Michael Hudson:  Origins of Money and Interest: Palatial Credit, Not Barter

Yves here Get a cup of coffee This is an important post on the origins of money and discusses the political significance of the barter fable versus the palace credit history.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is J is for Junk Economics  Jointly posted with Hudson’s website To be included in Springer’s rHandbook of the History of Money and Currency, scheduled for publication this autumn

Neolithic and Bronze Age economies operated mainly on credit. Because of the time gap between planting and harvesting, few payments were made at the time of purchase. When Babylonians went to the local alehouse, they did not pay by carrying grain around in their pockets. They ran up a tab to be settled at harvest time on the threshing floor. The ale women who ran these “pubs” would then pay most of this grain to the palace for consignments advanced to them during the crop year. These payments were financial in character, not on-the-spot barter-type exchange.

As a means of payment, the early use of monetized grain and silver was mainly to settle such debts. This monetization was not physical; it was administrative and fiscal. The paradigmatic payments involved the palace or temples, which regulated the weights, measures and purity standards necessary for money to be accepted. Their accountants that developed money as an administrative tool for forward planning and resource allocation, and for transactions with the rest of the economy to collect land rent and assign values to trade consignments, which were paid in silver at the end of each seafaring or caravan cycle.

Money’s Role in the Palatial Economies of Mesopotamia and Egypt

The origins of monetary debts and means of payment are grounded in the accounting practices innovated by Sumerian temples and palaces c. 3000 BC to manage a primarily agrarian economy that required foreign trade to obtain metal, stone and other materials not domestically available.These large institutions employed staffs of weavers and other craft personnel, who were fed by crops grown either on palace or temple land or that of sharecroppers paying grain-rent or fees to these institutions, and supplied with wool from temple and palace herds managed by entrepreneurs or owned outside of these institutions.

Building public infrastructure required feeding and supplying corvée labor and craftsmen with food, tools and beer, as well as provisioning celebratory festivals. In order to calculate budgets for forward planning and tally surpluses or shortfalls, these flows had to be measured and accounts presented to the palace for managing cropland and herds, brewing and selling beer, baking bread and producing handicrafts for use within these institutions and for local or long-distance trade.

Textiles and other products were consigned to traders to obtain silver, copper and other raw materials, while land and professional functions or enterprises were consigned to entrepreneurs to manage in exchange for a stipulated revenue, typically calculated in advance as a flat fee based on normal experience. This administrative system is described by Renger (1979 and 1984), Bongenaar (2000), and Garfinkle (2004 and 2012). The papers inHudson and Wunsch (2004) survey account-keeping and monetization of the Mesopotamian and Egyptian economies from the inception of written accounts in the late 4thmillennium BC to the Neo-Babylonian period.

The scale on which the large institutions operated required forward planning to schedule and track the flow of food and raw materials through their fields and workshops. The first need was to assign standardized values to key commodities. This problem was solved by creating agrid of administered prices, set in round numbers for ease of computation and account-keeping. Grain was designated as a unit of accountto calculate values and co-measure labor time and land yields for resource allocationinvolving the agricultural and handicraft sphere, as well as the means of payment.

The second need of these large institutions was to organize means of paymentfor taxes and feesto their officials, and for financing trade ventures. Silver served as the money-of-account and also as the means of payment for trade and mercantile enterprise. A bimonetary system was created for paying the palace and temples and for valuing disparate commodities and functions, by setting the shekel-weight of silver (8 grams) as equal to a gur“quart” of grain or 300 sila. Acceptability of grain and silver for settling official debt balances catalyzed their usage as money throughout the economy.

None of this is co-mensurability is found in “primitive” money. Philip Greirson (1977:19ff., endorsed by Goodhart 1998), for instance, seeks the origins of what has come to be called “state money” in wergild payments for personal injury. Along with dowries or bride-price, such fines were denominated in customary market baskets that might include animals or slave girls, items of clothing and jewelry, not a particular commodity. They thus were pre-monetary and special-purpose.

Likewise the “spit money” and other food money cited by Laum (1924:27ff., 158f.) was pre-monetary in character, not a common denominator to value disparate commodities. Although Laum was a follower of Knapp’s State Theory of money, he saw the archaic state as a religious cult not playing a commercial or financial role.In his view the valuation of goods finds its origins in the selection of sacrificial animals “in the cult, not in commerce (which knows no basis for typology, but remains purely individualistic).” Donations of animals defined status, but did not provide a standardized economic and monetary unit. Fines and contributions were levied without reference to a standardized commodity whose price was set by palaces or temples as the basis for account-keeping, commercial exchange and credit. That innovation occurred in Mesopotamia early in the third millennium BC.

Accounting and the Origins of Money

In contrast to the grain and silver that served as twin measures of value toevaluate Mesopotamian production and distribution, no monetary common denominators are found in Mycenaean Linear B accounting c. 1400-1200 BC. Tribute lists and deliveries from agricultural centers and workshops were “in kind,” with no indication of money as either a measure of value or a general means of payment. Finley (1981:198) cites Ventris and Chadwick (1956:113) to the effect that “they ‘have not been able to identify any payment in silver or gold for services rendered,’ and that there is no evidence ‘of anything approaching currency. Every commodity is listed separately, and there is never any sign of equivalence between one unit and another.’”

Van De Mieroop (2004:49)cites the challenge to ancient accountants: to record not merely “a single transfer, but the combination of a multitude of transfers into a summary. When information piles up and is not synthesized, it becomes useless: a good bureaucrat needs to be able to compress data. The summary account requires that the scribe combine information from various records.” Mesopotamia’s palaces and temples solved this problem by designating grain and silver as reference points to co-measure the wide range of transactions within their own institutions and with the rest of the economy for grain, textiles, beer, boat transport and the performance of ritual services.

Establishing a set of price equivalencies enabled values to be assigned and payments to be made in terms of any commodity listed on such a schedule. Englund (2004:38) cites major commodities such as copper, wool and sesame oil being assigned values in an overall price grid, mutually convertible with grain, silver or each other: “The concept of value equivalency was a secure element in Babylonian accounting by at least the time of the sales contracts of the ED IIIa (Fara) period, c. 2600 BC.”

Cripps (2017) has reviewed of prices for silver, grain and other commodities and found that administrative barley:silver price ratios among Sumerian cities “vary considerably with both the geographic origin of a text and the administrative context in which these ratios occur, whether or not we understand them as prices or equivalents.” However, these variations do not seem to reflect market supply and demand, but are administered. “The value of barley relative to silver arguably varies for quite other reasons than those of abundance or shortage due to natural events, or because of changes in the market and therefore the demand for and supply of one or the other of these commodities.” (See Englund 2012 for a general discussion.)

The 1:1 shekel/gurratio enabled monthly and annual income and expense statistics to be expressed in terms of the most basic common denominator, and was used to denominate fees, taxes and other debts owed to the large institutions. But more steps were necessary to fill out the monetary process. To provide a standard of value and serve as the means of payment – grain and silver had to be measured or weighed in standardized units. To facilitate calculation for internal resource allocation within the large institutions, these units were based on the administrative calendar that temples created in order to allocate resources on a regular monthly basis.

That in turn required replacing lunar months of varying length with standardized 30-day months (Englund 1988). Each monthly unit of grain was measured in volumetric gurunits divided into 60ths, apparently for consumption as rations to the workforce twice daily during each administrative month. Lambert (1960) describes how Babylonian accounts translated food rations into labor time for each category of labor – males, females and children. This sexagesimal system of fractional divisions enabled the large institutions to calculate the rations needed to produce textiles or bricks, build public structures or dig canals during any given period of time. Weights for silver and other metals followed suit, by dividing the mina into 60 shekels.

