The Trade Theory of Money: External Exchange and the Origins of Money

Abstract

For over a century, scholars have debated the merits of two competing theories for the origins of money. The commodity theory of money has traditionally held that money developed as a medium of exchange in order to increase the economic efficiency of barter economies. Alternatively, chartalist explanations have given causal primacy to the role of state taxation in standardizing money as a unit of account. Recently, skepticism over the existence of barter economies in either contemporary societies or ancient history has led to the increased popularity of the state-centric chartalist approach. Evidence from many pre-state societies around the world, however, shows that commodity money was often used in long-distance trade networks where systems of debt and reciprocity would have been impractical. This paper draws on evidence from two such exchange systems, the “interior world” of pre-Columbian western North America and the Bronze Age of western Europe, to argue that money can come about to facilitate exchange between strangers and across borders. As such, I suggest that the commodity theory of money is more accurately explained by the importance of exchange in external rather than internal economic systems. I propose that a trade theory of money can explain the origins of money in pre-state societies without relying on the “myth of barter”.