After four years of researching the design of money systems, I’ve decided to curate and encapsulate learnings that I think are particularly interesting, important, and useful for understanding how our world works, today. I’m sharing them as part of a lunch-and-learn series for family and friends. I’ve just decided to open them up to readers of this blog. You can sign up here for the Money Insights Lunch and Learns.
This first video gives a brief overview of the history of the bank-money system currently used by nations around the world. My next video will cover the details of how today’s system works, including the law, accounting, and limits of it.
I want to acknowledge, up front, that any brief overview inevitably leaves out a lot of detail and nuance. If you think I’ve missed something critical, please let me know in the comments.
I welcome your thoughts.
Jump to the…
Video Recording
Annotated Bibliography
These are organized in the order of their approachability and the sequence of information in the video’s narrative.
Ryan-Collins, Josh, Tony Greenham, Richard Werner, and Andrew Jackson. 2012. Where Does Money Come From? London: New Economics Foundation.
This book provides an excellent and accessible, yet scholarly, introduction to today’s national money systems.
Graeber, David. 2014. Debt: The First 5,000 Years. Updated and expanded edition. Brooklyn, NY: Melville House.
Anthropologist David Graeber is an entertaining storyteller. It impressed upon the reader that humans have invented an incredibly wide array of money systems, some better than others.
Zarlenga, Stephen A. 2002. The Lost Science of Money: The Mythology of Money, the Story of Power. Valatie, NY: American Monetary Institute.
Another excellent and approachable chronological history.
Di Muzio, Tim, and Richard Robbins. 2017. An Anthropology of Money: A Critical Introduction. London: Routledge.
A good mix of history, theory, and critique.
Ingham, Geoffrey. 2004. The Nature of Money. Cambridge: Polity Press.
This is a much more academic work that covers a lot of the same content as the above works but with much more theoretical analysis.
Desan, Christine. 2014. Making Money: Coin, Currency, and the Coming of Capitalism. Oxford: Oxford University Press.
A legal history of the formation of the first national money system based on private banking in the UK.
Feinig, Jakob. 2022. Moral Economies of Money: Politics and the Monetary Constitution of Society. Stanford, CA: Stanford University Press.
A fascinating recounting of the democratic monetary experimentation in the American colonies and early United States.
McLeay, Michael, Amar Radia, and Ryland Thomas. 2014. “Money Creation in the Modern Economy.” Bank of England Quarterly Bulletin 54 (1): 14–27.
The Bank of England’s seminal 2014 bulletin describes in clear language that banks do not lend out depositors’s savings because they newly create 100% of the money they lend via accounting.
Transcript & Slides
Great. So, this video is going to provide a brief history of today’s national money systems.
And just to give you a taste of what’s ahead, we’re going to be talking about the story that most of us have been told about where money comes from. And the fact that it’s “not an accurate description of reality,” and that’s the Bank of England saying that money is a system, it’s not a thing. And that money systems are designed for the purpose of controlling and directing a society’s labor and resources.
A lot of times we don’t think of money as something that’s designed because we think of it as a thing, because we think that it just evolved from barter. And the reason it’s important to know that they are designed systems is because how they’re designed profoundly impacts the world, especially average people’s lives. And we can’t have a discussion about our current monetary system design if we don’t even know how it works. And in order to understand how it works, we kind of need to know something about where it came from.
And just so you know, this presentation is built on a bunch of scholarly research and you can check that out in the notes.
So, when I’m talking about the money system that we use today, I’m talking about cash, and coins and banks, and credit cards and central banks, and so on.
And in particular, what I’m talking about is a particular type of money system that I think we could call the “European Colonizer” money system, because it’s a particular combination of those three things that evolved in or really was codified in Western Europe and spread around the world through colonization.
If you look at basically any part of the map outside of, or even, in parts of Western Europe and say, “When did this particular system of money arrive on that piece of the earth?” The answer is going to be, “It arrived with the British. …with the Dutch. …with the French. …with the Portuguese. …with the Spanish.” It’s a system that was imposed in many cases, has been thrown off at times, but has had remarkable sticking power for various geopolitical and military reasons.
Along the way that European colonizer monetary system that is what our systems are still built on today, marginalized many, many indigenous ways of organizing society by both non-monetary means and by other monetary systems.
So, there are other monetary systems than ones that I’m going to talk about today that have also existed but are not the modern systems that most of us are required to use today as part of our national money systems.
So, the story that many of us have heard, and probably you’ve heard, is that money evolved out of barter, and then barter was inefficient, so then people started using a metal, like bronze, copper, gold, or silver. And then, those got codified into metal coins that had the same weight and purity and so on. But those were heavy, and so then, paper money was invented, and then paper money was less convenient than plastic credit cards. And now, we have apps, and tomorrow, we’re going to have cryptocurrency because this is just the inevitable forward movement of money’s invention and innovation from inefficient to ever more efficient and lightweight, and so on.
