Was “Cigarette-Money” in World War II POW Camps a Case of Commodity Money Origination?

By Matthew Berg. Cross posted from New Economic Perspectives

1. A Parable About the Origin of Money

Perhaps the most convincing single example cited by proponents of the view that money is a commodity is the well-known use of cigarettes as “money” by Allied prisoners of war in Germany during World War II. Just six months after being liberated by the U.S. Army, former POW R.A. Radford published his famous article in the journal Economica, “The Economic Organization of a P.O.W. Camp,” describing how he and his compatriots had used cigarettes as a medium of exchange during their unpleasant stay at their not-so-idyllic Bavarian Stalag.

But as we will see below, there are some significant problems with the notion that cigarettes were really a form of commodity money which developed spontaneously in the way commodity money theorists suggest. In fairness to Radford himself, he recognized that “prison camp is not to be compared with the seething crowd of higglers in a street market, any more than it is to be compared with the economic inertia of a family dinner table.” But, as is often the case in economics, subsequent interpreters tend to underemphasize such subtle points as this. For example, in the view of prominent Austrian economist Robert P. Murphy, “there is nothing in Radford’s account that conflicts with the standard economists’ story about the origin of money.”

An identification tag worn by a POW from Radford’s very own Kriegsgefangenen-Mannschafts-Stammlager VII-A:


Radford’s article became an instant classic, and has since become a staple of introductory economics textbooks, with excerpts serving as a real-world illustration of the standard textbook fairy tale about how money arose. The trouble is that the fairy tale is not terribly convincing on its own terms, as we shall see in the next paragraph. Though Radford’s POW camp is not the center point of the commodity money argument (gold is), it makes for a pithy and compelling archetype which makes the commodity money narrative much more convincing for students.

The traditional fairy tale goes something vaguely like this: once upon a time, in a faraway land, there lived a princess, some peasants, and perhaps also a frog. The princess wanted various commodities, such as a quality comb and some food to eat, and the peasants wanted locks of the princess’ hair (as well as various commodities produced by other peasants). The princess’ hair had many desirable properties. First, it was uniform; second, it was transportable; third, it was divisible; fourth, and perhaps most importantly, it was shiny. The princess, of course, as the issuer of the locks of hair, became very wealthy. And that is how we got castles and expensive towers. But eventually the princess could not re-grow locks of hair quickly enough to cut them and package them into a sufficient number of locks to meet demand from the peasants and the frog, and so everyone began using gold instead. And then everyone lived happily ever after – especially the princess, who was as we have mentioned very wealthy.

2. The Functions of Cigarette-Money

Although cigarettes are not really durable, they had some other characteristics necessary for a usable exchange currency, such as relative uniformity, desirability, and light weight. Most captured American soldiers were addicted to nicotine (thanks to the free cigarettes provided to soldiers courtesy of America’s tobacco companies, who surely had only the troops’ best interests at heart as they provided them with the opportunity to develop a life-long substance abuse habit).

Support our troops: make them chemically dependent on our products! According to the website “The Cigarette Camps,” the American Tobacco Co.’s 1942 “Lucky Strike Green Has Gone to War” advertising campaign increased sales by 38%.


In fact, this addiction helped perform role of “driving” demand for the cigarette-currency, similarly to the way taxes drive demand for modern state-issued currencies: addicted soldiers had to get their smoke, and so they would always be willing to accept at least enough cigarettes to satisfy their cravings. Non-smoking soldiers would likewise be willing to accept cigarette-money, because they knew that their addicted confederates would want cigarettes. Similarly, citizens of modern democratic countries need the state-issued currency in order to pay taxes, and so they will always be willing to accept at the very least a sufficient amount of state-issued currency in order to fulfill their tax obligation.

In addition, cigarette-money had an additional feature to make it attractive to those who spend their days worrying about the ever-present phantom of hyperinflation: every time a prisoner smoked a cigarette, that cigarette was necessarily destroyed and the cigarette-supply was thereby reduced, thus ensuring that the quantity of cigarettes could not increase too rapidly. Similarly to Bitcoin, cigarettes were thus a naturally deflationary currency.

3. The POW Cigarette Economy as a “Pure Exchange” Economy

In a sense, it is strange that commodity money theorists would place so much weight on such an artificial case study. After all, the case of a band of brothers – who periodically receive cigarettes and other commodities which rain down exogenously like manna from heaven – is not exactly the most typical way that human beings have lived throughout history (not to mention the fact that they were locked up together in the midst of the most deadly and destructive war of all time).

But in another sense, it is not so strange at all. The artificial situation of a prisoner of war camp actually resembles a theoretical Walrasian exchange economy much more clearly than does the real world economy. In a prisoner of war camp, as in the theory of a pure exchange economy, there is absolutely no production of goods (at least for those fortunate enough to be incarcerated in genuine POW camps, as opposed to work camps or concentration camps).

Goods are simply given to the prisoners by their benevolent (or not-so-benevolent) warden overlord, and then the prisoners must confront the problem of how to trade the goods among themselves so as to ensure that they will be as satisfied as they can possibly be with the set of goods that they will eventually consume. POWs all received more or less the same allocation of Red Cross rations, but different POWs had different preferences. Some preferred chocolate; others preferred jam. And so they traded! And after a month’s time, cigarettes “rose from the status of a normal commodity to that of currency,” and POWs began calculating the prices of other commodities in terms of cigarettes.

Moreover, because all prisoners started off with the same allocation of rations, Radford’s POW camp was something of an egalitarian society, and hence was also a just world (excepting for the arbitrary power of the guards). In other words, the prisoners could trade a fixed quantity of commodities with a fixed initial distribution to maximize their subjective personal “utility.” It was Say’s Economy in action!

