systematic explanation for how people went from barter to a monetary economy. To understand why Menger’s work is so important, we need to understand that today, all ‘money’ is government-issued with the exception of cryptocurrencies. As such, it is very easy to think that something cannot be money until the government says so. In his book ‘The Origins of Money’, Menger explained that when we went from Commodity exchange to a Monetary system, money was created through a process of choice among individuals.

According to Menger different goods have different degrees of salability. If something is more salable, its owner can more easily exchange it for other goods at a desirable price. However, when someone has goods with low salability, it is difficult to exchange it for goods that they need in a barter. Therefore, they may find it more economical to exchange these ‘low salability’ goods for something that is highly salable, even if they may not have a need for it. They would use it as a temporary medium for obtaining the goods they really need later. Menger suggests that people would do so out of their own self-interest, “without any agreement, without legislative compulsion, and even without regard to the public interest.”³

Over a period of time “a certain number of goods … became acceptable to everyone in trade, that is, became money”³. This is exactly what happened in Radford’s POW camp. Cigarettes evolved in spite of the official Prison currency because the prisoners found it a much more ‘salable’ commodity and hence accepted it as money.

This is Menger’s economic perspective of how Barter gave birth to Money. His view aligns with Adam Smith’s views on the evolution of Money from Barter. Many Anthropologists do not agree with this view. Primarily, because there is no ethnographic evidence for this behaviour. In fact, they don’t even agree that the Commodity exchange system ever existed anywhere in the world. David Graeber thinks it may have existed in “occasional interactions between people never likely to meet each other again” [4] Contrary to Menger, Anthropologists believe there was always some form of rules, whether legal or cultural that decided what becomes money.

There are records of penalties set for different offenses fixed in terms of different goods. If the guilty person did not have the prescribed items, they had to provide its proportional equivalent in order to make peace with the victim. And that is the etymology of the word Pay. Its Latin root means to pacify or to make peace and the contemporary meaning of the word comes from the act of pacifying a person to whom you owe a debt.

Next time you pay someone, think about it.

This week I discussed arguments from Economists and Anthropologists on the nature of primitive money and their hypotheses about the evolution of the Monetary system. Next week, I will explore the Gold Standard and other Commodity money that was used until about a hundred years ago.

Further Reading

1. Money That Goes Up In Smoke — For a History of the use of Tobacco as Money. Also the source of the image of the Camels advertisement used above in the post.
2. Stop getting The Flintstones wrong — For an Analysis of Clams- the Flintstones money. Yabba Dabba Do!

References

[1] Richard Radford: The Economic Organization of a P.O.W. Camp -

[2] Chris Gregory (1982). Gifts and Commodities.

[3] Iwai, Katsuhito: Evolution of Money (November 1997)

[4]David Graeber: On the Invention of Money — Notes on Sex, Adventure, Monomaniacal Sociopathy and the True Function of Economics

You just read the third essay in the series ‘An Inquiry into Money’.

If you enjoyed reading this post, do come back next weekend for the next in this series. If you prefer these posts to be delivered to your inbox, you can subscribe to my Substack. You can find me on Twitter @himanshuatre