This silver and grain money served as the price coefficient by which the temples and palaces valued the products of their work force and the handicrafts they consigned to merchants. The rate of interest on commercial advances denominated in silver was set in the simplest sexagesimal way: 1/60thper month, doubling the principal in five years (60 months). This standardized rate was adopted by the economy at large.

Money and Prices

By the end of the third millennium the large institutions were stating the value of foreign trade and other palatial enterprise in terms of silver, which emerged as the “money of the world.” Gold was used in less public contexts, such as for capital investment in Assyria’s foreign trade ventures after 2000 BC. Its price vis-à-vis silver varied from city to city and from period to period. But any attempt to link price changes to variations in the money supply would be anachronistic as far as Bronze Age Mesopotamia is concerned. That is because “money” simply took the form of commodities acceptable for payment to temples and palaces at guaranteed prices. These large institutionsgave monetary value to wheat, wool and other key products by accepting them in payment for taxes and fees.

Monetary values had to be stable in order for producers to plan ahead and minimize the risk of disruptive shifts in prices, and hence the ability to pay debts. Officialprice equivalencies thus served as an adjunct to fiscal policywhile avoiding instability. §51 and gap §t(sometimes read as §96) of Hammurabi’s laws (c. 1750 BC) specified that any citizen who owed barley or silver to a tamkarummerchant (including palace collectors) could pay in goods of equivalent value, e.g. in grain, sesame or some other basic commodity on the official price grid (Roth 1998:91 and 97).

This ruling presumably was important for agricultural entrepreneurs and herd managers who borrowed from the well to do. But most of all, along with §§48-50 of Hammurabi’s laws, rulings that stabilized the grain/silver exchange rate “are all meant to give a weak debtor (a small farmer or tenant) some legal protection and help,” and are “‘given teeth’ by stipulating that if [the creditor] takes more he will forfeit ‘everything he gave,’ that is, his original claim”(Veenhof 2010:286f.). Babylonian debtors thus were saved from being harmed at harvest time when payments were due and grain prices were at their seasonal low against silver outside the large institutions. The palace’s exchange-rate guarantee enabled cultivators who owed fees, taxes and other debts denominated in silver to pay in barley without having to sell it for silver.

What was called a “silver” debt thus did not mean that actual silver had to be paid, but simply that the interest rate was 20 percent. If creditors actually wanted silver, they would have to convert their grain at a low market price at harvest time when crops were plentiful. Deliveries to the palace’s collectors were stabilized, minimizing the effect of price fluctuations outside of the palatial sector, such as outside the city gates in the quay area along the Euphrates. The effect was much like modern farmers signing “forward” contracts so as not to get whipsawed by shifting market prices.

There was little thought of preventing prices from varyingfor transactions not involving the large institutions.Prices for grain rose sharply in times of crop failure, droughts or floods, as when Ur was obliged to buy grain from the upstream town of Isin at the end of the Ur III empire c. 2022 BC. But these price shifts were the result of scarcity resulting from natural causes, not a monetary phenomenon.

A monetary drain was avoided in such cases by royal “restorations of order” (Sumerian amargi, Babylonian andurarum) cancelling agrarian debts when circumstances made them unpayable. To maintain general economic balance in the face of arrears that constantly mounted up, new rulers proclaimed these clean slates upon taking the throne. No money was required from personal debtors (although commercial debts were left in place). The details are spelled out in greatest detail c. 1645 BC in Ammisaduqa’s edict §§17f. (translated in Pritchard 1985).

Despite variation in market prices for transactions outside of the large institutions, Babylonia’s bimonetary standard had no Gresham’s Law of “cheap” or “bad” money driving out goodmoney. Grain did not drive out silver. When entrepreneurs in the agricultural sector sought to pay official debts in grain at harvest time, this was part of a structured stable relationship.There was no creation of fiat money by Bronze Age temples and palaces to spend into the economy, and no monetary inflation. Early “money” was simply the official price schedule for paying debts to the large institutions,along lines much like the American “parity pricing” policy to support farm prices after the 1930s. The fact that wool prices, for instance, varied in response to market conditions but nominally remained fixed by royal fiat for 150 years shows that this standardized price referred to debt payments owed to the palace and its collectors.

Rulers promised to promote prosperity by providing consumer goods such as vegetable oil and other commodities at relatively low prices – with what seems to have been an element of idealism. Around 1930 BC, §1 of the laws of Eshnunna (north of Ur, on the Tigris River) was typical in announcing the official rate of 300 silas of barley for 1 shekel of silver, or 3 silas of fine oil, 12 silas of regular oil, 15 silas of lard, 360 shekels (=6 minas) of wool, 2 gur of salt, 600 silas of salt, 3 minas of raw copper or 2 minas of wrought [i.e., refined] copper (Roth 1998:59).

These low prices were not to be achieved by reducing the money supply. Unlike the grain/silver ratio, such price promises were not monetary rules.

The Two Ideologies of Monetary Oigins

The root of the word numismatics(the study or collection of coins) is nomos, “law” or “custom.” Aristotle wrote (Ethics,1133) that money “is called nomisma(customary currency), because it does not exist by nature but nomos.” It is “accepted by agreement (which is why it is called nomisma, customary currency.” Government priority in supplying money always has been primarily legal and fiscal.

The policy implication of this “state theory” for modern times is that governments do not have to borrow from private banks and bondholders when they run deficits. They can monetize their spending by fiat money – and, as Aristotle added, “it is in our power to change the value of money and make it useless,” regardless of its actual use value. (See also Aristotle, Pol. 1257b10-12.)

Georg Friedrich Knapp’s State Theory of Money (1924 [1905]) described how money was given value by its fiscal role: the state’s willingness to accept it in payment of taxes. Innes (1913 and 1914) added an important dimension by describing the origins of money in paying debts. This linked money to the credit process, not to a commodity as such. (Wray 2004 reviews the historiography of early money and reprints Innes’s articles.) Karl Polanyi (1944 and 1957) led a school emphasizing that “redistributive” economies with administered price equivalencies took precedence over market exchange setting prices by supply and demand (Hudson, in press). Renger (1979 and 1984) elaborated the administrative character of Mesopotamia’s palatial economies.

These varieties of the State Theory of money (also called Chartalism) downplayed the role of personal and purely commercial gain seeking that had dominated most earlier views of money’s origins. Elaborating what Adam Smith described as an instinct among individuals to “truck and barter,” Carl Menger (1892 [1871]) put forth the classical version of the Commodity Theory of how money originatedWithout making any reference to paying taxes or other debts to public authorities, he postulated that money was an outgrowth of barter among individual producers and consumers. According to this view, a preference for metal emerged as the most desirable medium for such trade, thanks to its ability to servethree major functions:

(1) a compact and uniform store of value in which  to save purchasing power, compressing value (savings) into a relatively small space, and not spoiling (unlike grain);

(2) a convenient means of payment, divisible into standardized fractional weight units (assuming that their degree of purity or alloy is attested); and

(3) a measure of value. Because of the above functions, silver and gold have been widely acceptable commodities against which to measure prices for other products.

The Commodity or Barter Theory depicts money as emerging simply as a commodity preferred by Neolithic producers, traders and wealthy savers when bartering crops and handicrafts amongst themselves. In this origin myth bullion became the measure of value and means of payment without palace or temple oversight, thanks to the fact that individuals could save and lend out at interest. So money doubled as capital – provided by individuals, not public agencies.

