Lost in Transaction: Rediscovering Money from the Ground Up

When I stumbled upon Bitcoin in 2013, I was fascinated with its multifaceted nature. It sits at the intersection of various topics like cryptography, economics, mathematics, computer science, programming, game theory, politics, and investment. My intellectual curiosity kept ballooning as I learned about each subject.

I got more questions as I followed my curiosity and learned more about them. One of the big questions was, "What is money?" I can't tell you what money is in this short post, but I am going to tell you how it was born.

As the conventional theory suggests, I thought money was born as a medium of exchange. However, I learned that it was born as credit, originating from documenting credits rather than swapping goods.

The Myth of Barter#

The myth that money emerged from a barter economy is widespread. Although this narrative may seem intuitive and straightforward, it is inaccurate. You've likely heard the story with minor variations.

It goes like this: In the market, people used to exchange goods through barter. The problem with barter was that finding someone willing to trade what you needed for what you had was difficult. For example, if you had an extra fish and wanted to exchange it for a loaf of bread, you had to meet two conditions: 1) the other person had to want a fish, and 2) the other person had to have a loaf of bread, both at the same time and place. Economists refer to this as the "double coincidence of wants." At a certain point, someone had a brilliant idea to use a commodity such as gold as a medium of exchange. They can exchange goods using that commodity because it is universally valuable. This commodity, serving as a medium of exchange, has made trading more efficient at both personal and societal levels.

It is said that this story was first introduced by Aristotle in Politics. Adam Smith also discusses this story in Wealth of Nations. They are not the same story, but they both pointed out the birth of money as the economy transitioned from a barter economy. Although this conventional theory is merely anecdotal, it has since been widely accepted by other economists and the public.

Just because something is widely accepted doesn't mean it is right. A group of economists and anthropologists, such as Felix Martin and David Graeber, argue that there is no evidence of a barter economy and the emergence of money from it.

According to Cambridge anthropologist Caroline Humphrey, "No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money."

Then how was money born? In his intriguingly titled book Money: The Unauthorized Biography, Felix Martin shows us that the origin of money can be traced back to the Pacific island of Yap.

The Coinage on the Pacific Island of Yap#

In 1903, the young and eccentric American adventurer William Henry Furness III embarked on a journey to the Pacific island of Yap, one of the most remote and inaccessible inhabited places on Earth. Furness, a Harvard graduate and former doctor, was driven by a relentless curiosity and a thirst for the unknown. His expedition to Yap was not just a quest for adventure but a voyage that would unexpectedly shed light on the origins of money.

During his two-month stay on the island, he learned about the remarkably unusual coinage. It was a large, solid, thick stone wheel with a hole in the center, ranging in diameter from a foot to twelve feet.

IMG_3529 by stevenson_john is licensed under CC BY-SA 2.0

This coin, called fei, was difficult to transport. Furness observed that transportation of fei was rare, even though there were numerous transactions on this island. If a deal involved so much money that it required transporting a heavy fei, a new owner was content to accept the bare acknowledgment of ownership and, without so much as a mark to indicate the exchange, agreed that a transfer of ownership took place. And the coin remained in the former owner’s house. Most transactions took place without the use of coinage.

This report contradicts the conventional fairy tale of money. Firstly, although Yap had a simple economy where only a few products existed - fish, coconuts, pigs, and sea cucumbers - it was not based on barter. If even this simple economy was not based on barter, what kind of economy could be? Secondly, most of the time, fei was not exchanged; it was just a placeholder for a transaction record.

In fact, fei could disappear, yet the value still remained. According to Furness' guide, one of their fei was shipwrecked during a storm while in transit from another island near the Yap many years before. The parties involved talked about what happened, and everyone agreed that the owner still owned the stone—even if it was at the bottom of the ocean!

Money Was Born as Credit#

If fei was not used as a medium of exchange, what role did it play? Fei served as a token to record credit and implement the clearing process.

As Martin discusses in his book, the inhabitants of Yap were “accumulating credits and debts in the course of trading fish, coconut, pigs and sea cucumber.” These trades would offset against one another, and any outstanding balances would be settled by fei. For example, let’s say one pig is worth 10 coconuts. If I sell one pig for eight coconuts, eight will be offset against 80% of the pig’s value, and I should be entitled to get two more coconuts. So, I would get two coconuts worth of fei as a record of my credit, a record of the outstanding credit I can keep as the seller.

The conventional theory tells us humans began with a barter economy, invented money as a medium of exchange, and then developed a credit system. But the monetary evolution happened the other way around; money was born as credit first and then started functioning as a medium of exchange.

It's intuitive to think that money was born as a medium of exchange because we tend to believe that money was born as an object with intrinsic value, such as precious metals. In reality, money was born as just an idea of credit.

Having researched money, now I believe the essence of money is just a shared memory. That's not as shocking when we think about how money was born. But that's for another time.