Money, a pillar of modern economies, is often overlooked by mainstream economics. The first part of this critical introduction, a prolegomena, lays out the myths, fundamentals, and history of money. The second part goes further into detail about the core concepts required to understand money.
"Philosophy is a battle against the bewitchment of our intelligence by means of language." - Ludwig Wittgenstein, Philosophical Investigations §109
Money is the cornerstone of our modern economies. Yet the language and concepts we use when talking about money bewitch our intelligence begetting myths, falsehoods and misunderstandings. Without clear and rigorous thinking about money, we cannot shape money so that it works for a democratic polity. Francis Bacon observed that "knowledge is power", and we cannot have power over money without understanding how it works.
One common mistake we make is thinking banks lend out existing deposit money when it issues loans to borrowers. Another is that the state creates most, if not all, of the money supply. Others confuse statistical measures of money, e.g. M0 and M4, with the concept of money itself. Some think money must be backed by a commodity, e.g. gold or silver, so that it can have an inherent worth. Finally, many believe the state requires revenue so that it can spend, i.e. government is funded ex ante.
If we want a strong democratic polity, we must understand money to grasp both its possibilities and limitations in addressing today's challenges.
What is the most potent misconception we hold about money? That it is a tangible object we should be able to touch and feel. Even in abstract forms, we see money as an object; without commodity backing, it can feel artificial. It's like the rules are all made up and we become deeply suspicious of how finance operates in general.
We trust what feels closer and more tangible to us, while objects that are more substantial or luxurious are deemed more valuable. Apple iPhones made with stainless steel and glass feel heavier and more luxurious than those made from aluminium which feels more luxurious and weightier than iPhones made from plastic. Apple deliberately exploits this psychological bias, using materials that feel substantial to signal value and quality.
We trust what is concrete, over what is abstract. When money is abstract, it feels further away from us - less secure and less real. We even find it easier spending money when it is more abstract, than when we have cash on us. We feel a greater sense of ownership, as that money is ours, when it is in a physical form.
Historically, this bias toward tangibility shaped early money. Shells were used by traders because they were rare and beautiful. The Sumerians used barley and silver coining the term shekel—from the Akkadian 𒂅 šiqlu, meaning “weight.” This seems to support the idea that money began as a commodity.
It explains why many still have nostalgia over the gold standard, when money felt more concrete. Even if the coins and banknotes we use today are concrete, what underpins the value of them is anything but concrete. Value is determined by economic activity, with the institutional authority of the state also adding legitimacy to money's value. The state even dictates what money should be denominated in, i.e. the UK state decrees that pound sterling is legal tender for paying off obligations. But in the olden days, the value of gold ensured that money had an intrinsic value.
But money is not an object.
Money is a social technology - a tool we developed to solve civilisational problems that would otherwise remain intractable, as argued by anthropologist Mikael Fauvelle (2024:10).
Social cohesion, order, and trade require relationships—and, critically, trust. In large societies, individuals must keep track of obligations, roles, and promises—even between people who are not kin, who may rarely interact, or whose dealings stretch over years. Without such organisation, advanced civilisations—like those of ancient Mesopotamia—would be impossible.
This all results from what economists call the division of labour - the specialisation of labour. Initially men may be both gatherers of food and warrior. However, an elderly person displaying much wisdom isn't useful hunting boars or fighting invaders or invading others. As societies become more complex, gathering food and fighting becomes a specialised role. Warriors end up choosing between infantry and cavalry. Food gatherers start specialising in gathering types of food, whether barley or raw meat.
As we specialise, we must delegate other aspects critical to our functioning as both individuals and society to others. The warrior needs food so must rely on others to produce it. Markets are created so these goods can be sold to the warrior. Over time, the power of markets and commerce impacting how societies are organised creating what Adam Smith called the 'commercial society', otherwise called the market society.
Ironically, Smith misidentified the origin of money, proposing it arose from barter—a theory contradicted by the lack of evidence for barter societies. For instance, you may want to sell a cow for an axe so you can harvest wheat. But if no one wants the cow, then you can't get the axe. Money is deemed a universal commodity which everyone would like. Rather than sell the cow, you pay for the axe with money.
The problem for Smith is that there is no empirical evidence that barter societies even existed. As a theory of how money originated, it is wrong. Nevertheless, the importance of money in enabling more complex forms of social organisation is attested to in the historical data.
Money helps resolve problems like:
In his pioneering work Outlines on the Origin of Money, Heinrich Schurtz introduced the important distinction:
Schurtz emphasises between the role money plays within a social community, and the role for outside that community. So, inside a community, money was a useful measure of social stature. Outside of the community, it enabled commerce with outsiders and opened the community up to the outside world.
Let's apply Schurtz's distinction today. Most dollars today are created outside the United States, in the Eurodollar market. So, is a Eurodollar inside or outside money? It depends. For the U.S. Treasury and anyone living in the US, Eurodollars are outside-money—they exist beyond the domains of the United States. The Treasury doesn't even issue them and has no control over them. But for international banks trading among themselves, they function as inside-money because they are issued within the international trading community. Who you are and which community you belong to matters.