Differing views regarding the origins of money have different policy implications. Viewing money as a commodity chosen by individuals for their own use and saving implies that it is natural for banks to mediate money creation. Banking interests favor this scenario of how money might have originated without governments playing any role. The political message is that they – backed by wealthy bondholders and depositors – should have monetary power to decide whether or not to fund governments, whose spending should be financed by borrowing, not by fiat money creation. As a reaction against the 19thand early 20thcenturies’ rising trend of public regulation and money creation, this school describes money’s value as based on its bullion content or convertibility, or on bank deposits and other financial assets.

Governing authorities are missing from this “hard money” view, which its proponents have grounded in an aetiological scenario of prehistoric individuals bartering commodities among themselves. The policy implication is that it is irresponsible for governments to create their own money.

Both theories of money’s functions, origins source of value arerooted in the debate over whether money should be public or private, and whether it should be backed by public fiat or bullion. Charles Goodhart (1998:411) shows that the barter or “metallist” theory that money was developed to facilitate individualisticexchange does not even apply to modern times. He provides a bibliography of the long debate to highlight the politically partisan motivations behind today’s metallist bias.

Shortcomings of the Barter Theory of Monetary Origins

The long-dominant college textbookbyPaul Samuelson (1973: 274f.) summarizes the logic of the Barter Theory taught to generations of economics students:

Inconvenient as barter obviously is, it represents a great step forward from a state of self-sufficiency in which every man had to be a jack-of-all-trades and master of none. … If we were to construct history along hypothetical, logical lines, we should naturally follow the age of barter by the age of commodity money.

Ignoring credit arrangements and excluding any reference to palaces or temples in the Near Eastern inception of monetization, Samuelson then tries to ground this speculation in ostensibly empirical evidence by turning to pseudo-anthropology:

Historically, a great variety of commodities has served at one time or another as a medium of exchange: … tobacco, leather and hides, furs, olive oil, beer or spirits, slaves or wives … huge rocks and landmarks, and cigarette butts. The age of commodity money gives way to the age of paper money … Finally, along with the age of paper money, there is the age of bank money, or bank checking deposits.

Depicting commodity money as primordial and natural, this view sees the direction of history as culminating in today’s commercial banking. It puts credit at the endof the Barter-Money-Credit sequence, not at the beginning. By the time Samuelson wrote, the prehistory of money had become an arena in which free-market economists fought with advocates of government regulation over whether the private or public sector should be dominant, and whether governments should oversee credit and create their own money or leave it in private hands. Financial interests applaud the implication that it is natural to leave credit and pro-creditor rules of debt collection to bankers, bondholders and the wealthy, minimizing government “interference.”

Neither prehistorians nor anthropologists provide supporting evidence forthis Barter Theory. “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money,” anthropologist Caroline Humphrey (1985:48) has emphasized, stating that “all available ethnography suggests that there never has been such a thing” (cited in Graeber 2014:29; for further critiques see Wray 2004 and Ingham 2004). As for the cuneiform record, it shows that the major initial monetary activity of most Mesopotamians was to pay taxes, fees or to buy products that palaces and temples made or imported, on credit provided or regulated by these large institutions.

As far as convenience is concerned, the simplest and least costly way to conduct exchange is to circumvent direct payment in metal. Having to weigh money for retail or even larger exchanges would have maximized transaction costs. Yet when anti-government ideologues argue that commodity money and bank credit minimize transactions costs (Ober 2008:49f., echoing the ideas of North 1992), they compare coinage only to barter, not to credit, e.g., settled on the threshing floor at harvest time. The Barter Theory excludes the thought that palatial credit creation and regulation served to minimize transactions costs and indeed, to preserve economic stability.

The Barter Theory’s lack of evidence did not trouble Menger, because his logic was purely speculative: “even if money did not originate from barter, could it have?” Prehistorians and anthropologists would answer, “No, it couldn’t have happened that way.” Money always has been embedded in a public context, and hardly could have evolved without public catalysts and ongoing oversight to make it acceptable.

For starters, any practical payment system for creditand traderequires accurate weighing and measuring. This calls for public oversight as a check on fraudulent practice. Trust cannot be left to individuals engaging in barter or credit on their own. Crooked merchants historically have used light weights when selling goods or lending out money so as to give their customers less, and heavy weights when buying or collecting debts so as to gain an unduly large amount of silver or other commodities. (See Powell 1999 for discussion.)

Biblical denunciations of merchants using false weights and measures find their antecedents in Babylonia.Hammurabi’s laws (gap x[Roth 1998:98], sometimes referred to as §94 and §95) stipulates that merchants who lend grain or money by a small weight but demand payment using a larger measure should forfeit whatever they had lent. Ale‑women found guilty of using crooked weights and measures in selling beer were to be cast into the water (§108 [Roth 1998:101]). Many other rulings deal with creditor abuses, which date back to the rule of Urukagina of Lagash (c. 2350 BC).

Such abuses are timeless. The 7thcentury BC prophet Amos (8:5ff.) depicts the Lord as denouncing wealthy Israelites “who trample the needy and do away with the poor of the land” by scheming, “skimping the measure (making the ephah small), boosting the price (making the shekel great), and cheating with dishonest scales.” Likewise the prophet Micah (6:11) denounces merchants using “the short ephah, which is accursed? Shall I acquit a man with dishonest scales, with a bag of false weights?” (Kula 1986 reviews Biblical and Koranic examples.)

Leviticus (19:35f.) describes the Lord as directing Moses to instruct his followers not to use dishonest standards when measuring length, weight or quantity. Deuteronomy 25:13‑15 admonishes: “Thou shalt not have two differing weights in your bag – one heavy, one light. Thou shalt not have two differing measures in your house – one large, one small. You must have accurate and honest weights and measures … For the Lord your God detests … anyone who deals dishonestly.”

Regulating weights and measures was a step far beyond primitive barter among individuals. It needed official organization and supervision of exchange and credit. As noted above, the sexagesimal weights to denominate minas and shekels reflect the priority of transactions within Mesopotamian palaces and temples,deriving from their grain-based accountingsystem to schedule and distribute food. Jewish temples likewise provided standardized measures (Exodus 30.13 and 38.24‑27, and Leviticus 27.25; for royal measures see 2 Samuel 14.26), as did the Athenian agoranomoi(public market regulators). Throughout antiquity markets were located in the open spaces in front of city gates or temples, providing easy access to official weights and measures to prevent fraud.

In addition to public oversight of weighing and measuring, quality standards were required for alloys of silver and gold. Sales and debt contracts from the second and first millennia BC typically specified payment in silver of 7/8 purity (.875 fine, the equivalent of 21 carats). To avoid adulteration, silver was minted in temples to guarantee specified degrees of purity. The word “money” derives from Rome’s Temple of Juno Moneta, where silver and gold coinage was struck during the Punic Wars, mainly to arm soldiers, build a navy and pay mercenaries – not for barter exchange.

Formal coinage was not required for these functions. Weighed metal was sufficient, often stamped by temples to attest to its degree of purity.Long before coins were struck in the first millennium BC, raw silver (hacksilver) and weighed jewelry served the function that coinage did in classical times.Although coinage is not attested before the seventh century BC, Balmuth (1967 and 1971) may have located second-millennium Near Eastern antecedents, citing an inscription by the Assyrian ruler Sennecherib (705-681 BC) saying that he “fashioned molds of clay and poured bronze therein, as in casting (fashioning) half-shekel pieces” (Balmuth 1971:2). The earlier Ugaritic epics of Aqht and Krt describe “flows of tears  … as resembling 1/4 shekels or pieces-of-four and 1/5 shekels or pieces-of-five.”“Like markets, coinage was there before the Greeks,” summarizes Powell (1999:22); “the only significant difference that coinage makes in money transactions is the guarantee of quality; in Babylonia, as elsewhere, silver coins were cut up just like other silver and put in the balance pan.”

