Academic journal article Economic Inquiry

On the Origin of Monetary Exchange

Academic journal article Economic Inquiry

On the Origin of Monetary Exchange

Article excerpt

There are good reasons to think that the nature of money is not yet rightly understood.

John Law [1705]


If it were possible to plan and execute trades in goods, services, and financial assets at zero cost in time and other resources, we might still know fluctuating prices, unemployment, poverty, and sin; but we would neither know nor care about shoe shops, used car lots, wholesale bread distributors, brokerage houses, or other intermediaries, because we would not willingly pay others to perform trade-facilitating services that we could perform for ourselves at no expense. Neither would we know money, because we would never choose to execute two transactions (first selling an object for money, then buying another with money (Simmons [1947, 308]) when the same result could be achieved at no extra cost by barter. In real life, of course, things are more complicated; we are "awash" in trading intermediaries because we cannot easily discover and exploit potential gains from trade without them.(1)

We who live in private ownership economies are so accustomed to intermediaries (especially myriad local retailers) that we take their operations for granted. Similar familiarity with retail traders must have been almost as common in ancient cities: since the beginning of recorded history we find references to trade specialists of various kinds - butchers, grocers, silversmiths, prostitutes, spice merchants, house builders, marriage brokers, bankers, pawn brokers, etc. (Heidel [1963, 15, 27-32]; Polanyi [1957, 64-94]; Monroe [1924, 14, 27-8]). It seems likely, indeed, that "urban" dwellers always have been accustomed to deal with "marketors" who (in exchange for fees of one kind or another) perform services that give substance and direction to the Invisible Hand.(2)

The phrase "substance and direction" merits emphasis, because the function of every marketor is to make a ready market where other individuals can execute desired trades more easily and inexpensively than by acting alone. Evidently, this function would not be performed with such alacrity and diligence by so many persons in such similar ways in so many diverse societies over such long stretches of history were it not otherwise extremely costly for individuals to exploit more than a trivial fraction of potential gains from trade. But a "market" is one thing, "money" another. We know of no society historically in which "money" and "markets" did not coexist: in common parlance the term "money" has always meant objects that are routinely treated as acceptable means of payment by marketors. In the last century, money was often described by economists as a "veil," because it was thought to mask the "true" nature of trade, which was thought "really" to consist in "the exchange of commodities for commodities"; but that view obscures a more important truth: in every civilized community for more than three centuries specialized media of exchange have served to enable private marketors efficiently to coordinate individual economic activities over an ever-wider diversity of areas of economic and geographical experience. To be sure, the coordination process never is perfect and sometimes is perfectly terrible (as during the Great Depression of the 1930s). But consider the issue posed by Leijonhufvud [1981]: "How is it possible - how is it even conceivable that decentralized economic activities can ever be reasonably coordinated when nobody, really, is trying to ensure that outcome?" Perhaps the wonder is not that coordination is often imperfect but rather that it ever occurs at all (Arrow and Hahn [1971, 1-2]).

It is argued elsewhere (Clower and Leijonhufvud [1975]), that a world of cost-less exchange might be imagined in which households could efficiently execute trades directly by barter (cf. Debreu [1959, 28]; Veendorp [1970]). History even records instances that lend qualified support to this view (Jevons [1875, 21]). To explain privately organized markets, we must of course introduce transaction costs (Friedman and Hahn [1990, xii]; Clower [1977, 235]). …

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