Money (2 page)

When Furness expressed amazement at this aspect of the Yap monetary system, his guide told him an even more surprising story:

This
fei
, it transpired, had been shipwrecked during a storm while in transit from Babelthuap many years ago. Nevertheless:

When it was published in 1910, it seemed unlikely that Furness’ eccentric travelogue would ever reach the notice of the economics profession. But eventually a copy happened to find its way to the editors of the Royal Economic Society’s
Economic Journal
, who assigned the book to a young Cambridge economist, recently seconded to the British Treasury on war duty: a certain John Maynard Keynes. The man who over the next twenty years was to revolutionise the world’s understanding of money and finance was astonished. Furness’ book, he wrote, “has brought us into contact with a people whose ideas on currency are probably more truly philosophical than those of any other country. Modern practice in regard to gold reserves has a good
deal to learn from the more logical practices of the island of Yap.”
⁸
Why it was that the greatest economist of the twentieth century believed the monetary system of Yap to hold such important and universal lessons is the subject of this book.

What is money, and where does it come from?

A few years ago, over a drink, I posed these two questions to an old friend—a successful entrepreneur with a prospering business in the financial services industry. He responded with a familiar story. In primitive times, there was no money—just barter. When people needed something that they didn’t produce themselves, they had to find someone who had it and was willing to swap it for whatever they did produce. Of course, the problem with this system of barter exchange is that it was very inefficient. You had to find another person who had exactly what you wanted, and who in turn wanted exactly what you had got—and what is more, both at exactly the same time. So at a certain point, the idea emerged of choosing one thing to serve as a “medium of exchange.” This thing could in principle be anything—so long as, by general agreement, it was universally acceptable as payment. In practice, however, gold and silver have always been the most common choices, because they are durable, malleable, portable, and rare. In any case, whatever it was, this thing was from then on desirable not only for its own sake, but because it could be used to buy other things and to store up wealth for the future. This thing, in short, was money—and this is where money came from.

It’s a simple and powerful story. And as I explained to my friend, it is a theory of money’s nature and origins with a very ancient and distinguished pedigree. A version of it can be found in Aristotle’s
Politics
, the earliest treatment of the subject in the entire Western canon.
⁹
It is the theory developed by John Locke, the father of classical political Liberalism, in his
Second Treatise of Government
.
¹⁰
To cap it all, it is the very theory—almost to the letter—advocated by none
other than Adam Smith in his chapter “Of the Origin and Use of Money” in the foundation text of modern economics,
An Inquiry into the Nature and Causes of the Wealth of Nations:

Smith even shared my friend’s agnosticism as to which commodity would be chosen to serve as money:

And like my friend, Smith also believed that in general, gold, silver, and other metals were the most logical choices:

So I told my friend he could congratulate himself. Without having studied economics at all, he had arrived at the same theory as the great Adam Smith. But that’s not all, I explained. This theory of money’s origins and nature is not just a historical curiosity like Ptolemy’s geocentric astronomy—a set of obsolete hypotheses long since superseded by more modern theories. On the contrary, it is found today in virtually all mainstream textbooks of economics.
¹⁴
What’s more, its fundamental ideas have formed the bedrock of an immense body of detailed theoretical and empirical research on monetary questions over the last sixty years. Based on its assumptions, economists have designed sophisticated mathematical models to explore exactly why one commodity is chosen as money over all others and how much of it people will want to hold, and have constructed a vast analytical apparatus designed to explain every aspect of money’s value and use. It has provided the basis for the branch of economics—“macroeconomics” as it is known—which seeks to explain economic booms and busts, and to recommend how we can moderate these so-called business cycles by managing interest rates and government spending. In short, my friend’s ideas not only had history behind them. They remain today, amongst amateurs and experts alike, very much the conventional theory of money.

By now, my friend was positively brimming with self-congratulation. “I know that I’m brilliant,” he said with his usual modesty, “but it does still amaze me that I—a rank amateur—can match the greatest minds in the economic canon without ever having given it a second thought before today. Doesn’t it make you think you might have been wasting your time all those years you were studying for your degrees?” I agreed that there was certainly something a bit troubling about it all. But not because he had hit upon the theory without any training in economics. It was quite the opposite. It was that those of us who
have
had years of training regurgitate this theory. Because simple and intuitive though it may be, there is a drawback to the conventional theory of money. It is entirely false.