There were no public debts to serve as a monetary base for bank reserves as in today’s world. Throughout antiquity temples were society’s ultimate bankers and sources of money in emergencies. Sacred statues were adorned with golden ornaments that could be melted down in times of need to pay mercenaries (or perhaps pay ransom or tribute; see Oppenheim 1949), much as were the Winged Victory statues of Athens during the Peloponnesian War.

The Monetary role of Silver

Archaic palaces played the major role in importing silver and supplying it to the economy at large. Silver owed its status not to its technological use value in production, but to its role in settling debt balances owed to the palace, as well as the paradigmatic religious donation or commission to the temples.

Most silver was obtained by the palace mobilizing Mesopotamia’s crop surplus to supply weaving and other workshops producing handicrafts to export. Silver and also gold from Cappadocia (in Asia Minor) was sold to Elam and the Indus Valley (via the island entrepot of Dilmun/Bahrain) for tin. Late third-millennium BC records show that when merchants “receive silver and copper [from the palace] they are being paid to undertake a commission, not being issued with a commodity for disposal on the open market” (Postgate1992:220).

Denominating prices in silver forced reliance on scales. To prevent the awkwardness of weighing relatively small pieces, silver was cast into jewelry, such as bracelets made with easily broken-off segments measured in shekels. Powell (1977) notes that the Middle Babylonian word for 1/8 shekel, bitqu(literally “cutting”), suggests silver rings and coils, and may originally have denoted “a piece of standard size cut off from such a silver coil.” Such jewelry money gave way to coinage in classical antiquity as officially stamped weights of precious metal.

Throughout the history of Sumer “the management of silver and gold, of textiles, and of other precious or ‘luxury’ goods is largely dominated by the royal palace,” notes Garfinkle (2012: 244f., 226). Even in Lagash c. 2350 BC the temples “did not actively control the politically important treasuries” but were under control of the palace. In neighboring Umma numerous branches of the economy converted their primary goods annually “into tiny sums of silver, which were collected by the province and then delivered to the state in the form of donations to a religious festival. … Luxury goods – textiles, silver and gold, meat, and special edible delicacies – are primarily found in one specific context, namely the palace.”

Silver was used primarily by the palace and the entrepreneurs managing its trade and other enterprise. The result was a bifurcated economy, in which entrepreneurial trade and management operated on a silver standard atop a rural economy on a grain standard. Grain and wool were the main means of denominating and paying agricultural fees and debts, to be paid on the threshing floor or in the shearing season.

What is not well understood is how silver got into the hands of Mesopotamia’s general population. Some would have been obtained by selling crops, textiles or other handicrafts to the palace (Sallaberger 2008, cited in Garfinkle 2012:245), or to entrepreneurs who earned silver on their trade and management of public infrastructure. The palace paid some silver to mercenaries, and there are hints of rulers handing out silver tokens to soldiers after victory and perhaps at royal festivals. But most of the influx of silver from foreign trade was re-invested in more trade ventures or lent out in rural usury for current income and, ultimately, to acquire land. Silver lying around not lent out was called “hungry” for profit-making opportunities.

There is little hint of speculative credit, and no sudden gluts of silver such as occurred in classical antiquity when Alexander the Great looted the temples and palaces of their bullion in the lands he conquered, coined the booty and put it into circulation by paying his army. There also was no monetary drain, thanks to the fact that grain could be used as a substitute for silver at a stipulated exchange ratefor payments to the large institutions. Personal debts mounted up rapidly as a result of agrarian usury, and inability to pay them often resulted from crop failure, drought, or the debtor’s illness or other misfortune.

Royal proclamations cancelling agrarian debts preserved economic viability on the land. Public oversight of money thus went hand in hand with public management of debt, including the setting of interest rates and the customary royal amnesties for agrarian and personal debts. Ultimately underlying the conflict between the Barter and State theories of money is thus whether public policy should favor creditors or debtors. As creditors, banks seek “hard” debt collection rules. But governments recognize that most of their population are in debt and need to be protected from forfeiting their income and property to creditors, which would impoverish the economy at large.

Archaic Money and Interest-Bearing Debt

Interest always has been an inherently monetary phenomenon and officially regulated. The standard Mesopotamian interest rate for commercial loans denominated in silver was set to dovetail into palatial accounting practice at the “unit fraction”: one shekel (60th) per mina per month, 12 shekels a year (the equivalent of 20 percent annual interest in decimalized terms), doubling the principal in five years. Interest rates throughout antiquity emulated this practice for ease of calculation in terms of the “unit fraction,” e.g., an ounce per pound in Rome. Rates were set simply for reasons of mathematical simplicity in Mesopotamia’s sexagesimal system of fractional weights and measures. These rates remained traditional for centuries, not being related to productivity, profit levels or risk.

The ancient words for interest – mash(goat) in Sumerian and Akkadian, and tokosand faenus(calf) in Greek and Latin are used in the metaphoric sense for “that which is born or produced.” What was “born” was not goats or calves, but interest, on the new moon each month. (Hudson 2000 discusses the semantics.)

Much as the Barter Theory of money hypothesizes trade as leading to the emergence of money without any need for a public interface, its adherents have put forth an individualistic pre-monetary productivity theory of interest. According to this origin myth, early interest was paid by individual debtors to well-to-do creditors “in kind,” out of seeds or animals. (Böhm-Bawerk’s Capital and Interest(1890 [1884]) surveyed and refuted what he called “naïve productivity” theories of interest.) This scenario depicts the origins of interest-bearing debt as being productive and hence economically justified – and occurring without silver or other official money.

The classic attempt to depict such pre-monetary interest already in the Neolithic as reflecting productivity (and implicitly, profit) rates c. 5000 BC – subject to the risk of non-payment – is Fritz Heichelheim’s Ancient Economic History, from the Palaeolithic Age to the Migrations of the Germanic, Slavic and Arabic Nations (1958:54): “Dates, olives, figs, nuts, or seeds of grain were probably lent out … to serfs, poorer farmers, and dependents, to be sown and planted, and naturally an increased portion of the harvest had to be returned in kind.” In addition to fruits and seeds, “animals could be borrowed too for a fixed time limit, the loan being repaid according to a fixed percentage from the young animals born subsequently. … So here we have the first forms of money, that man could use as a capital for investment, in the narrower sense.” Such “food-money” supposedly was lent out in the form of seeds and animals, at interest rates reflecting their reproduction rates. This scenario depicts “money” as originating not as taxes or other payments to palaces or temples, but as capital in the form of seeds and animals, capable of producing an economic surplus as interest paid in kind, at a rate reflecting physical productivity.

The problem with this mythology is that the traditional communities known to anthropologists do not lend or borrow cattle, either for calf-interest or other payment (Sundstrom 1974:34 and 38, and Hoebel 1968:230). When seeds are advanced, it typically is by absentee landowners to sharecroppers. Debtors are obliged to pledge (and forfeit) their livestock to creditors out of need to survive, and pay usury out of their own resources, not from investing the creditor’s livestock or seeds at a profit.

Like the Barter Theory of money, the Productivity Theory of interest takes interest out of its historical context, treating money simply as a commodity owned by individuals, without public oversight or regulation. This is assumed to be the “natural” condition and, as such, applicable to today’s world – with government money creation and regulation depicted as unnatural, not original.

If Heichelheim’s scenario were valid, interest rates would have varied with the productivity of the cattle, seeds or mercantile profit rates. But interest rates remained standardized over many centuries, being set independently from the production process or profit rates on trade.

Barter-based “naïve productivity” theories of interest envision transactions among individuals acting on their own account, with borrowers hoping to make a gain out of which to pay interest. This reverses the historical line of development. The paradigmatic interest-bearing debts were owed to Mesopotamia’s palaces and temples. Interest charges did not reflect physical productivity but were specifically monetary, paid in silver at a stipulated rate – for instance, for the advance of export goods to long-distance traders, paid out of their mercantile profits. Most fatal to productivity theories of interest is that the majority of Mesopotamian agrarian debts did not result from actual loans, but accrued as arrears (seeWunsch 2002). Agrarian interest often was charged only after the “due date” was missed. In such cases one could say that interest was paid for the failureof productivity to keep up with normal expectations.

Mesopotamia did not have banking in the modern sense of taking in deposits and lending them out at a profit. Even in Neo-Babylonian times “banking families” such as the Egibi were simply wealthy families. They paid depositors the same rate (equivalent to 20 percent) as they charged customers, so there was no intermediation markup as in modern banking (Bogaert 1966).

The major policy tool for rulers to stabilize the economy and save their subjects from debt bondage was to proclaim Clean Slates wiping out the overgrowth of debt in excess of the ability to pay. Productive “silver loans” to commercial traders and managers were not subject to these amnesties. The exemption of credit from such royal Clean Slate proclamations shows a policy distinction between productive and unproductive credit – the contrast that medieval Church Fathers would draw between interest and usury.

Classical Antiquity’s Changing Context for Money and Credit

Interest-bearing debt is found spreading westwardto the Mediterranean lands around the 8thcentury BC, mainly via Syrian and Phoenician traders establishing trading enclaves (Hudson 1994). They brought with them weights and measures that were adopted by Greeks and Italians. A. E. Berriman’s Historical Metrology(1953) points out that the carat originally was the weight of a carob grain, ceratonia siliqua, a tree native to the Mesopotamian meridian, weighing 1/60thof a shekel. The Greek term is keration(“small grain”).

Greek and Roman elites also adopted the Near Eastern practice of setting interest rates in accordance with the local unit-fraction, e.g., Rome’s duodecimal system dividing the pound into 12 troy ounces. One ounce per pound per year (1/12th) was the equivalent of an 8 1/3 percent rate of interest. That was much lower than Mesopotamia’s agrarian interest rate of one-third of the principal (or one-fifth for commercial loans), but debts in Rome and Greece were inexorable and hence ultimately more burdensome.

Classical Greek experience confirms a number of generalities that can be drawn from earlier Near Eastern monetary development. Describing how the commercial Isthmus city of Corinth adopted coinage c. 575-550 BC (a generation after its origins in Aegina), Salmon (1984:170f.) supports the conclusion of the numismatist C.M. Kraay (1976:317-322): “coinage cannot have been intended to facilitate trade, either at a local level or on a wider scale.” Early money was to finance credit transactions, not the exchange of goods (Salmon 1984:171f.): “From the earliest issues to the second half of the fourth century, at least in Corinth, the association between coins and trade was mainly that they offered a means of providing credit. If they had acted as an item of trade themselves we should have expected them to travel much further, and in far greater quantities, from Corinth than they in fact did. Their main function was to be lent at Corinth for purchase of items to be traded.”

Money was mainly for paying taxes and fees, Salmon continues: Corinthian “coins were first issued in order to serve the purposes of the minting authorities. Cities would find it convenient if payments made to them – taxes, fines, etc. – were in the form of coins whose purity and weight were fixed; while payments made by the state from time to time for building schemes, mercenaries, and other purposes could be much simplified if trustworthy coins were available.”

However, taxation developed only slowly in Greek cities. Greece and Romeobtained bullion not from tax revenue or public enterprise but from war booty, by levying tribute or, in Athens, from local silver mines. Spending was the key,mainly to pay soldiers and hire mercenaries. In the Ionian cities of Asia Minor,money’s primary role was to pay “allowances to the sailors manning the huge fleet being prepared by the rebels”(Figuera 1981:157). “Hectataeus of Miletus did not propose a large capital levy or other forms of taxation to build up the allied fleet, but a confiscation of the treasures at Branchidae (Hdt. 5.36.3-4). This may suggest that taxation was primitive in early 5th-century Ionia.”

Military conquest remained the major source of monetary metal from Alexander the Great’s looting of temples and palaces down through the end of antiquity in Rome. Armies brought minters along to melt down the booty and distribute it to their commanders and troops, with a tithe to the city-temple. When there were no more realms for imperial Rome to conquer and extract tribute, the inability to tax the oligarchic economy led to debasement of the coinage. Replacing the State Theory of money by treating money simply as a commodity led to a monetary drain – ultimately forcing resort to barter.

The main difference between Greek and Roman economies and those of the Ancient Near East was the absence of debt relief, resulting in a long series of political crises extending from the 7th-century BC “tyrants” (populist reformers) from classical Sparta and Corinth down to Rome in the 1stcentury BC. Mid-19th-century historians attributed these debt crises to the introduction of coinage around the 7thand 6thcenturies BC, when Greek city-states issued coins imprinted with their city-images, such as the owls of Athens. But moneychangers still weighed coins from the various cities, in keeping with the use ofweighed bullion that predated coinage by about two thousand years.

The economic impact of coinage thus did not differ much from that of hacksilver. So it was not money, coinage or even interest-bearing debt by themselves that caused the polarization under antiquity’s creditor oligarchies. The problem was the way in which society handled the proliferation of interest-bearing debt.

As credit was increasingly privatized, debt became a dynamic powerful enough to dissolve the checks and balances that had shaped the social context in which money first developed. Mesopotamia had usury and debt bondage, but its rulers managed to avoid the irreversible disenfranchisement and ultimate serfdom that plagued the Mediterranean lands. The Near Eastern aim was to preserve a land-tenured citizenry supplying the palace with corvée labor and military service. Despite the palace’s role as the major creditor, it protected debtors by debt amnesties that undid the polarizing effect of interest-bearing debt. Most debts in early Mesopotamia were owed to the palace, so rulers basically were cancelling debts owed to themselves and their collectors when they proclaimed Clean Slates that saved their economies from widespread debt bondage that would have diverted labor to work for creditors at the expense of the palace.

But as debts came to be owed mainly to Greek and Roman oligarchies, debts no longer were canceled except in military or social emergencies to maintain the demos-army’s loyalty. What came to be “sanctified” was the right of creditors to foreclose, not cancelling debts to restore economic balance.

Money and debt in Greece and Rome thus followed a different trajectory from its origins in Mesopotamia. Oligarchies gained sufficient power to stop civic debt cancellations. Rural usury in Greece and Rome expropriated indebted citizens from their land irreversibly, typically to become mercenaries in armies formerly manned by self-supporting citizens. Land ownership was much more concentrated than in Bronze Age Mesopotamia or even in the contemporary Neo-Babylonian economy.

Today’s mainstream ideology maintains this shift to hard pro-creditor law, and depicts non-payment of debts as leading to chaos. Yet Clean Slates are what savedNear Eastern economies from the chaos of economic polarization and widespread bondage.Mesopotamia’s economic takeoff could not have been sustained if rulers had adopted modern creditor-oriented rules.

Nor was classical antiquity’s takeoff sustained. By the closing centuries of the Roman Empire, wealthy elites had monopolized the land and stripped the economy of money, spending most of what they had on imports that drained monetary silver and gold to the East – leaving a barter economy in its wake as the “final” or “third” stage of monetization: impoverishment and polarization in which money was stripped away.

