Monday, September 17, 2012

The root of all money

William Stanley Jevons, who coined the term "double coincidence of wants"

A while back I had an interesting conversation with David Andolfatto on his post Evil is the Root of All Money. This is surely one of the more catchy phrases developed by monetary economists, who tend to the less-flowery end of the literary scale. David fleshes out a model that shows how untrustworthiness, or evil (what is called a lack of commitment in the NME literature), can lead to the emergence of money.

David finds this interesting because his model doesn't need the absence of a double-coincidence of wants to exist in order to motivate a demand for money. The double-coincidence problem - the unlikelihood that two producing individuals meeting at random would each have goods that the other wants - has historically been the explanation of choice for the emergence of monetary exchange. After all, if one person doesn't want another's goods, she can still transact by accepting some third commodity that is itself highly liquid and therefore likely to be easily passed on come the next transaction.

I think David is pushing a catchy phrase too far. While I agree that a lack of double coincidence of wants is not necessary to explain monetary exchange, neither is a lack of commitment necessary to explain monetary exchange.

Imagine a world with no evil, and no, this isn't a John Lennon song. Individuals in that economy are 100% trusted to pay their promises, i.e. full commitment exists. But people are widely dispersed and suffer from the double-coincidence of wants problem. It will make sense to trade amongst each other using transferable personal promises. Each promise guarantees to pay out some quantity of goods produced by that individual upon that promise being presented for redemption. Because promises are far cheaper to hold and transport than actual goods, these promises, and not goods, will circulate along long transactional chains. When a promise is accepted by someone who actually desires the given good, that  promise will be "putted back" to the promisor, the good will be delivered, and the promise canceled. Thus you get monetary exchange... without the evil.

One real-life example of such as system would be the bills of exchange market that existed during the medieval ages up to the early 1900s. See this paper, for instance. Start on page 23 when the discussion on transferability, assignability, negotiability, and endorsement begins if you want a flavour for the bills of exchange system.


  1. This is an interesting post, along with David Andolfatto's. Awhile ago I posted on this very idea of trust and money, etc. at Gavin Kennedy's blog adamsmithslostlegacy, but the original post was lost and I didn't save it. However, I replied later at, (click button Show Original Post) but it was hastily written.

  2. Hi SM,

    Interesting post. It takes up the same issues as David's and mine. ie:

    "Notice the difference between the existence of money and debt/credit. The latter is formed through trust (reciprocity, etc.) While the former is related to distrust (commodity money) as exchange between strangers. "

    I think a lot of the difficulties involved in these discussions are often definitional. In particular, what is the definition of money that is to be used? Myself, I assume that any item that an individual "stocks up on" in order to facilitate future exchange is money... therefore bills of exchange - a form of credit - are money-like in my world. Money is liquidity. What leads people to stock up on liquidity? In general, I think that uncertainty about the future and not evil drives this instinct.

    1. I think when I was discussing the idea of distrust about future payment is similar or can coincide with the idea about uncertainty of the future/demand for liquidity (I think we just used different terminology and that distrust is not necessarily concerned with evil). My main concern was about the origins of money and I came up with that idea over the lack of anthropological evidence in the transition between hunter/gather societies and the emergence of early states. In many (all to my knowledge) anthropological books on the subject seem to skip from the one society to the next without examining the transition period in between. I agree that bills of exchange are money-like, but how far back do they go when concerned with the origins of money? I really don’t have any answers, I’m really just asking questions.

  3. Agreed. You can generalize "evil" to mean uncertainty... distrust about future payments can be thought of as a form of uncertainty. People stock up on liquidity-in-general to deal with general uncertainty... the type of liquidity they choose, whether a commodity or credit, depends on the specific uncertainties they have.

    You asked about bills of exchange. Bills of exchange emerged in Italy in the 12th century or so. Henry Dunning Macleod in Theory of Credit talks about negotiable debts (exchangeable debt obligations) in Roman times. I don't know that much about the anthropological history of money. I haven't read Graeber, for instance, though it's on my list.