That is a story that you have probably heard. It’s in many of our textbooks. In fact, it’s constantly repeated on the media. And it’s a really powerful story because what it suggests is that, one, money is not something that’s designed. It’s something that’s a thing. It’s a thing that just was found to be useful. And this thing has continued to be found to be useful in different formats over time. And that there’s just this inevitable progress that, ultimately, is going to lead us to cryptocurrency according to the people who made this chart.
And so, there’s this way in which we shouldn’t question or we can’t question how money works or where money comes from, or there’s this feeling that it would be ridiculous to question it because it’s just this one way of evolutionary progress from better to better.
And the problem is that this story is just made up. Adam Smith invented it in his “The Wealth of Nations” book in 1776, basically because it just seemed logical to him that this must be how money came into existence.
But the problem is that anthropologists, and sociologists, and archaeologists have tons of data actually about where money systems first appeared in human civilizations, and there is virtually no evidence. Actually, there is no evidence for Adam Smith’s story.
In fact, what we know from the vast archaeological and anthropological evidence is that for most of human history, humans lived in small societies that didn’t need anything like a money system because they could just say, “Hey, I’ll get you today with this thing that you need. And when I need something in the future, you get me back.” And that’s how most exchange happened, and still happens today, in many small, well-knit societies.
And that has been the vast majority of the exchange system, we believe, throughout all of human history. Even as we got into settlement and larger agricultural civilizations, 10,000 years ago, still no sign of anything like what we would call money today.
It wasn’t until the invention of city-states that we found these hierarchical, highly structured societies where labor wasn’t cooperatively moved around… “We’re going to go tend this person’s field tomorrow, and then go tend somebody else’s field the next day.” But was instead organized in these very sophisticated trades, with elites and farmers, and so on. And it’s at that moment that we discover the invention of money in human history.
And archaeologists, and anthropologists, and others are pretty clear that Sumeria, in about 3000 BC, is the first known money system that’s antecedent to what we have today. There are other systems like shell monies, and so on. Most of them appear to have been more ceremonial and ritual in their transactions than commodity exchange until much more recent eras. (Though this is disputed by some scholars who point to evidence that some of these may have been used in long-distance trade, but not in everyday exchange. For example, see Shell Money by Mikael Fauvelle.)
So, this system in Sumeria, was a debt-based money system, where basically the palace, the king said, “Everybody’s in debt to me each year. And I have accounting records in my temple where we are keeping track of your debts. And over the course of the year, you must pay them off to me by providing me goods and services. And I will pay for goods and services by issuing, essentially, tax credits to people who do my bidding and build my temples.” And so, this system of using recorded debts and credits as both a way of making payment and receiving payment was invented here.
And it was good in the sense that it allowed very complex, highly specialized skills and crafts and structures, and things to be built. It could provide for the common defense, and so on, which was a major problem for agrarian societies that were sedentary. It was easy to swoop in and attack them at harvest time, for example.
But it was also bad in the sense that average people began every year in debt. And if they couldn’t pay the debt, they would lose their land, they would have family members taken into slavery. It was also a brutal system – the enforcement of this monetary system, the way this debt-based system operated, and people had to participate in it. They had to put serious value on these tax credits because not having them had severe consequences.
Importantly, this system of money had no physical units. It wasn’t a thing. These units only existed as accounting records in the temple. And so, this is an actual example of a clay accounting tablet. And it was kind of like a bank account – tracking debits and credits – just like your bank account does. And believe it or not, this is actually the first known evidence of human writing. There’s an understanding, or a belief, that writing actually evolved out of the need to keep track of these credits.
And this system worked really well. The Egyptians developed a very similar system at around the same time, probably influencing each other, and used it for the next 3,000 years as a way of organizing the resources and labor of their society, using this ledger accounting system.
So, what about this idea of money as a physical unit that can be carried around versus something that’s just being accounted for?
Well, we know also from the archaeological record where that came into existence. And the earliest known record of that is in western Turkey and Lydia. And right around the same time in Greece – the very first coined money, and you can see the silver coins there. It’s actually electrum.
And what you should understand about this is that this was a major innovation in monetary history. Basically, what it allowed is folks like Alexander, the so-called great, to maraud with his army, paying them in these coins. And then demanding that the places and the people that he’s occupying their lands, provide food and other services to his soldiers in exchange for these coins because he’s going to come around and collect them as taxes.
And so, because they have to have these coins or else their heads will be cut off, they will supply his army whatever they need in order to get these coins from the soldiers. And thus, he doesn’t have to have any supply chains. He doesn’t have to have any complex accounting system. He doesn’t have to have any storehouses of his own in the way the palace and the temple ledger money system worked.