From an economic point of view, Schurtz's definition is problematic. His distinction is underpinned not by economic considerations of different types of money, but by defining which social community someone or something belongs to. The function of money within the community is different to outside the community. Sociologically, this is helpful, but it doesn't tell us much about money itself.
In Money in a Theory of Finance by Gurley & Shaw, the distinction between inside-money and outside-money is defined differently. Inside-money is that issued by the private sector as demand deposits. Inside-money is an asset to us and businesses within the private sector, while being a private liability to banks. It's the private liability existing which makes it inside-money. In contrast, outside money is created by the state. Currency and central bank reserves are examples of outside-money. There are no private liabilities with outside money.
Let's consider the Eurodollar market example again. Eurodollars are issued privately on international money markets. Under this Finance view, Eurodollars are inside-money. Unlike in Schurtz's distinction, who the community is don't matter. This distinction is financial in nature, whereas Schurtz's distinction was social.
The Finance View poses the question: why is the state considered outside the private economy? That assumes there is a hard distinction between the public and private sectors. In a mixed economy, the system is hybrid with integration between both private and public sector. This is especially true for money. The financial system requires private money and state money be traded on par as if there was no distinction between the two. There is no hard distinction between the private and public sector, not without splitting the economy into two pieces. In practice, they work alongside each other and intertwine themselves together.
This hard distinction between state money and private money is somewhat artificial and doesn't explain how the financial system works, except during a financial crash. During a financial crash and bank runs, the distinction between state money and private money becomes clear.
Perry Mehrling, the founder of the Money View, defines the distinction between inside-money and outside-money differently. He treats inside-money as any form of money which is an asset for one person and a liability for another. Like with the finance view, all private money is inside-money. However, Mehrling also notes that currency and reserve are also liabilities to the central bank. Consequently, they also are inside-money. Only from the private sectors perspective, in which all reserves and currencies are assets for everyone can state-money be considered outside-money.
The advantage of Mehrling's approach is that it helps us distinguish between fiat systems and metallic money systems. In fiat systems, all money is an asset and liabilities to someone. Therefore, all money in fiat systems is inside-money. However, under a gold standard, gold is an asset to everyone and a liability to no one. Therefore, metallic systems pin the value of inside-money on the value of outside-money. This tells us something different about different types of money systems.
Furthermore, both Schurtz and Mehrling emphasise that who you are and where you are in the system/community determines what is and isn't inside-money and outside-money. Looking at the whole system, all fiat-based systems are inside-money. But from the private sector, all state-money is an asset meaning it is outside-money for the private sector. But for the state, currency and reserves are a liability of the central bank and an asset to the Treasury. Thereby, it's inside money.
Money works relativistically. Special and general relativity only make sense when you define a reference frame - a point of view for measuring physical quantities. Without it, nonsensical conclusions arise. Likewise, the same for money. Who you are, where you fit into it all, and where you are situated in the hierarchy of money (some money is better than other money) depends on what is what. For another person or entity, the situation will look very different. Without being clear of whose perspective you're talking from, monetary analysis results in confusion at best and nonsense at worst.
Credit is a social technology that defers final payment. But its deeper function lies in creating mutual obligations within a society. The deferral of enforcing obligations—including repayment—is how credit operates, not what it is. At its core, credit is an IOU: "I owe you."
A creditor extends funds under specific terms; the debtor accepts the obligation to repay. The creditor holds the IOU as a claim, while the debtor recognises it as a liability. This claim includes repayment conditions and interest—compensation for the initial outlay.
The word credit comes from the Latin credit, meaning “one believes.” Trust is foundational. Without it, credit collapses, and the social and economic ties it enables unravel. Credit is a mechanism for trust-building, encouraging obligations that bind individuals to one another. Strong institutions magnify this process, accelerating economic development.
In early human societies, credit was often the default mode of exchange. Reciprocity governed such economies: the IOU implies a UOI—"you owe me." I give you ten chickens today; you owe me a cow in a month. Violating such obligations could mean social expulsion—often a death sentence in tightly interdependent communities. In these systems, mutuality was essential for survival and free-riding intolerable.
Credit provides flexibility. It lets people access goods or services now, while paying later when resources become available. Payments could take the form of crops, labour, or luxury goods - whatever the creditor found valuable. In more coercive settings, the debtor could become the payment—laying the groundwork for slavery as both a social relation and a brutal technology of control.
Economists, historians, and anthropologists disagree on what ultimately caused the emergence of money. Given the scant and scattered evidence from ancient times, we're asking the wrong question. Instead of looking for a singular origin, we should see money as a social technology that enabled more complex relationships and the development of civilisation itself. The way different societies developed money reveals more about their particular histories than about any universal origin.
We should ask instead:
From at least 100,000 years ago, ancient economies were gift- or credit-based. German ethnologist Heinrich Schurtz observed that there is no evidence of barter economies. Archaeologist Michael Hudson highlights how Mesopotamian evidence links money closely to credit, debt, and mutual obligations.
