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Money and bartering is not how trade began

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When I wrote Digital Human, I got hauled up for saying that money replaced barter. It is a commonly held belief that humans evolved from nomads to farmers to cities and that, as they became civilised, they bartered bread for meat. However, that proved difficult if the butcher didn’t want meat, so how would that work? That’s why we invented money thousands of years ago. The oldest form of money was found in Mesopotamia. Now, we all have it.

However, this history of the evolution of money is not true, according to anthropological researchers. Based on extensive studies of indigenous tribes, academics have found that most tribes work in a gift economy. If you need meat, the butcher gives it to you. Then, when the butcher needs bread, the baker gives it to him. It’s reciprocal, with each specialist in the tribe giving what is needed to the others in the tribe.

So, where did this idea of barter come from?

Answer: Adam Smith.

Adam Smith (1723 – 1790) was a Scottish economist and philosopher who, for many, is seen as “the Father of Economics/Capitalism”. His major work was An Inquiry into the Nature and Causes of the Wealth of Nations (1776). In this book, he puts forward the theory of how money developed, and describes an imaginary scenario in which a baker living before the invention of money wanted a butcher’s meat but had nothing the butcher wanted. “No exchange can, in this case, be made between them,” Smith wrote.

This sort of scenario was so undesirable that societies must have created money to facilitate trade, is the commonly held view, particularly as the evolution of barter to money is a fixture in just about every economics textbook. The belief is that people bartered precious stones, beads, fabrics and food, but it could be difficult to achieve a deal. Therefore, money was invented to simplify the process. For example, Square has a fantastic resource for teachers about such systems and the history fo money. The start-point on their website is:

Bartering involves a direct trade for goods and services. Although some aspects of this transaction are similar to the exchange of money, bartering required time as people hammered out the terms of the deal. Utilizing money as the medium for trade simplified transactions significantly. Trade and barter were precursors to the monetary system used in today's society.

Mint concurs:

The history of bartering dates all the way back to 6000 BC. Introduced by Mesopotamia tribes, bartering was adopted by Phoenicians. Phoenicians bartered goods to those located in various other cities across oceans. Babylonian’s also developed an improved bartering system. Goods were exchanged for food, tea, weapons, and spices.

However, as mentioned, this is not true. The idea that humans became civilised, started to barter and replaced bartering with money is a fallacy, according to anthropologists.

The Atlantic explains why, stating that “no academics I talked to were aware of any evidence that barter was actually the precursor to money.”

Anthropologists have pointed out that this barter economy has never been witnessed as researchers have travelled to undeveloped parts of the globe. “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money,” wrote the Cambridge anthropology professor Caroline Humphrey in a 1985 paper. “All available ethnography suggests that there never has been such a thing.”

So, what was the process instead?

If you were a baker who needed meat, you didn’t offer your bagels for the butcher’s steaks. Instead, you got your wife to hint to the butcher’s wife that you two were low on iron, and she’d say something like “Oh really? Have a hamburger, we’ve got plenty!” Down the line, the butcher might want a birthday cake, or help moving to a new apartment, and you’d help him out … it’s much more efficient than Smith’s idea of a barter system, since it doesn’t depend on each person simultaneously having what the other wants. It’s also not tit for tat: No one ever assigns a specific value to the meat or cake or house-building labour, meaning debts can’t be transferred.

Sounds like a commune or community concept? Well yes, it is.

The Atlantic article continues to afrticulate that this worked well within the commune, but also for trading with other tribes. For example, women would go to the other tribe and, in exchange for intimacies with their men, would receive beads and tobacco to bring back to their husband.

Not sure I like that idea, but it is probably true as this has been found in monkey colonies. From my blog in 2009:

Monkeys wise up and get the hang of money

Keith Chen, an associate professor of economics at Yale, asked himself: what would happen if I could teach a bunch of monkeys to use money?

His monkey of choice was the capuchin which, in the tradition of monkey labs everywhere, were given names. Felix was Chen’s favourite.

The monkeys lived together in a large, open cage with a testing chamber at the end. For currency, Chen settled on a 1-inch silver disc with a hole in the middle.

The first step was to teach the monkeys that the coins had value.

If you give a capuchin a coin, he will sniff it and, after determining he can’t eat it will toss it aside. So Chen and his colleagues gave the monkey a coin and then showed a treat. Whenever the monkey gave the coin back to the researcher, it got the treat.

It took many months, but the monkeys eventually learnt that the coins could buy the treats.

Chen now introduced price shocks to the monkeys’ economy. Let’s say Felix’s favourite food was Jell-O, and he was accustomed to getting three cubes of it for one coin. How would he respond if one coin suddenly bought just two cubes?

To Chen’s surprise, Felix and the others responded rationally. When the price of a given food rose, the monkeys bought less of it, and when the price fell, they bought more. The most basic law of economics — that the demand curve slopes downward — held for monkeys as well as humans.

Other experiments confirmed the parallels between human beings and these monkeys. And then, as if Chen needed any further evidence, the strangest thing happened in the lab.

Felix scurried into the testing chamber, gathered up all the coins that had been placed there, flung them back into the communal cage and dashed after them — a bank heist followed by a jailbreak.

There was chaos in the big cage, with 12 coins on the floor and seven monkeys going after them. When Chen and the other researchers went inside to get the coins, the monkeys wouldn’t give them up. After all, they had learnt that the coins had value. So the humans resorted to bribing the capuchins with treats. This taught the monkeys another valuable lesson: crime pays.

Out of the corner of his eye, Chen saw something else that was remarkable. One monkey, rather than handing his coin over to the humans for a grape or a slice of apple, gave it to a female monkey. Chen had done earlier research in which monkeys were found to be altruistic. Had he just witnessed an unprompted act of monkey altruism?

Then — bam! — the two capuchins were having sex. As soon as the sex was over, the female brought the coin over to Chen to purchase some grapes.

What he had seen wasn’t altruism but the first instance of monkey prostitution in the recorded history of science.

In conclusion, the reason barter is being debated today is we are in a recessionary crisis. Expect a lot more of it, and maybe more of the above too.

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Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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