John Maynard Keynes was right about Yap. William Henry Furness’ description of its curious stone currency may at first appear to be nothing more than a picturesque footnote to the history of money. But it poses some awkward questions of the conventional theory of money. Take, for example, the idea that money emerged out of barter. When Aristotle, Locke, and Smith were making this claim, they were doing so purely on the basis of deductive logic. None of them had ever actually seen an economy that operated entirely via barter exchange. But it seemed plausible that such an arrangement might once have existed; and if it had existed, then it also seemed plausible that it would have been so unsatisfactory that someone would have tried to invent a way to improve on it. In this context, the monetary system of Yap came as something of a surprise. Here was an economy so simple that it should theoretically have been operating by barter. Yet it was not: it had a fully developed system of money and currency. Perhaps Yap was an exception to the rule. But if an economy this rudimentary already had money, then where and when would a barter economy be found?

This question continued to trouble researchers over the century after Furness’ account of Yap was published. As historical and ethnographic evidence accumulated, Yap came to look less and less of
an anomaly. Seek as they might, not a single researcher was able to find a society, historical or contemporary, that regularly conducted its trade by barter. By the 1980s, the leading anthropologists of money considered the verdict to be in. “Barter, in the strict sense of moneyless market exchange, has never been a quantitatively important or dominant mode of transaction in any past or present economic system about which we have hard information,” wrote the American scholar George Dalton in 1982.
¹⁵
“No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there has never been such a thing,” concluded the Cambridge anthropologist Caroline Humphrey.
¹⁶
The news even began filtering through to the more intellectually adventurous fringes of the economics profession. The great American economic historian Charles Kindleberger, for example, wrote in the second edition of his
Financial History of Western Europe
, published in 1993, that “Economic historians have occasionally maintained that evolution in economic intercourse has proceeded from a natural or barter economy to a money economy and ultimately to a credit economy. This view was put forward, for example, in 1864 by Bruno Hildebrand of the German historical school of economics; it happens to be wrong.”
¹⁷
By the beginning of the twenty-first century, a rare academic consensus had been reached amongst those with an interest in empirical evidence that the conventional idea that money emerged from barter was false. As the anthropologist David Graeber explained bluntly in 2011: “[T]here’s no evidence that it ever happened, and an enormous amount of evidence suggesting that it did not.”
¹⁸

The story of Yap does not just present a challenge to the conventional theory’s account of money’s origins, however. It also raises serious doubts about its conception of what money actually is. The conventional theory holds that money is a “thing”—a commodity chosen from amongst the universe of commodities to serve as a medium of exchange—and that the essence of monetary exchange is the swapping of goods and services for this commodity medium of exchange. But the stone money of Yap doesn’t fit this scheme. In the first place, it is difficult to believe that anyone could have chosen
“large, solid, thick stone wheels ranging in diameter from a foot to twelve feet” as a medium of exchange—since in most cases, they would be a good deal harder to move than the things being traded. But more worryingly, it was clear that the
fei
were not a medium of exchange in the sense of a commodity that could be exchanged for any other—since most of the time, they were not exchanged at all. Indeed, in the case of the infamous shipwrecked
fei
, no one had ever even seen the coin in question, let alone passed it around as a medium of exchange. No, there could be no doubt: the inhabitants of Yap were curiously indifferent to the fate of the
fei
themselves. The essence of their monetary system was not stone coins used as a medium of exchange, but something else.

Closer consideration of Adam Smith’s story of commodities chosen to serve as media of exchange suggests that the inhabitants of Yap were on to something. Smith claimed that at different times and in different places, numerous commodities had been chosen to serve as the money: dried cod in Newfoundland; tobacco in Virginia; sugar in the West Indies; and even nails in Scotland. Yet suspicions about the validity of some of these examples were already being raised within a generation or two of the publication of Smith’s
Wealth of Nations
. The American financier Thomas Smith, for example, argued in his
Essay on Currency and Banking
in 1832 that whilst Smith thought that these stories were evidence of commodity media of exchange, they were in fact nothing of the sort.
¹⁹
In every case, these were examples of trade that was accounted for in pounds, shillings, and pence, just as it was in modern England. Sellers would accumulate credit on their books, and buyers debts, all denominated in monetary units. The fact that any net balances that remained between them might then be discharged by payment of some commodity or other to the value of the debt did not mean that that commodity was “money.” To focus on the commodity payment rather than the system of credit and clearing behind it was to get things completely the wrong way round. And to take the view that it was the commodity itself that was money, as Smith did, might therefore start out seeming logical, but would end in nonsense. Alfred Mitchell Innes, the author of two neglected masterworks on the nature of money, summed up the
problem with Smith’s report of cod-money in Newfoundland bluntly but accurately: