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Why Money Does Matter

(or why money is not simply another kind of barter)

by Federico Morando

Money may be defined as a store of wealth, a measure of value or a mean of payment and exchange: All these roles may be played by coins (minted money, usually by a state or other political entity) or by widely accepted and easily storable commodities (metals, but also grains or salt).

Economists usually suggest that coins are an evolution of pieces of metal used as a mean of exchange: this is probably the case of Roman As (at the very beginning, it was a form of cast bronze, exchanged by weight, following an Etruscan custom).

Ethnographic studies favor the emergence of money from "social regimes of value": in ancient times, this is the case of Celtic Potins (somehow, an ancient form of fiat money, with an higher value than the intrinsic content of metal).

Celtic Potin

Potin has no intrinsic value, so the caste potin coinage of the Gaulish Celts was fiat money (like the dollar bill, it has no value except that it is accepted in trade). There were no weight standards. Each type was accepted only by the tribe that issued it.
Cast potin, De La Tour 8124, SGCV 136, Monnaies II 581, VF, 7.4g, 22.3mm, 180o, obverse warrior king walking right holding torch and spear, reverse bear right attacking a snake, snake above; scarce.

Olbian Dolphins are a form of currency, derived from a religious custom:

Olbia dolphin coin

Small cast dolphins were cast in Olbia, beginning 550-525 B.C., first as sacrificial objects for worship of Apollo and later as a form of currency.
8421. Bronze cast dolphin, SGCV 1684 var., F+, .093g, 24.2mm, c. 5th Century B.C.; obverse dolphin with raised eye, spine, dorsal fin and tail.

In this short and simple paper, I will not analyze the historical origins of money: I would like to explain just some of the basic economic advantages, due to the existence of money, in comparison with mere barter.

Imagine a simple economy with three individuals: Titius (a breeder, who likes honey and has a surplus of meat), Caius (a fisher, who likes meat and has fish) and Sempronius (a bee-keeper, who likes fish and has honey).

In this economy it is not possible to have direct barters. For instance, Caius would like to have meat from the breeder, but the fisher has nothing to give to Titius in exchange (because the latter doesn’t like fish).

The same situation apply to any other direct barter, but it is possible to create a mechanism to coordinate barters and obtain mutual advantages: let’s call this mechanism a "market".

It is possible to imagine at least two kind of markets: a physical place to meet and exchange products (let’s call this place agora) or a complex structure of contracts (with an enforcement structure). So, our individuals can meet in the agora and exchange their products or can do conditional contracts, like "I, Titius, will give Caius my meat if and when Caius will be able to give me some honey, he can receive from Sempronius" and so on...

Both solutions are very costly, because there are transaction costs associated with trips to the agora or contract writing. But it is possible to create a decentralized market (that is, a market unbound from the agora) with low transaction costs: the use of money can lead to this output.

Money can substitute for complex contracts, if everybody accepts coins, that is, if money is trusted: if there is a single individual refusing money, the entire process can stop (for instance, if Sempronius doesn’t accept money in exchange for honey, Titius cannot use money he receives from Caius, so also the breeder will not accept money, and so on…).

Money is also useful as a "medium of exchange", because it reduces the number of "prices" that each individual must calculate. In the agora without money, each trader must calculate three exchange ratios: meat for honey, honey for fish and fish for meat. With money, it is sufficient to know two monetary prices (of the desired and owned goods): in this example there is only a slightly difference, but this advantage can increase in a more complex economy (with many more producers and goods).

The real weak point of a monetary economy is in the fact that people must trust money to trigger a good functioning of the exchange mechanism. To achieve this result, the state can give a special legal status to money, called legal tender: in this situation, individuals must accept money as a payment for their credits. Even if there isn’t a real legal tender, "currency could still serve as the main medium of exchange as long as governments accept tax [and/or fine] payments and pay salaries using currency"1. This may be the case of Athens in the 4th Century B.C.E. or of the late Republic and Empire of Rome.

For instance, in the case of Athens, "Aristotle (Ath. Pol. 24) claims that more than 20,000 persons were maintained out of the proceeds of the tributes and the taxes and the contributions of the allies"2. "For Aristotle barter was characteristic of the past and of uncivilized tribes, but not (by implication) of his own society (Arist., Pol. 1257a)"3.

Athens "Owl" tetradrachm

Issued in the century of Aristotle. In 393 B.C. the almond shaped eye of the old style tetradrachms was replaced by an eye in profile. Most coins of this type are roughly engraved and carelessly struck on very thick irregular flans. The charming owls on this type are often a bit cartoon like.

8451. Silver tetradrachm, SGCV 2537, SNG Cop 64, VF, 16.89g, 22.8mm, 270o, c. 393-300 B.C.; obverse head of Athena right with eye in profile, wearing crested helmet ornamented with three olive leaves and floral scroll; reverse AΘE to right, large letters, owl standing right, head facing, to the left an olive twig and crescent.

The following excerpt from Tacitus' Annals testimony that the daily pay of a legionary was of about one denarius at the time of Augustus or Tiberius, even if it was probably integrated by payments in nature (The following speech is attributed to a common soldier, that starts a mutiny in the legions of Pannonia, after the death of Augustus and the accession of Tiberius):

"Our only relief can come from military life being entered on under fixed conditions, from receiving each the pay of a denarius, and from the sixteenth year terminating our service. We must be retained no longer under a standard, but in the same camp a compensation in money must be paid us. Do the praetorian cohorts, which have just got their two denarii per man, and which after sixteen years are restored to their homes, encounter more perils?"4.

Denarius of Tiberius - the tribute penny.

Jesus, referring to a "penny" asked, "Whose is this image and superscription?" When told it was Caesar, He said, ''Render therefore unto Caesar the things which are Caesar's and unto God the things that are God's" (Matthew 22:20-21). Since Tiberius was Caesar at the time, this denarius type is attributed by scholars as the "penny" referred to in the Bible.
8056. Silver denarius, RIC I 30, RSC I 16a, SRCV 1763, VF, 3.70g, 19.9mm, 270o, Lugdunum mint, 16 - 37 A.D.; obverse TI CAESAR DIVI AVG F AVGVSTVS, laureate head right; reverse PONTIF MAXIM, Livia seated right holding scepter and branch, legs on chair ornamented, feet on footstool; very little wear but some areas not fully struck.

But it was not only the state itself that used and accepted coins: Another example comes from the taxes of the Temple of Jerusalem:

Half Shekel - the currency of the Jerusalem Temple

At the Great Temple in Jerusalem the annual tax levied on Jews was 1/2 shekel per male. The 1/2 shekel and shekel were not always used in everyday commerce, but were the only coins accepted by the temple. Many taxpayers required a currency exchange, so money changers set up in the Temple court. Jesus found this business and their shouting (advertising rates) offensive, so he threw over their tables
8303. Silver half shekel, BMC Phoenicia 224, SGCV 5921 var., VF, 6.98g, 21.6mm, 0o, Tyre, Phoenicia mint, 87-86 B.C.; obverse laureate head of beardless Melqarth right, Lion's skin knotted around neck; reverse ΤΥΡΟΥ ΙΕΡΑΣ ΚΑΙ ΑΣΥΛΟΥ (of Tyre the holy and inviolable), eagle standing on prow, palm frond under wing, LM (= year 40 = 87/86 B.C.), club and palm frond left, monogram in right field, Phoenician letter beth between legs; struck with high relief dies, BM does not mention palm frond in left field.

Obviously, all advantages I described can derive from money or from a widely accepted way of payment, such as peaces of metals (bars of iron or bronze): but, in the case of money, not only the state (or temple, or like) reduces transaction costs with its guarantee of weight and purity (and the punishment of forgers); it also uses coins and contribute constructing the trust around them (and when it fails to do so, like in the case of a debasement of precious metals content of coins, the consequences for the economy may be disastrous).

There are many other advantages of coins over metal commodities with the same value and diffusion: even ignoring the issues related to trade, banking and credit, there are very relevant aspects related to politics, religion and propaganda (for instance, see "The Roman World–Politics and Propaganda", by Wayne G. Sales). So, it could be interesting to deepen the importance of money in triggering a more modern economy, but it is always necessary to remember that economics cannot directly explain everything: coins also served as a powerful media of communication, and this was not a collateral use.

For any comments, please write an e-mail to: federico.muras@tiscali.it.


1 Shy, Oz – "The Economics of Network Industries", Cambridge University Press, 2001 (Media of Exchange as Networks, p. 201-205).

2 Howgego, Christopher – "Ancient History from Coins", Routledge, 1995, reprinted 1997 (Money, p. 19).

3 Howgego, ibidem, p. 21.

4 Translation from "Internet History Sourcebooks" (http://www.fordham.edu/halsall/).

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