If you’ve taken a college course in economics, you’ve probably learned a simple story about money. First, people bartered. But the barter was difficult because it required a “double coincidence of desires”: I must want what you have, and you must want what I have. So people used pieces of precious metal to facilitate bartering. Then the paper came to represent the metal, and the paper gained value. Ta da! Money.
This story was selective and highly political. As the U.S. government continues to create new dollars and cryptocurrencies compete against each other to see what can appreciate faster, we are seeing the renewal of an old argument about the history of currency. Anyone who controls what we use as money has great power. So there has always been a strong push to say that the only true historical nature of money is oh, wow look! This is the thing that I have!
The term double coincidence of needs originally comes from Stanley Jevons, a 19th century British economist who published a detailed history of money in 1890. He came to the particularly Victorian conclusion that the UK was right: pairing silver with gold, a valuable commodity that would naturally flow with trade where it was needed.
Two decades later, Alfred Mitchell-Innes, a British diplomat, told a story that financiers should find heartwarming. Credit did not follow money, he argued. Credit came first. He has been money. Archaeologists had found traces of debts in ancient excavations. In Italy, 3,000-year-old iron discs had been snapped in half right after being forged – half for the creditor, half for the debtor. In Germany there were similar broken discs, made of a silver alloy. In the Fertile Crescent, there were clay debt markers, anonymized in tamper-evident clay boxes. Coins weren’t the only way to overcome a double coincidence.
I picked up Jevons and Mitchell-Innes this week after reading The Bitcoin standard, by Saifedean Ammous. It starts with Jevons’ story: money is a commodity that made barter better. Then he concludes that gold was the only suitable currency in the past and that bitcoin is its only heir. Each story is a simplification. As Ammus simplifies, he clearly expresses his concerns about the present.
When governments control money, he writes, they inflate its value, to wage war without paying the price. Inflation is a purely monetary phenomenon: producing more money, obtaining more inflation. People don’t need to be told to spend; they will do it on their own. But people need to be encouraged to save, in a scarce currency that continues to appreciate. According to these assumptions, he argues, the only rational defense against the tyranny of government credit money is to buy the scarce base currency of bitcoin.
If you believe these assumptions, please buy bitcoin. But it’s also easy to find historical examples where they don’t stand up. Sometimes people prudently put their savings together in hard coins. But sometimes the trade took the coins elsewhere, and people found themselves without hard money, in a deflation that they couldn’t control. In these cases, people did what they always do: They found a way to make money that worked.
In the 18th century, the American colonies got only a tiny fraction of the global currency of their time, a flow of hard silver coins that went directly from the Andes to China. The merchants in these colonies did not patiently stack the coins they had and avoided deflation. They pushed for changing local exchange rates to attract more money, and then eventually pushed colonial governments to create paper money, colony by colony. Some of those paper notes fell apart. Some swelled in value but continued to circulate. Some notes, like those from Pennsylvania, have held their value very well. This paper does not look like tyranny; it looks like an adaptation to the circumstances.
There is not just one true nature of money. Almost everywhere you look you can find both coins and credit flowing together. The Habsburg kings of Castile had money from the Americas, but financed their wars on credit. Renaissance Florence and Venice had gold from Africa, but financed their trade by credit. The merchants of the medieval woolen fairs of Burgos would write off their trade debts and then settle what was left with coins.
And over the past week, my childhood friends’ texts have focused not on bitcoin, but on dogecoin, an expansion of the money supply created like a dog joke. People have ways to create the money they want. There has never been a good way to stop them.