David R. Henderson  

Larry White on the Origin of Money

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This [Cartalist] account fails to explain, however, why governments chose bits of gold or silver as the material for these tokens, rather than something cheaper, say bits of iron or copper or paper impressed with sovereign emblems. In the market-evolutionary account, preciousness is advantageous in a medium of exchange by lowering the costs of transporting any given value. In a Cartalist pay-token account, preciousness is disadvantageous -- it raises the costs of the fiscal operation -- and therefore baffling. Issuing tokens made of something cheaper would accomplish the same end at lower cost to the sovereign. (By the way, note also Graeber's equivocation "invented or." Proposing that governments enlarged the acceptance of coins, after the market economy had already begun using them, is categorically different from proposing that governments invented coinage. Menger himself had no problem with the former proposition, but he rejected the latter as an unfounded prejudice.) (italics in original)
This is a key paragraph from Larry White, "Why the 'State Theory of Money"'Doesn't Explain the Coinage of Precious Metals," Alt-M.org, August 24, 2017.

The whole thing is well worth reading.


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COMMENTS (5 to date)
Hazel Meade writes:

I can think of a couple of possible explanations:

1. GOld and silver are softer and thus easier to impress with new faces. A new sovereign might prefer to quickly reimprint existing coins with his face rather than melting it all down and making new coins. It's harder to do this with iron and copper.

2. People objectively value gold and silver for it's appearance, so any coinage traded into a distant land could always be melted down and turned into jewelry. It's also relatively rare to it will fetch a higher price in a foreign market - which makes it a more dense store of wealth. Copper and iron are more abundant and cheaper, so you have to carry a lot more of them to your distant destination to get equivalent value.

DougT writes:

Another major factor: ever since Archimedes, people have understood that gold's density and luminosity make it almost impossible to counterfeit. It's pretty easy to tell when a gold coin doesn't weigh as much as it should.

YS writes:

Maybe governments chose gold and silver because of limited supply and ease of transportation?

Presumably, governments had to occasionally pay each other (and also pay mercenaries or pay back lenders over whom they had no jurisdiction) and could not trust each other not to expand the money supply and thus de-value their obligations. What's to stop a government from printing a million more IOUs or stamping a million more iron coins?

So technically, in the absence of other governments or jurisdictions, Government could easily and rationally choose hard to counterfeit paper tokens or iron as money. However, since governments do not trust each other not to inflate, they need something scarce as only scarce materials would be relatively trust-less and thus acceptable.

So by adoption precious metals as money, they killed two birds with one stone - had a functional national currency and also by virtue of taxation collected an 'international-approved currency' they could trust other,third parties, to accept.

I supposed bitcoin would have done just as well back then ...

David Graeme writes:

Remember also that gold lasts indefinitely without corrosion (silver less so, iron and copper hardly at all). You can find workable gold in nature (see the California Gold Rush, the Yukon, etc.), but raw silver is rare, raw copper is rarer still, and raw iron is almost never found as it oxidizes readily (i.e., rusts). As for organic materials (paper, wood, fine silk cloth), well ...

David Friedman writes:

The problem with a token currency is the difficulty of preventing counterfeiting. A gold or silver currency whose nominal value is close to its bullion value doesn't raise that problem to anything like the same degree.

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