On the Origin of Money
Abstract: The paper develops a theory of the origin of money that is consistent with the historical and anthropological fact that money usually replaced fairly sophisticated credit arrangements and did seldom grew out of barter, contrary to the usual explanation in economics (e.g. Smith, 1776; Menger, 1892). Our theory compares money as an anonymous payment instrument with credit as a record keeping technology that records transactions and names of debtors. We show that the introduction of money can be explained by the fact that governments may be able to better tax agents if trade is conducted through money instead of credit even if credit trade is more efficient than the monetary trade. In this economy money circulate because by implementing a higher taxation rate on people holding no cash, the ruler is effectively incentivizing traders to constantly trade in order to acquire cash and hence reduce the chance to pay the higher tax rate associated with having no cash. The net effect of the introduction of money in this economy in terms of welfare depends on whether the credit system is both encompassing and cheap. We present evidence that this theory can go a long way in explaining why during the antiquity money, was introduced when a ruler was in need for more taxes, for example because of war, and that its introduction was not necessarily associated with an increase in prosperity.