This post-Roman oligarchic collapse into local self-sufficiency and barter reverses the once-held idea that exchange evolved frombarter via monetization to credit economies. Yet textbooks still repeat that sequence without recognizing the early role of credit, without mentioning the palaces and temples where monetization first evolved, orciting the tendency of debts to be mathematically self-expanding when not overridden by debt writedowns and clean slates.If such economic theorizing really were universal, history simply could not have occurred in the way it did.

Also reversed today is understanding of how the charging of interest originated. Instead of reflecting productivity, profitability or risk, interest rates were officially administered and remained remarkably stable in each region throughout antiquity. Today’s governments continue to regulate interest rates. Yet mainstream economic theory continues to propose interest-rate models based not Treasury fiscal and monetary policy, but on profit rates, “risk” and consumer “choice.”

Summary: The shifting historiography of money’s origins

Origin myths at odds with the historical record are the result of the conflict between vested interests and reformers over whether the monetary and credit system should be controlled by banks or by governments. Are credit and debt to be administered by laws favoring creditors, or should the prosperity of the indebted population at large be protected? The way in which economic writers answer this question turns out to be the key to their preference regarding the Barter or State Theories of the origins and character of money, credit and interest.

Assyriological and anthropological research confirms that money and monetary interest were not created by individuals trucking and bartering crops and handicrafts or lending crops and animals with each other. Archaic economies operated on credit, creating money as means of paying debts, mainly to Mesopotamia’s palaces and temples. Interest emerged as the means of financing long-distance trade and advancing land to its cultivators or managers, administered mainly by palace officials.

Recognition of this palatial origin of money and interest is at odds with the drive by commercial bankers to depict their own control of money and credit as being natural and primordial. Ever since Roman law was written to favor creditors, history has been written to defend the view that private credit and the “sanctity” of debts being paid is natural. The resulting mythology to explain the origins of money and interest reflects public relations lobbying by bankers and other creditors.

Goodhart (1998) highlights the relevance to modern times of misinterpreting the history of money: It underlies creation of the euro. The eurozone was created without a central bank to monetize budget deficits for EU member governments. The anti-state ideology underlying the euro thus stands in opposition to the State Theory of money. Central bank credit is to be created only to bail out commercial banks for losses on their own credit creation and bad investments, not for governments to spend directly into the economy.

What makes today’s monetary system opposite from that of Bronze Age Mesopotamia is an ideology that recognizes no role for money and credit creation except to benefit creditors. Understanding how the origins of money went hand in hand with checks and balances to protect economies from being polarized and impoverished by debt would call for treating money and credit as part of the overall economic system, not merely a matter of “individual choice.” To view contractual monetary and debt arrangements between individual lenders and borrowers without regard for how the overgrowth of debt may disrupt the economy is not only a travesty of economic history, but is largely responsible for today’s short-termism in re-enacting the debt crises that plagued classical antiquity.


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  1. Norb

    Thank you Michael Hudson for a great summary. Just as Milton Friedman popularized the neoliberal transformation that overtook economic thinking some 40 years ago, your writing and analysis needs to be disseminated to a larger audience. It can be viewed as free to choose revisited- for the wrong choice was made the last time around.

    Its time to turn the power of the state, and cooperative, collective action into a positive force for the many, instead of the cynical tool of predators.

    How the state should function is the fundamental choice. All policy, and possible outcomes stem form that decision.

    1. Jean

      Absolutely. Hudson is The Man when it comes to understanding economics.

      Make Hudson’s work about interest and debt into simplified comic books, a-la “Classics” from the 1960s, then disseminate these to kids in high schools or even younger ages and you would have a brewing revolution against Parasitical capitalism.

      What’s with the words running together in the article? Is that a problem between the text editor it was written in and the website, or, is it my Firefox browser?

  2. Ignacio

    This post makes me recall some others that PlutoniumKun about the early bronze european cultures, I think particularly the bell-beaker culture which is associated with a period of strong cultural exchanges within Europe (and probably trade). Those were coin-less societies but there was apparently exchange of beakers, copper, bronze and grains. The culture is also associated with expansion of barley (almost certainly beer) and with single-grave burials. Burials reveal some societal divergence and beakers could somehow be symbols of power/wealth. The absence, during more than 1000 years of beaker culture, of both coins and an organized state migth support the palatial credit theory i guess.

    1. Louis Fyne

      Apparently European bronze age cultures also experienced their own version of cryptocurrency bubbles: bronze swords.

      Archaeologists find founds troves of buried, never used bronze swords—-the running hypothesis is that they were used as stores of value

      1. Wukchumni

        All over Africa, there was what is now termed as ‘odd & curious money’ with all sorts of variations, few of which look like coins as we know them.

        Kissi money kind of looked like little swords, and was current on the west coast of Africa and elsewhere in the late 19th century.


  3. loco

    The statement “The rate of interest on commercial advances denominated in silver was set in the simplest sexagesimal way: 1/60th per month, doubling the principal in five years (60 months).” is incorrect. An interest rate of 1/60th per month is doubling the principal in 42 months, i.e. 3 1/2 years.

      1. Michael Hudson

        There was no compound interest in the Near East. 1/60th per month, month after month, amounts to 60/60ths after 5 years. That is simply how they thought and how their contracts were written.
        At the end of five years, a new loan had to be negotiated.

        1. Larry Motuz


          Were you talking compound interest –rather than a fixed monthly amount on the Babylonian lunar calendar– the annual rate of ‘interest’ would be 15%.

          I was jarred when you ‘converted to 20 per cent, especially since there is no ‘added’ interest on a month to month or year to year basis. Cumulative ‘interest’ as such did not exist in this fixed fee system.

          Which is to say that I’d prefer the use of ‘fixed fee’ equivalency debt repayment rather than the term ‘interest’ as such.

          But, maybe that’s just me.

          BTW, an absolutely brilliant essay!

  4. Wukchumni

    Early money was to finance credit transactions, not the exchange of goods (Salmon 1984:171f.): “From the earliest issues to the second half of the fourth century, at least in Corinth, the association between coins and trade was mainly that they offered a means of providing credit. If they had acted as an item of trade themselves we should have expected them to travel much further, and in far greater quantities, from Corinth than they in fact did. Their main function was to be lent at Corinth for purchase of items to be traded.”
    One thing that set the Roman Empire apart monetarily from the various Greek city states that issued silver & gold coins hundreds of years earlier, was the tri-metallic nature of it’s monetary issuances, including copper coins.

    This included every Roman citizen in the monetary system, and as far as trade goes, it was quite widespread, and to this day, ancient Roman coins show up in India, as the breadth of the usage went that far way back when. Hoards of hundreds of thousands of Roman copper coins have been found all over Europe, including the UK.

  5. Off The Street

    An interesting American history question may be to look at what happened to debtors and to creditors during and after the Revolution and in subsequent periods of economic upheaval. Who was made whole, who wasn’t, perhaps why. Please point me toward resources for further study.

    1. Wukchumni

      1,000 Continental paper dollars could be exchanged for one dollar in lawful specie in the 1790’s. If you owed money to somebody in Continental Currency, it wasn’t quite as free as owing somebody money in Germany in 1923, but almost.

      This so soured the young nation on fiat money that not one dollar in currency was printed again until 1861.

    2. Self Affine

      There is an interesting book called “The Whiskey Rebellion” by William Hogeland which examines this as well as the first internal tax protest after the Constitution.

      What happened to creditors? Well it depended on where one was placed in the power hierarchy.

  6. Jim Haygood

    ‘Because of the time gap between planting and harvesting, few payments were made at the time of purchase.’