So even if we are skeptical of the idea that the actual real world economy resembles a pure exchange economy in which people use money only because it is a bit more convenient than outright barter, it might seem that we must admit that the resemblance between commodity money theory and observation is much clearer in the case of the POW camp than in the standard commodity money creation myth.

Furthermore, all of this involved no government intervention, but rather a market emerged as the result of spontaneous self-organization by the POWs! Or so it might seem…

4. So it Might Seem, But So it Isn’t

But unfortunately for our commodity money theorists, the POW camp story is almost as much of a fairy tale as is the tall tale of The Princess and The Hair. If the economic theory of “pure” exchange is purely anything, then it is purely mistaken.

As Christine Desan explains in her article, “Coin Reconsidered: The Political Alchemy of Commodity Money”, Radford’s story “capture a powerful intuition about money’s origins and its character that continues to anchor assumptions about the market.” That “most of that history is imagined and modeled rather than mapped” only makes it more compelling. That this story was a chimera seems somehow to be outweighed by the fact that it was a shared daydream – common among (apparently almost) everyone from Menger to Marx.

The more closely we examine Radford’s fable, the less convincing it becomes. As Desan reminds us:

There is a problem with the paradise presented… (in Radford’s account)… and the problem is critical. That ‘brand new society’ — with its cigarette currency and its pristine market — was a POW camp.

Far from being a stateless society or a paradise of market individualism, Radford’s POW camp was in fact… a POW camp. And that is not something we should allow ourselves to easily forget. There was a “state,” and for that matter the “state” (the German guards) was all-powerful. It was possible for the “market economy” to emerge because and only because the guards and the Red Cross established and preserved the conditions to enable it to emerge. Cigarettes and other commodities were – because of decisions by the Red Cross and the Germans which lay entirely outside of the control of the prisoners – delivered from a distant and utterly disconnected external world:

Recognizing that fact subverts the meaning of the microcosm. The condition for the function of its market and its money was a situation in which governance and all the functions of the collective had been externalized and determined by an alien power. Note that centralized authority was not absent; rather, it was omnipresent, fixed, and definitive. The structure that determined Radford’s camp thus established as premises precisely those issues of relative value that are negotiated collectively when a community of users itself creates a currency — and, for that matter, a market. Those issues range from the profound to the apparently mundane. Each connects a society’s constitution, as a dynamic of people interacting, to its money, as the mode they use together and as individuals to mark and transfer value.

This was only possible because:

The prisoners had no need to create and pay for the conditions that premised their everyday exchanges, from the guards to the way they were fed, because others had conclusively done so for them… Just as they had no say in creating the conditions for exchange, the prisoners had no involvement in determining the reach of each prisoner over resources relative to their group, there in a context that dictated the quantum of sustenance and shelter, removed freedom, and made labor extraneous.

Less jarring criticisms can also be made. For one, the American POWs had all grown up in a money-using society. They thus did not invent money from scratch, but rather attempted to re-create what they already knew – a much different challenge than the one of creating money in the first place that would have confronted a hypothetical tribe of Lockean noble savages, according to the commodity money fairy tale.

Another difficulty Desan points out is that “cigarettes may also have been the only item that German guards reliably accepted as bribes, giving them unique appeal.” It being necessary for POWs to periodically bribe guards for various reasons, the bribes in effect operated precisely like taxes or fees, collected by the powers that be – in this case the guards. Thus, “in the end, outsiders effectively customized a currency for the POWs and bore its costs.“

5. The Negative Contribution of Radford’s Prison Camp

Post-Keynesian economist Geoff Harcourt recently wrote in an obituary of the late General Equilibrium pioneer Frank Hahn that:

“Frank was eventually to say that general equilibrium’s major contribution was a negative one: to make precise the conditions that had to hold (for what he perceived to be Adam Smith’s conjecture that greedy people in a competitive environment could bring about a sort of social optimum) were so special that they robbed general equilibrium of any significant role in descriptive analysis.”

We might say something similar about Radford’s prison camp: it makes the negative contribution of illustrating the sorts of extreme conditions which must hold if the commodity money origination story is to be dressed up in the garb of something that vaguely looks like a documented theory.

No doubt commodity money theorists do not advocate locking everyone up in prison camps (nor do I!). However, commodity money theorists are presented with an awkward and unforgiving realization: if we all lived our daily lives in Prisoner of War camps, and if we were all well-supplied with regularly scheduled deliveries of addictive chemical substances, then perhaps the theory might be a bit closer to being correct.

The alternative option would be as unlikely as it is unthinkable: adopting an altogether different theory of the origin of money, for which there is actually supporting historical evidence (some of which Desan recounts in the rest of her paper, for interested readers).

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  1. washunate

    This is a fascinating read. It reminds me that my personal interest is in the practical implementation of money – to me, money is ‘just’ a concept, an idea, an intellectual notion we hold in our heads of how to compare the values of two otherwise unrelated items, ie, how many apples is an orange worth, and how do I obtain apples and oranges if I’m an auto mechanic?

    I am intrigued about this specific framing of the fantasy of wealth: “The princess, of course, as the issuer of the locks of hair, became very wealthy”

    The Princess, I would argue, didn’t become wealthy through the issuance of hair. She was already wealthy when people desired locks of her hair. The issuance of her hair was simply a trade of hair wealth for castle wealth.