So, this is great for marauding and pillaging, and for armies. But both of these systems, what’s important to note about them, and this is something that economists, archeologists, anthropologists, and others have discussed as the “state theory of money,” which is this observation that money – these money systems – whether it’s the coin one or the ledger system, the credit system, came into existence in the hands of states.
It is states that are looking to control the labor and resources of their people or their regions that invent these systems and generally impose them upon people. There are surely and there have been, today even, attempts to make cooperative money systems for exchanging labor and resources. And it’s definitely possible.
But we also know in the historical record that the types of money systems that we have that are the antecedents of today arrived alongside states and law. In particular, laws enforcing the payments of debts, mostly tax debts.
So, this particular way of coinage was pretty problematic. Actually this design, it did a lot of damage. Alexander’s army, for example, needed a half a ton of silver per day to pay his soldiers. And what that meant, and for many governments that used a gold, or silver, or bi-metal standard for their money and coinage ever after is that if they wanted their military to grow, or they wanted their economy to grow, it wouldn’t grow if they didn’t find more metal in order to have more money to be able to transact goods in a larger volume.
And so, this meant that they were always seeking new silver or gold mines or new silver and gold to pillage, or they could borrow and tax. So basically, those were their four options. They can get lucky and strike it rich or they can go steal from a mine or from a community that has gold or silver, or they can borrow it or they can tax it.
And of course, what this means is that this becomes a scarce commodity. It becomes very valuable to have these hoards and to hide them away, and to lend them out, and so on. And so basically, anybody that wasn’t on the successful end of the hoarding would end up having to borrow and would be deep in debt. And this happened to kings and queens, not just regular people.
So, for example, the Spanish king and queen were profoundly in debt when Christopher Columbus came around and said, “Hey, I want to try and sail to the West Indies and come back with gold and spices,” and so on. And the queen literally did pawn her jewelry to pay for Christopher Columbus’ trip across the ocean, basically, as a Hail Mary pass to try and find some gold with which to have money. (CORRECTION: Queen Isabella pawned her jewelry for other military endeavours, not for Christopher Columbus’ voyage. Unfortunately, I unknowingly perpetuated a popular myth. What is true is that the Crown was looking for ways to fill its depleted metallic money supply.)
Now, that hunt for gold and silver was an attempt to solve a money design problem, which is that these nations had adopted a way of creating money that meant that the money supply could not grow and the economy could not grow without finding more stardust (metal atoms are only created in the tremendous pressure of cosmic collisions) in the places where it had landed on our earth and collected. So, Christopher Columbus was very explicitly searching for gold in order to have money when he was going to the West Indies. And he wrote about it 60 times in his journal, about how he was searching for gold.
So, this particular money system and its design ended up being incredibly problematic – not just for the people of the West Indies, but really, all over the world, because a large portion of Western European exploration was driven by this desperation to solve a money-system design problem in Western Europe.
And not just to solve the problem, but also to enhance the riches. If you can just find gold in the ground or silver in the ground, then the money system grows, and you grow richer. So, it wasn’t just that there was a deficit, there was a desire to hit the jackpot, to get lucky in a world where prestige as well as food and resources were kept behind a cash box.
And it was also a problem for any economy in the world that didn’t have gold or silver. So, the American colonies were actually pretty interesting because they had no gold mines until they hit California and Alaska. There was no gold or silver there and they had lots of land that they’d just stolen. They had lots of timber and lots of agricultural products, and so on, but they had no money with which to transact it. And their economies were struggling – there was a constant problem of not having money with which to transact all these goods that they were producing.
And so, they actually did things like co-opt indigenous means of exchange, such as the wampum of the Pequot in Rhode Island. And these were belts, and beautifully woven shell bead pelts that were not intended to be money. They were not being used as money, but they were part of trade relations and trade agreements that the Pequot had with beaver trappers and people, all in the region, in the watershed.
And the Massachusetts colonists realized that they could trade for these in trade relationships with the Pequot, and then go trade them with others in the watershed to get resources. And so, believe it or not, they enslaved the Pequot and turned them into a mint by forcing them to just sit there full-time producing these belts, these wampum belts. So, they figured out, they understood that they could create money out of anything as long as there was some type of ability to create value or to demand value.
And that and other experiences, ultimately, led them to realize that they could create money out of anything. And ultimately, the American colonists, in 1690, in Massachusetts, hit upon the idea that they could create money out of paper.
Now, they were also inspired by some “card money” that had been created in the north, in Canada, which also was having a money problem. And the basic idea was a little bit like the tax credit system of the Sumerians, but in the reverse. Well, not the reverse, but very, very similar. It’s a ledger system. We’re going to open up the accounting books of our government, we’re going to enter into it that people owe us taxes, we’re going to issue tax credits as paper to pay for things. And then, people will be able to bring those back to cancel out their tax debts.
