Sāmatvārtha: From Gift Economy to Fiat Currency, the Evolution of Money and the Case for Monetary Localism

This article discusses the evolution of money from anthropological obligations to fiat currency, illustrating how societal relationships, the need for standardized units, and state control have shaped money into a tool for denominating, discharging debt, and managing economic obligations, and suggesting a shift towards monetary localism and diverse currencies for better economic resilience and equity.

From Anthropological Obligations to Fiat Money Supply

The anthropological view on money, according to David Graeber, suggests that societies did not begin with barter systems, but rather, with gift exchange systems; that social relationships and obligations, rather than economic self-interest, have been the driving force behind the development of money. Per him, barter was a tool being used when it is a stranger on the other side; within the tribe though, it would be a simple gifting alongside an unsaid social obligation to give something back in future. A softer kind of “I Owe You” (IOU), an early version of social debt, obligation and trade.

Ethan Buchman in his blog The Properties of Money - Origin Account collates these views to suggest that in the paleolithic/anthropological money, accounting follows the logic of kinship and religion, reproductive power and justice. Units of Account are taken from nature in the form of stable quantities of valuable material private possessions that represent wealth. Eventually, a certain count of grain was equated with a weight of silver, giving rise to the first standardized Unit of Account - the shekel. But there also was a parallel evolution into neolithic/political money, where accounting follows the logic of redistributive states, of the accumulation and distribution primarily of grain.

Over time, people started using certain standards - of weights and measures - on commodities such as salt, seashells, beads, and eventually precious metals as a Medium of Exchange. This convenience of using commodities as money also solved the said ‘double coincidence of wants’ of barter. Money, thus, started having a nominal Store of Value as well beyond the intrinsic value of the underlying commodities - as being determined by their rarity, durability, portability, divisibility and desirability of it - making them a better tool for ever-increasing trade. Ethan also points out how with the introduction of coinage in the 7th century BC, the

Medium of Exchange would begin an evolutionary trajectory towards ever more accessible and prominent forms, formalizing the market pattern and further empowering commerce as an anonymous force independent of the State.

Eventually, after a flourishing era of European banking, their private money started to get consolidated into sovereign currencies. These sovereign currencies were also originally backed by the underlying commodity of gold; but eventually, the reserve gold backing was also dropped to envision fiat currencies, probably not for the greatest of reasons. Fiat currency is money that is not backed by a physical commodity. Instead, the value of fiat is derived from the faith in the ‘sovereign’ government. It is just representative money which is essentially a debt instrument - an IOU (I Owe You) - by the sovereign. Eventually, on behalf of the sovereign state, the central banks took over the Store of Value property of the fiat.

The ever-increasing trade required ever-increasing velocity of money. This was either facilitated by moving to a more convenient form of medium of exchange - thus metal coins were majorly replaced by paper notes, which then got shadowed under the mammoth spectrum of digital money; or the velocity was increased in faux by just increasing the ‘sovereign’ money supply by the central banks - the modern monetary theory. End of the day, with each abstraction, someone’s money became another one’s liability. Thus trust versus verify norms have been an important factor in each evolution as well.

Today, there are a plethora of financial products that make up a country’s money stock or money supply. Let’s take a closer look at the various measures of money supply:

• M0 is the narrowest definition of money supply, including only hard currency in circulation. In other words, the money you can hold in your hand (or in CBDC wallets maybe soon). The liability here is of the central bank directly.

• MB includes M0 plus the hard currency held in bank reserves. This isn’t technically in circulation, but it’s still an important part of the money supply. Bank Reserves are like cash for Banks.

• M1 is a more common definition of money supply and includes M0 plus checking accounts - current accounts and demand deposits - and other checkable deposits like the outdated traveler check. These deposits aren’t technically in circulation since they’re held in banks, but they’re still considered part of the money supply because the owner can retrieve them from the bank upon demand.

• M2 includes all of M1, plus savings deposits and time deposits like CDs (Certificates of deposit, or fixed deposits in India). These deposits are slightly less liquid than checking accounts but can still be converted to cash quickly.