    Whether the Princess trades her hair for castle wealth directly, or whether she trades hair for gold and then gold for castle, the intellectual act of engaging in the processes and describing the processes is money. The specific items involved (hair, gold, castle) are wealth.

    If people reduce their desire for locks of Princess hair, the princess becomes less wealthy, regardless of how much or how little hair she grows and distributes.

    1. Matthew Berg

      I think that’s quite perceptive. The princess (and it is unexplained how she became the princess in the first place) is the beneficiary of the fact that for some also unexplained reason, people want her hair.

      Your distinction between “money” and “wealth” also seems very similar to the MMT distinction between “money-of-account” (money is a unit of measure, like an inch or a meter) and “money-things” (things which are denominated in the money-of-account).

      1. washunate

        Thanks! My big disappointment with MMT is that the people talking about it in public discourse generally don’t acknowledge that how resources are allocated is what matters.

        The problem we face isn’t a lack of money; it’s money spent the wrong way (because the people in power aren’t interested in the public good – not because we don’t know what projects have positive ROI). No trillion dollar coins or other forms of printing change that underlying problem, yet monetary tweaks are often advocated as fundamental solutions rather than arranging deck chairs.

        1. Massinissa

          Oh for gods fucking sake, the trillion dollar coin was NOT ABOUT PRINTING MONEY.

          The trillion dollar coin was not going to be spent or enter the economy in any way.

          You know the debt ceiling? Theres no reason to HAVE a debt ceiling. Its a political gimmick.

          The trillion dollar coin was a silly accounting trick to get around the debt ceiling. It would only have been a trillion dollars on paper. It would not have entered the economy, it would not have been spent, and it would not have caused inflation.

          All the trillion dollar coin was, was a gimmick to get around the ‘debt ceiling’, which itself is an even sillier gimmick.

        2. Gizzard

          “Thanks! My big disappointment with MMT is that the people talking about it in public discourse generally don’t acknowledge that how resources are allocated is what matters.”

          You really need to read more MMT then because that is patently false. Resource allocation demands a fiscal response, MMT advocates fiscal interventions not monetary policy.

          Thats the big difference between monetary and fiscal. Monetary simply changes prices of things and lets the market try to adjust the relative quantities while fiscal changes he relative quantities and lets prices adjust to the new distribution.

          1. washunate

            These two comments in combination definitely illustrate my point.

            “The trillion dollar coin was a silly accounting trick”

            Agreed. Yet many people talking about this in the public sphere acted like it was some deep substantive change, not an accounting gimmick.

            “Resource allocation demands a fiscal response, MMT advocates fiscal interventions not monetary policy.”

            That is not what has been discussed in the public sphere (that public advocacy is what I’m talking about, not more in-depth papers and books – this is akin to discussing healthcare and referencing Jacob Hacker’s detailed work rather than the simplified and cherry-picked proposals that the Obama camp actually put into the public sphere). Rather, gimmicks have been discussed – policies that don’t actually solve underlying, systemic problems. Furthermore, why does MMT get to claim some unique insight into the superiority of legislation over central banking? Virtually everyone across all perspectives of political economy feels that way. Don’t you remember Hank Paulson getting down on one knee to have Nancy Pelosi force EESA down the House’s throat? Are you claiming TARP as a shining beacon of MMT wisdom?

            This is exactly my critique. The problem is not arcane technicalities of the monetary funding mechanisms of the government, how the fed works, how money printing works, how the debt ceiling works, how currency works, etc.

            The problem is much simpler – the leaders in DC aren’t governing with the interest of the public in mind. The public MMT response of spend more money doesn’t show how the money will be spent wisely.

            Here’s my challenge to people who say spending more money is the answer – disprove the following statement:

            Every dollar that the USFG has wanted to spend over the past decade has been spent.

          2. financial matters

            One of the more fiscally oriented parts of MMT would be the Job Guarantee/Employer of Last Resort JG/ELR. Obviously the fiscal counterpart to the Feds lender of last resort.

            There are many ways that this would act as a powerful macroeconomic stablilizer essentially creating a floor that wages would not fall below. The uniform basic wage will reduce both inflationary pressure in a boom and deflationary pressure in a bust. The pool acts like a “reserve army” of the employed dampening wage pressures as private employment grows. And also allows workers to maintain and even improve skills while still keeping up some demand for production.

            Largely taken from Chapter 7 ‘Policy for Full Employment and Price Stability’ from L. Randall Wray’s Modern Money Theory primer.

          3. washunate

            financial matters – I wish we were having those discussions about how to spend money. JG is an interesting concept and there is a lot of substantive discussion to happen comparing that with an unemployment insurance system that is distinct from infrastructure/public works projects and weighing the costs and benefits of each approach.

            (Personally, I think insurance is better than JG, because 1) the managerial structure necessary to implement JG would quickly become unwieldy in the ‘real world’, 2) ROI should determine specific public works projects, not a safety net mentality, and 3) at a philosophical level, I oppose the notion that humanity’s natural state is to be working in organized employment controlled by someone else – that’s oppressive, not liberating, in my book. Who gets the cushy assignments and who gets the back breaking ones? How do you manage and train a temporary employee who can neither be fired nor guaranteed to stay for a period of time? How do you determine the value of projects when the tab is picked up by some other department? How do you implement grievance and whistleblower procedures to protect employees that actually work? How do you arrange transportation? How do you prevent it from becoming a free-for-all of political back scratching? Support the mayor’s re-election and we’ll supply your university with free library staff! And so forth.)

            But we’re not having those kinds of discussions. The actual political discourse is almost entirely about whether we should spend more money or less money (stimulus v. austerity, debt ceiling kabuki theater, etc.) with periodic flareups about how gimmicks like high value platinum coins would be a game changer.