In pure credit economies, unresolved obligations become a social, economic, and political burden. An excess of obligations can impoverish the population and, in doing so, delegitimise the sovereign. This raises difficult political questions: Who should be free, and who should be enslaved? Who belongs to the polity, and who does not? How can we discharge obligations in a way that preserves social stability—and at what cost?
Cambridge CoreMikael Fauvelle
Anthropological archaeologist Mikael Fauvelle specialises in investigating economic and political complexity in pre-state and non-state societies. In his recently published Shell Money: A Comparative Study, he argues that money predates sovereign authority. In pre-state hunter-gatherer societies in Southern California, shell beads served as money, thereby facilitating trade among strangers and across boundaries long before the emergence of formal political structures. This pattern emerges not just in south California but throughout the world. The evidence suggests trade is essential for establishing money.
Money, in this context, is not born of state decree but private necessity. Trade requires a medium of exchange. Whether the actors involved are private individuals or tribal leaders acting on behalf of their communities, trade across social boundaries demands a trusted, recognisable unit of value. As civilisations became more complex, internal trade intensified and pure gift or credit economies—based on mutual obligation and reciprocity—became insufficient.
For trade across tribes or distant communities to function, participants needed a mutually recognised standard of payment. Scarce and valuable commodities such as shells, beads, or metals—often tied to prestige—came to fill this role. A trader would not accept a gift or obligation from someone they did not know; but they might accept a commodity recognised as valuable by all.
This necessitated new forms of political organisation. Internally, societies required institutions and norms to regulate trade and coordinate complexity. Externally, scarce and recognisable money enabled long-distance commerce. In regions like Mesopotamia, where critical resources were often lacking, such trade was essential for survival. Thus, money enabled—not followed—the rise of the sovereign and the state. The state is the creature of money, not its master.
Why can money beget the state? Because money can build trust. Credit and money facilitate relationships based on deferred and mutual recognition of obligations. Sovereignty, by contrast, imposes authority. While authority can regulate trust, it does not inherently generate it.
There are, however, cases in which authority will generate trust. Typically, the state ideology emphasises that the ruler actions were divinely sanctioned. In Sumer, 𒋗𒈨𒊒, power was initially held by the Ensí, 𒑐𒋼𒋛, who were priest-kings in charge of theocratically run city-states. They controlled the distribution of grain allowing it to become a standard unit of account. In this case the divine authority of the Ensí created the conditions for the emergence of money as grain.
Grain was then used as money in trade, which Sumer was dependent on given its geographical location. Silver was gradually brought in and could also be used as money. As silver became more prominent in Sumer, the Lugal (King), 𒈗, influence and power rose until the divinely sanctioned secular authority held more power than the priest-kings Ensí.
The Sumerian case highlights the importance of legitimacy, and the role authority can play in shaping what money is. The priest-kings legitimacy lay in their religious authority focusing on ritual and administrative factors. The King, however, was a secular ruler legitimised by military prowess and divine sanction. It was silver that enhanced the power of the King, rather than the other way round. Whereas the limited religious authority of the Ensí was focused on administrative issues which along with the geographical context allowed them control over the distribution of food, thereby giving it the power to create money.
Even outside that, states were critical in codifying and standardising the norms surrounding money, giving it institutional backing as societies scaled. The state would also impose itself and its authority through issuing money, but sophisticated financial systems like we see today would not be possible if states issued authority so brazenly and crudely.
Tribal societies did not require sovereigns because interpersonal ties were sufficient to maintain order. Leadership existed, but it was embedded in proximity and mutual recognition—typically the wisdom of an elder. But as societies grew in scale and complexity, they required social technologies like law—and money—to function smoothly.
Even though money preceded the state, there is a close relationship between the emergence of money and sovereigns. There will be many examples in which the state created money first. The work of Fauvelle and other anthropologists suggest that money has frequently arisen from the state, but it also isn't necessary either. Trust, ultimately, remains the foundation. The strength of commodity money lies in its ability to preserve trust where institutional or interpersonal trust is fragile. People might not trust a foreign ruler, but they might trust gold.
This becomes especially relevant in imperial contexts. Why would a citizen of the Sasanian Empire trust the authority of the Byzantine Emperor? Acceptance of a foreign currency signaled tacit consent to the issuing sovereign’s domain. When a sovereign could not regulate distant subjects directly, coins became a symbolic projection of authority—an expression of imperium.
In the modern age, sovereigns no longer require physical tokens of metal to project their power. Within functional states, authority is institutionally embedded and geographically secured. Today’s fiat money—money with no intrinsic commodity value—is sustained by trust in state and banking institutions. But the principle remains: money flows from trust, and trust breeds legitimacy which enables money.
Having examined the social, political, and historical foundations of money and credit, we can now turn to the operational mechanics of the modern financial system. Understanding how money moves, interacts, and is structured within the economy will allow us to explore more advanced concepts — including the hierarchy of money, the four prices of money, and the dynamics of reflux and flux — and see the theory in practice.