• M3 is the broadest measure of the money supply and includes larger deposits, institutional money market funds, and other larger liquid assets.

Central banks are responsible for controlling the money supply by adjusting various interest rates and ratio requirements, which in turn affects the rates charged by private banks - one way or another. This management of the money supply through interest rates is broadly known as monetary policy.

The history of money is still ongoing. The evolution of payment rails has been driven by changes in the money supply of the time. From shekels to coins, cash and now various electronic payment systems, payment rails are constantly evolving to keep up with changing technology and consumer preferences. Alongside that evolution also comes our cyclical understanding of “Trust, but Verify”. The monetary system will continue to evolve as long as humans aspire for a better-fit unit of account, medium of exchange, and store of value.

The Collaborative Finance (CoFi) View on Monetary Localism

This is where I would like to share how Informal System’s Collaborative Finance effort is thinking about Money. Money is where the payments are! To use some analogy from electricity, “Money is for payments - i.e. to Denominate and Discharge Debt” - where:

• Unit of account (UoA) helps to denominate debt

• Medium of exchange (MoE) helps to discharge debt, here and now

• Store of value (SoV) helps to discharge debt, elsewhere and later

These properties also bring in certain trade-offs or tension:

• UoA/MoE: liquidity - the tension between elasticity and discipline

• MoE/SoV: legitimacy - the tension between “bad” and “good” money

• SoV/UoA: solvency - the tension between deflation and inflation

Ultimately, what emerges out of these is a payment system - or a means of settling debt - which is considered the fourth property of money by some. A transaction is two transfers, and between them - however small - lies a monetary debt - an obligation to pay something worth a monetary amount. Thus, a payment system is a set of obligations and a liquidity source which can help discharge - or settle - those obligations.

Now the said liquidity source in a payment system can also be a local money abstractions on a currency: from custodial money, mutual credit, credit clearing, clearing houses, etc. The way to settle - beyond simply transfer of funds - can thus also be clearing set-offs, overdrafts or novation. Using these primitives, the CoFi team is attempting an interesting approach to monetary localism, which can clear obligations even across different currencies while saving liquidity by finding potential loops of obligations in the payment system.

The reason to discuss this is not to understand CoFi deeply, but to showcase that thinking in fundamental simple heuristics and first principles still has alpha. Money is just an IOU, and monetary policy is about managing the meta of the monetary obligations that the state has towards us. Similarly, fiscal policy can also be thought of as social contract obligations the state has towards us.

To quote from The Properties of Money - Intro • Easy There Entropy:

The institution of money specializes in settlements of a “monetary variety”, effectively, payments to settle debts. But it could also be said that the kind of money we use is itself a settlement between the various social strata on how value and wealth will flow through society, on how we replicate patterns of inequality over time. Even the (hegemonic) dollar system has the properties of money effectively unbundled, where the Unit of Account is the USD, the Medium of Exchange is the eurodollar, and the Store of Value consists of US Treasury Securities. With these thoughts in mind, maybe we should challenge the premise of having a single currency for a nation!

The economy is not just about efficiency but also about resiliency. Post-covid era is anyway gravitating towards industrial policy again, then why not attempt applying a similar lens to money as well? Money, at the end of the day, is just a tool for collaboration. In a world where the return on capital is highly favored over the return on labor, as Piketty pointed out, there are only two ways to tackle inequality:

• Either bring rate of return parity (wage inflation equating asset price returns), or

• Allow labor to translate to capital ownership as early as possible.

We thus need to better the velocity of ‘monies’, and in the right loops, for sponsoring more opportunities that turn our demographic labor into federated wealth. Maybe one such ‘money’ can also be explicitly about the ecology - to internalize the externalities and solve for collective action problems pertaining to urbanism, pollution and resource exploitation. Maybe another such ‘money’ can be about welfare, simply in the abstracted realm of universal tax credits. We already have many forms of money, maybe we can do with some more currencies as well..?

In the next part, we will go over the simplest approach towards taxation, welfare and urbanism. We will then figure out if is it possible to devise a smooth transition to such policies by leveraging CBDCs.

Authored by Moberation. Published by Brhat.