The difference was that they had now a physical medium with which people could go and do those transactions. And they weren’t intimately involved in each of those transactions. Whereas, in the temple ledger tax-credit system of Sumeria, if you wanted to go transact, if money units needed to be transacted between departments of the state, it was all basically on one big ledger. And the authorities knew every transaction that was made anywhere.
So, this was innovative in that it had some of the benefits of the coined money in terms of anonymity, in terms of being able to travel with it, but it was operating on the same tax-credit system.
Right around the same time, in the UK, there was a big challenge because the government was massively in debt. They were fighting all these wars with France, and so on, and they had to find money. And gold and silver were in short supply.
Basically, some elites got together in the parliament and outside of parliament and said, “You know, we have this ability where we could create paper money, we could create notes.” And they were actually inspired by a similar tax-credit system that was actually based on wood tally sticks, which I have a picture of, but I didn’t get it in here.
And they basically said, “We don’t want the government to print the money. We want them to borrow it. And basically, what we’ll be doing as the lenders to the government is we’ll be allowing the government to use its tax credits from the future, its tax revenues from the future, today, as silver and gold payments.” (NOTE: Here are clearer explanations of the accounting by which this system works and the politics behind it.)
“So, we’re going to put up a little bit of money in as silver and gold. The government can borrow from us by committing to give us its future tax revenues, and we’ll make payments on its behalf. But we’re going to make those payments using our own balance sheet, using our own ledger, and using paper notes, very similar to in the Americas. And we’re going to issue lots and lots of these paper notes. We’re going to basically issue as many paper notes as we think the government can be good for.”
“And in addition to that, we are going to make loans to anybody else that we think can be credit-worthy like the government. Because here’s the deal is that the government’s guarantee that they’re going to accept our notes as payment for taxes, and that they’re going to make good on our notes in the future with gold and silver payments, means that our money, our paper notes are money. They’re as good as gold.”
“And so, anybody who says that they’re going to bring us back gold in the future, and signs a loan contract with us saying that they’re going to do that, we can issue notes for them too. Those notes are going to be as good as gold too.” But the difference is, banks and others had done this type of thing before, but now these paper notes were officially recognized by the government as the money of the land, and were the money that the government was using for tax purposes.
So, what we’ve arrived at is a new age of ledger money. It’s similar to the one that the colonies were using, in that, there’s a ledger that all the record keeping is in. And then, there are paper notes that represent entries on that ledger, which can be circulated. But now, that ledger is the ledger of a bank, it’s not the ledger of the state.
And in fact, the state is essentially in tax-debt to the bank and has to repay the bank. And this debt originates at the time the state says, “I need to borrow money,” and as interest accrues. So, these debts (of the government) are building up on the bank’s balance sheet (assets for the bank), and these are effectively kind of a private tax credit that must be repaid.
So, we’ve arrived at this incredible system by which we have the ledger, a similar type of ledger tax-credit system as the Sumerians. And we have a paper representation of those ledger entries, similar-ish to the circulating media of the metal standard, but it’s privately operated. And even the state is indebted to this system.
And this is actually the system that we still have to this day. There have been little modifications along the way. But if you go and you read from the Bank of England… which is the proto bank in this entire system, it’s now the central bank of the United Kingdom… they published a paper in 2014, called “Money Creation in the Modern Economy.” It’s the one that says literally what you’ve been taught about banks taking in deposits and lending out deposits is incorrect. The truth is that every time a bank makes a loan, they create new money, simply through accounting entries.
And also, by the way, cash only comes into existence to serve as a physical representation for those accounting entries, when people want to have a physical representation of their accounting entries.
The Federal Reserve Bank will tell you the same thing in their “Modern Money Mechanics” publication. “Loans are made by crediting the borrower’s account, i.e. by creating additional deposit money. Of course, they [banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created.”
And finally, the European Central Bank. Let’s just cover the continents here. “Commercial banks can also create bank deposits. This happens every time they issue a new loan.”
So, to this day, money is created by banks when making loans to the government, businesses, and the public. Your bank account, when you look at it, it’s kind of like a modern clay tablet. It tracks credits and debts. But in this case, instead of them being tracked to the state, as in Sumeria, they are tracked to a bank.
And there’s an actual banking legal historian named Morgan Ricks, who likes to say that, “You can think of our modern monetary system as one giant spreadsheet with just a bunch of accounts with entries in them, and the entries are added to and moved around. And then you can say, ‘Okay, well, let me just split that spreadsheet up across a bunch of banks.’ And that’s basically our modern money system.” So, that’s at a high-level how we got here and how it works today.
But obviously, this raises a lot of questions of how exactly does this work? How does the accounting work? How does the law work? Like, why do governments allow this? And why would they give away their privilege to create money? How does it work in law today? And obviously, there must be some limits on how this works. So, what are those?
And so, that is going to be the topic of our next video and our next session.