            Who honestly believes that the government won’t raise the debt ceiling to fund the wars and bailouts and tax cuts?

  2. vlade

    Not really sure what the author meant.

    Does he mean that gold has a problem as money? Gold isn’t commodity money (because gold’s intrisnic value is close to nil nowadays).Gold is just different “fiat” money (where a set of humans agrees that something well divisible, rare and unconsumable – thus with little intrisnic value – becomes a medium of exchange).

    Does he mean that commodity backed money can never work? How does that follow from a very specific PoW ciggarete cases? Why not compare say the Yugoslavia break up, when ciggaretes were also common currency (much more common and accepted than gold), even w/o prison guards and red cross distributions? Why would the above imply that say energy backed money could never work? (how about a chat with Chris Cook?)

    1. Matthew Berg

      My point is less a theoretical one that commodity backed money could never under any circumstances be possible, and is more empirically focused.

      I *do* think that, as far as the examples which commodity money theorists point to of something that resembles commodity money actually coming into spontaneous existence in the real world, the cigarettes in the POW camps are one of the more (and perhaps even the very most) compelling case. They don’t really have a whole bunch of other cases to point to, and the other cases (e.g. maybe some sort of commodity money developed in the immediate aftermath of the Soviet Union, or as you say Yugoslavia) always seem to involve very unusual and bizarre circumstances. Since we can only find these unusual sorts of examples, this suggests that the theory of spontaneous origination of commodity money theory is not very general – even if we grant that it applies to the examples like POW camp – which is itself questionable because of the power of the guards, etc.

      1. vlade

        Ok, I think I see your point. I agree that PoW is a bad example, as it’s more of a controlled experiment (I know, it isn’t intended to be, but as you say the conditions are very controlled).

        The other cases of com. mon (Yugoslavia etc.) is more where there was no alternative for shared-trust medium of exchange, so immediately useable commodities started to take the place (cigarettes and gas being two main ones).

        Those situations are interesting because it usually existed together with fiat currencies (DM in Yugo, or even USD) – but those were in general much less accessible to the broad population than gas/cigarettes which were smuggled from abroad (so still exogenous), and also had the advantage of easier divisibility than either paper (coins weren’t generally accepted) DM/USD or gold.

        So I’d say if you want to study com. money, the breakup of state powers is much better environment than PoW. It would be quite interesting to see where it leads to using com money and where “hard currency” (such as USD nowadays) takes over. Seems to me that the latter is in general preferable unless there’s problem of divisibility and/or cash supply (since in those cases lots of economy works off cash, although quickly pseudo-credit institutions start coming up).

      2. Calgacus

        Was reading a history of the immediate postwar era in Germany some years ago that detailed the use of cigarettes as “money” in the US occupation zone, not a POW camp. The resemblance to the MMT pyramid of money with federal money/debt sitting at the top and bank money below it was striking. The cigarettes were used by ordinary people, while the US soldiers were major sources of cigarettes and the much scarcer and more valuable US dollars, acting much like banks. I think one private Henry Kissinger made out pretty well this way.

    2. Sy Krass

      Yes, enough people recognized the cigarrettes as another form of money. Ive worked at a nursing home since 2004, and have watched the “exchange rate” of cigaarettes go from 4cigs to $1, to 2cigs from $1, as the price of cigarettes has gone up. Its used not in place of US dollars, but alongside because its convenient. And if that doesnt upset you non MMTers, We can print up coupons as money at any time as needed. HAHAHAHAHA!!!!!!!

  3. YankeeFrank

    Perhaps this isn’t the best space for this, but I have one quibble with the MMT’ers and this post, and I’m sure many other economic-type rationales for the value of money. The vast majority of people, the great unwashed, of which I am a proud member, don’t value money because they can pay taxes with it. They value money because they can, in not any particular order perhaps, buy food, shelter, heating oil, a car, gasoline, a television, a dog, to a lesser extent a cat ;)… and oh yes, the ubiquitous bling. What’s all this fascination with paying taxes? If taxes went away tomorrow, money would still have value, we’d just have a lot more of it to spend. And since taxes don’t fund government spending in any real way, we could even keep the roads paved and schools open. So what gives?

    1. Yves Smith Post author

      You don’t grok the essence of the MMT argument.

      The value of money comes from the state settling a value for it. Otherwise you’d have to fight over how much whatever you used as money was worth in any transaction (as in you’d need to figure out the value of the currency as well as the goods). You’d also almost certainly have multiple types of money and their values would fluctuate relative to each other. That would be a nuisance and increase the risk of holding money. It would not be a stable source of value as it is (for the most part) now.

      By having the state denominate tax liabilities in currency terms, it sets a certain value for that currency.

      1. YankeeFrank

        I guess I still don’t get it, but thanks for trying Yves. I’m not an economist, nor do I have any economic training, but I thought the value of money was based on what someone could feasibly or willingly pay for something. If rice crispies sold for $20 a box, very few people would buy them. Don’t prices have more to do with the cost of production, distribution and profit margins than any value set by the government? And taxes are always expressed as percentages, so how could that determine the value of money? I guess, perhaps tax brackets tell us something, but really they are just signifiers for the distribution of income, which one could argue, sets prices more than taxes. So I’m still at a loss. I am not quibbling with MMT itself, unless this piece of the puzzle is foundational or something, which I don’t really think it is. I think MMT has given us a huge gift in peeling back the garbage that passes for standard economic description of our finance system, and I pray it will, in future, be taught and disseminated more widely. But this taxes thing has me confusticated.

        1. Matthew Berg

          There’s an argument that the government can set the value of the currency based upon what it pays for things. E.g. if the government pays $1,000,000,000 for an aircraft carrier, the general price level of the economy will be based around that. Whereas if the government pays $1,000,000,000,000, the general price level will be based around that.

          But try thinking about it this way – the point is more that taxes ensure that money (at least a certain amount of it) will be *accepted* – the point about the actual *value* of money is an aside.

          Take an example that seems to have nothing to do with how money works. Suppose the government required that you hop on one leg 10 times each day, or else you would risk some sort of punishment. If this were the case, and if you wanted to avoid the risk of punishment, then you would hop on one leg at least 10 times each day.

          You might also decide that you actually like hopping on one foot (it’s good exercise!), and so you might decide you want to hop more than 10 times. But at the least, the government’s requirement ensures that you will “supply” at least 10 hops per day.

      2. John F. Opie

        The State sets the value of money? That is foredoomed to failure if there is anything like a functioning market to determine the value of the currency. Otherweise you have administered prices, and we all know how well that works (i.e. not at all and ends in tears).

        As an aside, this analysis is really nothing new: as someone who traveled a fair amount in the Warsaw Pact, you could get pretty much anything you want with the right cigarettes. While the example of the WW2 Stalag might be the earliest that your writer has found, the use of a commodity as money really isn’t new under the sun.

        If anything, it undescores how the commodity nature of the currency, such as a carton of Kents in Romania in, say, 1982, is overshadowed by its use as a means of exchange. Money is whatever the market decides, at the end of the day, fulfills the role of money: in human history, it has been as varied as seashells (wampum) and large dressed stones, neither of which were very practical or useful. Mundell’s classic paper on the birth of coinage points to a more or less universal decision amongst many early civilizations that one ox was worth approximately 130 grains of gold: this is significant because there was no state that set that price.

        That the cigarettes has secondary uses and that there was differentiation amongst brands underscores that they were being traded more for their commodity status and less for their monetary status. All it says is that there is a price for consumption and that at least one kind of good was scarce. Add to that the fact that cigarettes go stale and have a limited life (Kent cigarettes in Romania were never used for currency if they weren’t heavily wrapped in plastic!).

        1. Yalt

          What’s revealing to me about much of the commentary on this piece is how hard it seems to be for people in our society to imagine one in which money doesn’t need to be “particularly useful” because it isn’t used in everyday transactions. Where, for example, when your shoes wore out you didn’t buy a new pair, you went to the Women’s Council and asked for leather from the community supply so you (or someone else with the necessary skill) could make a new pair.

    2. Matthew Berg

      Taxes (or fees/fines/etc) are a sufficient condition to give money value. But you are right that they are not a necessary condition.

      Taxes ensure that people will accept at least as much of a currency in order to pay their taxes (or else they will bear the consequences of not paying their taxes).

      Then, what usually happens in modern states is that a social convention of more generally accepting the money is also established on top of that – and I think that’s what you are referring to.

      1. YankeeFrank

        I dunno. It seems to work the other way. Money is first and foremost used to buy things and services. If we don’t earn any money, we don’t pay any taxes. So earnings, which are driven by the desire to purchase things, give money value. Taxes are an afterthought. There was money long before there were taxes, no?

        1. Matthew Berg

          I’d say it’s probably true that in 2013 most people accept money, at least consciously in their own minds, more because they know that they can buy things with it than that they are thinking about paying their taxes.

          The question is, what brings money about in the first place, originally?

          If you are trying to introduce a new currency into the world, and if you have political or other power, you can get people to accept at least some of your currency by requiring them to accept a certain amount of the currency. That is in effect what taxes do.

          Note that strictly it need not actually be a modern nation-state. For example, UMKC requires for some classes that students acquire and deliver “Buckaroos” for 5% of their grade. That works in precisely the same way, even though UMKC is a University, not a nation state.

          Similarly, check this out about the Denison Volunteer Dollar.

        2. JTFaraday

          I tend to agree that this sounds likes an alternative origin story, perhaps one a more grounded in recent therefore more readily determinable history.

          Say, for example, you were Banker Robert Morris, and you wanted to issue “Mr. Morris’ Notes” and for those notes to have real value. To accomplish this you could strike a deal with an emergent government, whereby that government exclusively accepted “Mr. Morris’ Notes” as payment for taxes.

          Your new tax paying citizens would then be compelled to scrounge around for Mr. Morris’ Notes and they would gain value through government compulsion.

          See, for example, the top of page 164:


          So that’s one explanation. Not sure how it holds up in terms of the twists and turns of US monetary history.

          The question you might be asking is whether this sort of explanation isn’t more historical artifact at this point. Or, perhaps, just too one-dimensional.

          1. Yalt

            Graeber’s account of the establishment of currency in Mozambique follows this line pretty well. Of course, how a colonial administration chooses to force a colony into a market economy doesn’t necessarily have anything to do with the origin of currency, any more than the choices of prisoners whose psychologies were formed in a market economy do.

        3. okie farmer

          Yes, Yankee Frank, the “social convention” mentioned by Berg above is to create an artificial commodity to trade for whatever. If you’re engaged in capitalist enterprise, which few commenting on this site seem to be, you know full well that money is a commodity. It doesn’t matter whether it’s artificial or not. As Wittgenstein explained long ago, “use” determines “meaning”. The MMT guys have only partially illuminated meaning, but they are trying, and may get there yet. Or not. As a capitalist I welcome those who think money is not a commodity – fools, easy to out trade.