    The agriculture-driven annual credit cycle apparently soldiers on, even in industrial and post-industrial economies. A paper investigates the superior (and statistically significant) outperformance of global markets during the six months from November to April, after planting debts have been liquified by harvest income:

    On average, stock returns are about 10 percentage points higher in November-April half-year periods than in May-October half-year periods. We also find the Sell in May effect is pervasive in financial markets.


    A behavioral driver is possible, as people begin to anticipate starting a new year that will be better than the old year. Hope springs eternal, as it were. But this would be a challenge to prove.

    Meanwhile the bad May-October period is but three weeks away. Tick-tock, comrades.

  7. LawyerCat

    I know you frown on formatting comments, but I would really like to share this article without having that be a distraction and this is a really good foundational summary so that the time investment of cleaning it up maybe makes more sense; i.e. this article will last and be relevant longer than the typical topical articles published here.

    What I’m noticing are spacing issues where words are running together.

    And thank you Professor Hudson for putting front and center why these academic-historical issues that may strike some as obscure are so relevant to the organizational and institutional choices in our modern societies.

  8. Robert

    Mr. Hudson, I respectively disagree with your binary view of this topic, and I would humbly suggest that you sit down and talk with people who hold – what you pejoratively call – a commodity theory of money. You in essence straw manned the implications of holding that view. It’s not mutual that one might think the origins of money might have been brought about by a Hayekian natural order, and that money creation should be totally a private domain, although, admittedly, the crossover is likely quite dramatic.

    In my opinion you are both right, and much could be learned here with a simple dialectic. If you look at the history of systems or paradigms of human creation, i.e., ethics, morals, monetary, markets, you’ll find that the state – or a primitive ruling structure – simply codifies an already socially accepted manner of being if and when it is possible and politically expedient. Which is the most likely scenario at play here; the state didn’t arbitrarily choose silver or grains, the people chose them through centuries of human interactions. And, yes, the advanced credit system that the state laid on top of that was an obvious economic improvement in efficiency.

    1. Yves Smith Post author

      Help me. “Sit down and talk:” with people whose views are extremely well documented and made up out of whole cloth?

      There is a vast archeological record supporting Hudson’s account, and none backing your ideology. That includes your assertions re the role of the state.

      1. Scott1

        Born into debt I worked up to running a Manhattan based business. Bad times came from Unions and New codes.
        I did not succeed in getting enough credit to rebuild the entire business and conform to the new normal.
        My back was wrecked. There was the second beating in 3 years.
        Victimhood set in.
        From competitive wages & income from equipment rentals, I went to a state of barter existence in Florida.
        So as Michael Hudson describes the the history of money in a final stage, as money started for me and ended for me by 40, it is an accurate story of my
        personal experience.
        The system that exists did to me what he says it does.
        The final stage is the reduction to barter when money is the weapon of choice.
        Living in a money civilization, on a barter system is like slavery.
        Trading with friends for marbles or comic books or knifes or baseball cards, is a luxury activity. You do not want to be dependent on such activity to get
        food, clothing and shelter. It is not barter.
        If founding now, a new nation, adopting the State Theory will create
        a better nation than adopting the Barter Theory.
        This is what I get from Mr. Hudson”s tract.

    2. Jamie

      If I am reading Hudson correctly, it doesn’t matter that there may have been primitive antecedents. It is not agrarian credit, per se, that creates money. It is the official equivalence of standard units that does it. The advanced credit system is merely one of the drivers of the process.

      Whatever the practices of the people prior to the state, the state is required for, first, the standardization and, then, the fixed equivalence. So, in so far as those are the foundations of money, it is not a simple codification of an existing practice among individuals. Until the state enforces it, it does not “exist” in any meaningful sense. So I suggest that your premise, “that the state… simply codifies an already socially accepted manner of being” is false in this case. States create new conditions that do not exist pre-state, as well as codifying preexisting practices.

      And this is apart from the philosophical question of the effect of codification itself. If there is no difference between a practice and a codified practice, then there is no reason for a state under your premise and one must explain, why there are states? why is there codification? One cannot minimize the role of the sate by stating it “simply codifies”.

      1. Robert

        Well, I agree that the state needs to codify the thing before it becomes a thing. That doesn’t mean that money or even credit didn’t arise naturally from organic social structures and then become this whole new and even better thing.

        Take markets for example, people traded goods from the beginning of our existence. That’s a social order that sprung up and was abstracted out from our own biological and psychological structure. Hypothetically, those proto-markets didn’t have the force of any state behind them, and consequently would have had issues with all sorts of fraud and theft problems. The power of the state, and it’s ability to enforce regulations as a third party, enabled these proto-markets to become actual markets.

        But that doesn’t mean the state created the idea. The state became an abstraction of power that enabled this nascent idea to become a fully realized operation.

        It’s the same thing with money and credit.

        1. Jamie

          Well, perhaps you are right, but I don’t think it is exactly the same for money. If the idea of a proto-market is based on individual barter, sure that precedes a state regulated market, which can also be a barter market and doesn’t necessarily imply money. The difference between an individual trade and a state regulated market is only two things: scale, and the power of the state used to ensure trust. And you are right, involving more people and establishing a system of rules does not fundamentally alter the nature of the exchanges taking place. It does not create some new kind of exchange that was never seen before. The market, without money, is just like me trading sandwiches with my friend at lunch, only writ large.

          But money is not something that exists or is needed for barter. Where is the proto-money in that exchange of sandwiches? My friend and I have no need to tokenize our sandwiches, exchange the tokens, and then exchange the sandwiches. Money doesn’t exist in that proto-market, because money doesn’t become a thing until trading begins to involve repeated exchanges between a 3rd, 4th, 5th, etc. party, exchanging distinct items that need to be valued equivalently. What Hudson is describing is why and how that need to provide the standard of equivalences arose. You can say it was always there, but that is far from obvious, because the need for such a standard does not exist in a simple individual exchange.

          But you are right that, before that standard of equivalences was established, yes, there was grain and wool and silver and other things being used and exchanged. And there was credit and debt (i.e. delays in exchange). There just wasn’t any money. At least, that’s how I see it. I think that’s what people mean when they say that, “money is the unit of account”.

        2. Stephen

          Societies that existed prior to neolithic revolution were hunter gatherer societies with gift exchange as opposed to markets. Market’s do not spontaneously arise without states. Markets in fact require surplus to exist (they require specialization). Nothing about markets as a form of social order is “abstracted out from our own biological and psychological structure” (whatever the hell that means). It is entirely a function of the state sector which sets the bounds and rules within which markets operates. Prior to that gift exchange was the primary form of social order.

    3. Michael Hudson

      Both cannot be right. The question is what came first.

      Hayek was a propagandist. He hated the public sector, he hated big government except that controlled by fascist elites such as his Chicago Boys backed in Chile.

      One cannot have debates with people like you. Your “sit down” means, “Let us shoot you, as we did in Chile for anyone who wanted a positive role for government.”

      One has to call you guys what you are. You and Hayek are dishonest censors of history in pointing to individualism as the key, not social institutions such as temples and palaces seeking to organize society on an ongoing basis.

      1. Robert

        Well, that’s a reasoned response…

        It might be time to take some time away from the internet, sir. There was no reason to attack nor make wild assumptions. I was respectfully trying to engage in an open conversation wherein I see an easily bridgeable gap of understanding. I meant no offence, and, while I disagree with varying levels of your work, have found you quite intellectually stimulating and persuasive.

        I was merely was attempting to define better terms for this “debate”, instead of this incessant need to define things rigidly to fit preconceived ideological positions. I honestly expected better.

        Have a wonderful day.

    4. eg

      If you are serious in your desire to entertain a productive dialogue about the origins of markets and money, I would encourage you to begin by investigating the process by which the civilizations of the Fertile Crescent and environs themselves emerged from their nomadic, tribal antecedents during the Neolithic Revolution.

