Why the “State Theory of Money” Doesn’t Explain the Coinage of Precious Metals

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Why the “State Theory of Money” Doesn’t Explain the Coinage of Precious Metals

24 Aug 2017

I’ve begun working on a new book on the gold standard. In the first chapter I plan to discuss the origin of money, as a preliminary to discussing how silver and gold became the world’s dominant commodity monies. The topic of the origin of money has become controversial in recent years. The dominant view among economists (for good reason), suggested by Adam Smith in the eighteenth century and fleshed out by Carl Menger in the nineteenth, is that money is a market-born institution. Convergence on one or two commodities as the common media of payment emerged from the actions of barterers seeking more effective trading strategies, without anyone aiming at the final result. But this view has lately been challenged by a resurgence of the “state theory of money,” also known as Cartalism, which argues that governments played an essential role in the establishment of money. Money's Origins: A Cartalist View Cartalists have made the valid point that extensive specialization in production could not have preceded the development of commonly accepted media of exchange; rather, greater specialization and wider acceptance of media of exchange must have developed together. But this is a useful expositional caveat rather than a refutation of the Mengerian theory. While a lecturer spelling out the Mengerian theory (and I have done this myself) may ask the listener to imagine a highly specialized producer (say, an asparagus farmer) entering a moneyless market and meeting frustration in attempts to trade directly (say, for a plaid shirt) in order to dramatize the difficulty of direct barter, this should not be taken to suggest that, as a historical matter, societies developed extensive specialization and trade before the emergence of money. Indeed, because it starts from the premise that finding a well-matched trading partner (who “has what you want and wants what you have”) is very difficult, Menger’s theory implies the opposite. As Adam Smith himself emphasized, the division of labor is limited by the extent of the market, and the extent of the market is limited by the ease of trade.
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Authors

Lawrence H. White

Published in
United States of America

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