  4. JGordon

    No economic ideologue fanatics or criminal control freaks micromanaging people’s lives by central fiat: only people personally deciding to use whichever currencies they feel best hold value. What could be more fair?

    By the way, the original form of “money” was a community currency of reciprocity, where people did favors for each other and helped each other when the need arose without any abstract, quantified units being attached to the activity (Debt: The First 5,000 Years, by David Greaber) Strangely enough, that kind of currency isn’t even illegal in America yet. And when I do things for people these days, I’m more inclined to collect favors than money.

    1. jrs

      I think if services were more often taxed with sales type taxes, that it would be illegal. Kinda a reason I don’t favor that if it would be part of a VAT or whatever. State sales tax nowdays are just on goods not services.

    2. Massinissa

      Gordon, read that paper by Christine Desan, “Coin Reconsidered”.

      And read the entire thing would you? ALl of it please.

      It may clear up some reconsidered.

      The link is in the article somewhere. Please do read it.

    3. Massinissa

      If you had read the article by Christine Desan, you would realize that coins were debased as well, for hundreds of years. And not only by sovereigns, but by individuals scraping parts off (though admittedly it was mostly sovereigns doing the debasing).

      If sovereigns dont debase currency, then either issuers or individuals will debase it themselves, even if it is coinage. Its nowhere as simple as you believe.

    4. ChrisPacific

      I agree with your second paragraph, but your first makes no sense. Did you read the article? The example presented was the epitome of micromanagement by control freaks. It was effectively a socialist command economy. That’s the whole point.

    5. Calgacus

      No economic ideologue fanatics or criminal control freaks micromanaging people’s lives by central fiat: only people personally deciding to use whichever currencies they feel best hold value. What could be more fair?

      But that is what we have right now. You can use whatever currency you want to, as long as you pay debts you incur in the currency you incurred them in.

      By the way, the original form of “money” was a community currency of reciprocity, where people did favors for each other and helped each other when the need arose without any abstract, quantified units being attached to the activity (Debt: The First 5,000 Years, by David Greaber) Strangely enough, that kind of currency isn’t even illegal in America yet. And when I do things for people these days, I’m more inclined to collect favors than money.
      Right. But that “original form” is the only form of money that has ever or will ever exist. A dollar is just an Uncle-Sam-favor. The favors you owe to and are owed by other people are just the same; as abstract, as concrete as dollars. Uncle Sam just standardizes his favors, and people add them up and subtract them – just as you do with your favors, though the quantification is probably rougher (big or small favor) and the addition & subtraction too.

      1. Yalt

        That’s a critical distinction though. There’s a qualitative difference once those favors are divorced from the personal relationships they originated in, when they become exchangeable, even outside the community, and explicit quantization is an important, probably necessary, component of that process.

    6. Newtownian


      I experienced something similar to a prisoner of war camp a couple of decades back which was arguably fairer still. Living on an Antarctic base with about 25 to 100 people for 17 months. During that time, and in no stories of old I heard, was there any tendency that I remember for any serious money economy to develop. None.

      The place was organised/governed along paramilitary lines and controlled by a distant administration. We accumulated money back home. There was rationing – beer, chocolate – we couldn’t go down to a store buy stuff we didn’t have on site. It was mostly men – all sort of like a POW camp.

      Active use of money was confined to three situations – telephone calls which came off the salary/bank account, mail ordering some small items from the world to take advantage of some tax breaks and maybe a trivial toy from a visiting boat. Small bikkies.

      So why didn’t we evolve a money economy? Perhaps it was because:
      – Food and shelter were fully satisfied as per Maslow’s needs hierarchy.
      – Work was divided equitably into – main job (scientist, electrician), rotated drudge (garbage collection, nightwatch), collective (weekly full clean-up) and volunteer calling (photographer, brewer)
      – Everyone had a job and role.

      This collective functioned extremely efficiently without irrelevant paper given the size of the facility and the small numbers.

      Given the base was quite complex and required many people doing many coordinated jobs and individuals could have benefitted for example to get out of the crappy jobs or nightshift why didn’t we develop a money economy?

      Nor did we even use much normal money which we had a reasonable amount of (I found most of mine hidden in a sock on return).

      I’ve never thought about this until this POW article. At a first guess I’d offer the following possible reasons:
      – overall there would have been little benefit
      – and even disbenefit from the accounting system needed
      – knowing everyone and their motives up close and personal so trust was based on what you knew rather than an arbitrary counter.
      – sense of self and respect despite interpersonal conflicts which there were significant (nothing violent).

      At the least this suggests use of money is not at all natural.

      Perhaps a better question is what was different about the POW camp to generate a currency.
      – A lack of sufficiency leading to desperation and dog eat dog?
      – pathological Milo Minderbinders? (I’m reminded of the film of Changi POW camp – King Rat)?

      These are my first guesses.

      Could it be that money is an accident of hard times desperation maintained mainly by nasty lazy psychopaths, also self-described as Masters of the Universe?

  5. Jim Haygood

    Matthew Berg advocates ‘adopting an altogether different theory of the origin of money, for which there is actually supporting historical evidence (some of which Desan recounts in the rest of her paper, for interested readers).’

    Those who follow the link will find a 47-page paper by a Harvard lawyer. Desan surveys a couple of millennia of the history of coinage and some inevitable issues it raises (minting, seignorage, wear, dilution, bimetallism, etc.) She ends up proposing a kind of Heisenberg uncertainty principle of money:

    If communities make their money rather than find it, their decisions configuring value affect the transfers that money will measure. Insofar as money itself represents an intricate arrangement of claim and obligation, then the market is also a collective orchestration rather than the aggregate of individual choices.

    At best, one can nod agreement with an apparent truism. However, this is hardly an ‘altogether different theory of the origin of money.’ Indeed, how exactly does a ‘collective orchestration’ differ from an ‘aggregate of individual choices’? Desan doesn’t explain, but at first glance, it’s an impressive rhetorical flourish.

    Desan’s paper presents some interesting historical minutiae regarding coinage, but proposes no alternatives and offers no analytical tools. Perhaps it could be most charitably described as a ‘semantic tour de force.’

    1. JGordon

      From one of my favorite Dmitry Orlov lectures, “Twilight of the Antipodes” commercial money as we know it today is an extremely bizarre and unstable thing that only came about within the past few centuries. Basing elaborate economic theories on something so transient and ephemeral, compared to the totality of the rest of human history, is really not a especially intelligent thing to do.

      So rather than being bogged down in the useless and irrelevant minutea of technical jargon, it would be a much more fruitful use of time to step back at the big picture. But to do that you’d have to be able to question your fundamental cultural assumptions, which most people are incapable of doing admittedly. So I suppose we’ll have neoclassical and MMT and Austrian theories or whatever right up until the whole mess implodes and there’s nothing left for anyone to argue over.


      1. Jim Haygood

        Maybe you were, but Desan’s focus is entirely on coinage. Her essay does not necessarily offer comfort to advocates of fiat currency:

        Not until prices in coin for goods rose high enough (the value of coin had dropped so far) that coin was no longer better than the silver it contained at buying goods, would people begin to melt coin.

        That price, the breakpoint at which coin was worth only its value-by-weight, represented the “melting point,” a price point for goods higher than the minting point. The “melting point” of coin, a price in coin/good, thus set an upper limit to the use of coin.

        Desan thus acknowledges that coinage offers a popular check on inflation initiated by the sovereign.

        As you probably are aware, in early 2008 the value of the U.S. nickel’s 75% copper / 25% nickel composition reached 10 cents. By collecting nickels and melting them down, one could earn a 100% profit, not to mention performing an exemplary social service by braking the excess money supply growth which had caused the inflation.

        But Congress responded by making it illegal to melt down U.S. coinage.

        This illustrates the essential high-handedness of fiat systems: when the people take reasonable and responsible action to avoid being mulcted of their purchasing power, their tormentors respond by making monetary self-defense a pretended crime.

    2. Luciano Moffatt

      “how exactly does a ‘collective orchestration’ differ from an ‘aggregate of individual choices’? Desan doesn’t explain, but at first glance, it’s an impressive rhetorical flourish.”

      Having said that I did not read Desan, I could not help myself to point out that there is a huge difference between collective orchestration from an aggragate of individual choices. A collective orchestration arise from a self-organizing dynamic, where each ones decision affects all others. A good example is a pool filled with people that want to swim. If everybody swim in a different direction, collision will occur. After some indesitions either the people will swim clockwise or counter-clockwise, since it is better to join the crowd. I think it is fair to call this process a collective orchestration.

  6. Andrea

    WW2 Europe.

    Cigarettes, drugs, strong alcohol such as Cognac, priceless – Gold and jewelry (held by individuals, not gold bricks in vaults or the like, small family cache of supposed valuables), silver, mostly in the form of table ware, art works (even the most minor if seemingly antique and professional), stockings, lipstick, medicines, wool in a skein that can be knitted, contraceptives, bike tires, a small generator, needles, and so on, even dead rats (yes)…could be traded for …‘money’ of some kind aka, other goods, other favors or advantages.

    Where to draw the line? Are stockings or lipstick commodity money? I guess not.

    In certain situations, specially in small communities, some goods become a sort of standard, a somewhat standard measure that ppl refer to. A sturdy table is worth 20 skeins of wool. A pair of boots – leather and strong but with damaged soles – only 2 skeins, they need repair. A bicycle ..might be worth 300 g. of silver, another measure is used.

    See the Sumerians.

    1. HotFlash

      But but, which commodity is the currency and which the item purchasedÉ Vodka is a portable and well-received trade good, esp in times of war andéor economic collapse, that can get you food and gas. Nylons and lipsticks are well received trade goods that can get you laid (assuming you are male). We are talking anecdotes here, I take it, but I don`t recall any tales of ladies trading lipsticks or stickings among themselves. And if guys were taking them in trade (say, for cigarettes or vodka), were they amassing `wealth`or rather hoping for a really good time when they located a lady to trade the stockings for servicesÉ: (sorry abt that, my kbd has switched to French and I can`t remember where the question mark is…)

    2. rur


      ” write as I can in the rhythm of interminable weeks
      monday: empty storehouses a rat became the unit of currency”

      –Report from the Besieged City, Zbigniew Herbert

  7. Aussie F

    Sex was the first commodity to be traded – recorded blood lines, trade and dowry grew togther. The etymology of the term is embedded in sacred temple ‘prostitution.’ The word ‘Money’ itself derives from the Temple of Hera (June Moneta). Money ‘paid’ for temple ‘prostitution,’ (of course, without the prejorative connotation the word has today). Similar developments occured in Phoenecia, and other parts of the Near East: The cult of Ishtar, etc.

  8. ian

    Where does use of another country’s currency fit in? In the former soviet union, for example, people bought and sold things with US dollars. Sure, you could exchange these for rubles, but even there the exchange rate bore no resemblance to the official one, and it wasn’t necessary.

  9. kevinearick

    “if we all lived our daily lives in Prisoner of War camps, and if we were all well-supplied with regularly scheduled deliveries of addictive chemical substances, then perhaps the theory might be a bit closer to being correct.”

    the majority lives in denial…

    tobacco was a currency in this country prior to the revolution, officially, and after the revolution unofficially. tobacco has a long history as an alternative currency.

    America is self-medicated and it is a prisoner of its own stupidity, perpetuated by its school system.

    ever been to tobacco road?

    tobacco is being used as alternative today, in many small communities

    1. kevinearick

      got 3 shillings??

      unitization, removal from government control, natural fluctuation, and accounting for addiction (oxygen).

      1. kevinearick

        “The fund said that some US public pension funds had significantly increased risk exposure, and in some cases were using investors’ money to gamble on complex derivatives and hedge funds in a bid to generate higher returns. It said the weakest funds had increased “alternative investments” to “about 25pc of assets in 2011 from virtually zero in 2001.”

        drum roll please…

        1. kevinearick

          No, No. We must not have free markets. Government is the answer.

          “Two things in retrospect strike me especially…The first was the rapidity of the improvisation of order out of chaos.”

          “Hundreds of people died in the aftermath of Katrina because others, including police, vigilantes, high government officials, and the media, decided that the people of New Orleans were too dangerous to allow them to evacuate the septic, drowned city or to rescue them, even from hospitals. Some who attempted to flee were turned back at gunpoint or shot down. Rumors proliferated about mass rapes, mass murders, and mayhem that turned out later to be untrue, though the national media and New Orleans’ police chief believed or perpetuated those rumors during the crucial days when people were dying on rooftops and elevated highways and in crowded shelters and hospitals in the unbearable heat, without adequate water, without food, without medicine and medical attention. Those rumors led soldiers and others dispatched as rescuers to regard victims as enemies. Beliefs matter…”

  10. Jesse

    I think it takes a somewhat obsessive interest in the subject to care about this longer than about twenty minutes.

    The characteristics of money as a medium of exchange and a store of value are fairly well established.

    In certain circumstances, things like cigarettes suffice. Apparently none of you have any relatives who have done hard time.

    Where there is something else especially if it has an official sanction that works even better. If that particular medium falters, real goods substitute. I was in the former Soviet Union when that happened in the 1990s

    But I have to say this is particularly pointless, but no doubt intended to ‘prove something.’

  11. RanDomino

    As David Graeber also said about what the invention of cigarettes as currency supposedly proves, would they have conceived money if they hadn’t already been used to it?

  12. Paul Niemi

    When I read Radford over thirty years ago, the instructor highlighted that in the prison camp the prisoners traded with the less expensive, I think Kent, cigarettes and hoarded the more expensive European brands. The conclusion was that when two or more currencies are in competition, the one of least inherent value will prevail as the currency of choice. Today, I see this concept applying to Europe, where the Euro is in competition with the Dollar. Quantitative easing makes the Dollar less inherently valuable or easier to obtain, thus it may become more broadly used as a replacement for the Euro in everyday transactions.

    1. financial matters

      Very interesting and somewhat similar to the shaving of coins mentioned earlier. Kings and their subjects tended to hoard the heavier coins but the merchants at least were forced to accept any coin.

      Similar to foreign exchange where the euro increases against the dollar. If the euro and yuan want to be stronger in international value I think they need to accept this appreciation and let their workers earn more and thus be able to better support domestic production and even buy more imports. Rather than working to export to others.

      Also re-structuring their budgets to run deficits would put more of their currency out there and thus make it a better candidate for an alternate reserve currency.

        1. financial matters

          Gresham’s Law seems to be used now in mostly a negative context. Ie “she attacked a rigged system that produces what economics and white-collar criminology calls a “Gresham’s dynamic” in which bad ethics drives good ethics out of the marketplace.” http://www.nakedcapitalism.com/2012/11/bill-black-wall-street-urges-obama-to-commit-the-great-betrayal.html

          The point is more how to compete with what is seen as a predatory reserve currency. I would say that Hudson sees it as predatory, Wray sees it as neutral and Pettis actually sees it as negative for the US but in the sense that too much whiskey is bad for an alcoholic. Ie it is leading to the real destruction of US industry through debt. When I say that Wray sees it as neutral I think he recognizes the danger of using it inappropriately.

          This is just a suggestion of how to take on the US and help rebalance the global economy.

          1. Paul Niemi

            I thought of Reverse-Gresham, or as R. Mundell said: “bad money drives out good if they are the same price.” The Dollar is in quantitative easing, while the Euro not so much, yet the exchange rate is held tightly, meaning they are about the same price, and increasingly people can freely choose which currency to use. So what would the Father of the Euro predict will happen?

          2. financial matters

            The Impossible trinity (also known as the Trilemma) is a trilemma in international economics which states that it is impossible to have all three of the following at the same time:
            A fixed exchange rate.
            Free capital movement (absence of capital controls).
            An independent monetary policy.

            Probably the most policy space is with a floating exchange rate where you don’t have any pressure to convert your currency. China is an exception in that it can run a peg to the dollar as it has enormous dollar reserves. I don’t think the Euro has that luxury.

            Also it’s difficult for the Euro to run an independent monetary policy without a fiscal union. The BRIC countries are trying to protect themselves from the massive inflows of speculative US dollars by developing trade in their own currencies and more countries are considering capital controls. Also this is where the US has to be careful not to overexploit its military power as countries such as Malaysia and Iran become sympathetic to these new currencies.

            Again not that other strong currencies aren’t useful for a rebalancing but I think the US at least wants the USD to still be a player.

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