  9. Susan the other

    Do people hoard letters of credit? Which is what money was. In that coins were first minted to standardize weights which correlated with the weight of grain and could be used more easily than bushels of grain. Money was a unit of accounting. Metal was simply convenient – conveniently smelted, measured and preserved. Money as metal was first used to settle accounts in trade so money was a convenience. A fiat of convenience and trust. The same as a series of digits today. So when did money jump the shark and become value itself? When there was no more collateral? And it had to be replaced by high rates of interest? In an economy based on unnecessary things.

      1. Michael Hudson

        The key is that silver and copper imports were controlled by merchants associated with the palace sector. They also were, as Yves says, donated to temples as precious objects.

        My key point is that money started in accounting for palatial product and labor flows, and then for taxes on land or other fees owed to the public institutions. Trade was secondary.

    1. John Quixote

      “So when did money jump the shark and become value itself?”
      Imminently. As soon as ‘merchants associated with the palace sector’ found themselves surrounded by an accumulation of silver and copper and precious amulets, they would have been imbued with a symbolic power derived from the real objects.

  10. Craig H.

    “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money,” anthropologist Caroline Humphrey (1985:48) has emphasized, stating that “all available ethnography suggests that there never has been such a thing”

    This might be the most important point and I wonder how many economics textbooks still teach that barter rigamarole. Mine sure did. Humphrey made that observation pretty early in her career. I looked at her author’s page and she now has twelve books in print. It looks like she is in the 1% of mental powers.

    Did any member of the Economics Empire ever strike back?

  11. Oregoncharles

    ” The ale women who ran these “pubs” would then pay most of this grain to the palace for consignments advanced to them during the crop year. These payments were financial in character, not on-the-spot barter-type exchange.”

    So was the “palace” (do you really mean temple?) a bank, or a grain repository? (I’ve been to an Illinois grain elevator; it was clear that it doubled as a social center, with a line of grizzled old farmers sitting in the lobby.) That kind of overlapping function, where the palace or temple serves critical economic functions, persisted into modern times in Tibet (that I know of).

    1. michael hudson

      The Mesopotamian palace dominated the temples. As my book coming out this summer, “… and forgive them their debts” points out, rulers typically appointed their relatives as heads of the temples. So we’re talking about elites.
      Second, most families were self-sufficient on the land. Temples housed the (war) widows and orphans who wove textiles and produced other handicrafts. (There also was limited local handicraft production by village families.)
      The important thing is that it was not “people” who traded. It was traders with means, organized into guilds. “Money” was used to denominate payments to the palace and temples for fees, rents and some goods.
      All this makes it hard to explain money clearly without explaining how the economy worked. And it was so different from today that armchair speculators (like Hayek and earlier Austrians) are anachronistic.

      1. Paleobotanist

        Hello Prof Hudson

        I hope that you check back in and respond to this.

        1) How did commoners buy things in the marketplace in Mesopotamia? Any commoner household will want to purchase metal tools that they can not make themselves, also herbal medicines, special fine clothes for weddings, etc. Mesopotamia definitely had retail markets.

        2) Life is unfortunately short and one cannot study all that one would wish, but I notice that you are concentrating on the Old World. What about the New World with its very different economic and social systems? Densely populated, highly stratified Andean polities managed complex exchange of goods and labor without money (Inka) or even marketplaces (Tiwanaku). So it is clear that there are other ways to regulate economies than today’s. Tenochtitlan had huge market places and used cloth and cocoa beans as money. I have always wondered who controlled the cocoa trees and crops? The nobles? kings? priests?

        Thank you

  12. templar555510

    A piece like this makes you realise, if you didn’t already just how narrow and small minded is the idea that the market – a simple human construct – should be expected to carry the entire range of human interaction especially in the age in which we now live , when like it or not , we have to deal with degrees of sophistication greater than anything our parents could have foreseen. This is not to say this is good or bad ( please let’s leave that defeating polarisation to one side ) but I just have think about my parents’ world view and that of their parents to know this to be true.

    We have to raise ourselves up above Wordsworth’s ‘ getting and spending ‘ to see something of his ‘ sunlit uplands ‘, but try we must.

  13. Altandmain

    The alarming thing is the similarities between modern society and the later stages of the Roman Empire.

    – Very pro-creditor laws
    – In the case of the US, trade deficits again, ironically with East Asia
    – Family farms have declined in favor of factory farming, a modern day latifundia
    – The use of third world labour under Dickensian working conditions and illegal immigrant labour in the US
    – The decline of the American middle class and rising inequality mirrors Rome
    – Arguably the overspending on military (over-extension of the Roman Empire)
    – Lead pipes may have lead to poisoning in Ancient Rome – there appear to be quite a few American communities facing similar issues (https://www.reuters.com/investigates/special-report/usa-lead-testing/)
    – Decline of democracy (witness the transition from the Roman Republic to Empire)

    History does not repeat itself, but it rhymes. We do not yet have anything like the devastating plagues, but it is possible with global warming.

    A big issue that has not been discussed is the similarity between the Roman Patrician class and our modern day elites. The sheer greed of the Roman Patrician class played a significant role in their empire’s eventually downfall.

    I think that societies live or die depending on whether their elites decide to treat their people benevolently or in an extractive manner. Aggressive anti-debtor credit laws is part of just part of it.

  14. RBHoughton

    Civilisations grow in river valleys. This article is all about the succession of cultures in the Tigris / Euphrates area and nothing about the Indus / Ganges or the great Chinese rivers. Even the Nile is unmentioned. That seems to be a defect.

    It continues from the Levant to Greece and Rome noting the absence of debt relief in European monetary affairs and the consequent political crises. Today we have pro-creditor law as the basis to dealing with debt. The result is, at least in UK where I come from, the debtor spends every last asset to keep himself afloat before acknowledging his business plan does not work. You’d think it was something to be ashamed of. Then whatever can be scrapped back is pocketed by liquidators in lieu of fees. Result misery.

    The Babylonians et al cancelled agrarian debts when circumstances made them unpayable. New rulers on taking the throne would proclaim debt jubilees for personal debtors. We were fairer and more just 4,000 years ago than we are today. We should revisit those initiatives.

  15. The Rev Kev

    One line that snagged my interest was when Hudson said: “What is not well understood is how silver got into the hands of Mesopotamia’s general population.” In reading the first section of the article, I wondered about those people that wanted to have a reserve in place. Something to fall back on in case of need or famine. It could not be grain or beer as they deteriorate over time but silver would fill this role nicely. As to how it came to be in so many hands I have an idea. I would guess that the Palace would need to let out contracts for items that they could not make themselves such as works of art, sophisticated pieces of bronze, etc. and payment for one reason or another may have been made in silver. Once it is outside the Palace and Temple walls it would start to go into circulation. Maybe for reason of prestige, maybe because of the sheer convenience and some as a reserve for when the crops did not do so well or the like. In a way, you could say that silver in Mesopotamian times is like an embarrassing photo on the internet in modern times – once it is out there you cannot get it back.

  16. Ape

    That’s funny!

    So modern banking ulimately evolved out of labor-value distributive systems where socially valuable labor was almost entirely defined by calorie production and debt was a failure in prepaid calories to pan out as produced calories.

    Enkidu wad a Marxist god?

  17. evodevo

    It’s interesting that the rise of accounting and debt probably underlay the advent of writing systems, i.e. cuneiform in the case of the early Bronze Age. AND cuneiform persisted from ~3500BCE down to ~100 BCE, encoding a long list of Mesopotamian languages.
    I’m looking forward to the book!

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