Evolution of Money

Since millennium, economists have advanced two competing theories on the evolution of money. Commodity theory asserts that money has evolved spontaneously from one of the useful commodities through a long process of barter exchanges, and cartal theory argues that money was introduced by a communal agreement or political decree or legislative action that is external to the exchange process. While economists are busy in fighting with each other, anthropologists have also developed a different story which traces the origin of money to the ancient system of gift exchange. The purpose of this paper is to put all these stories to a critical test. The question of how money has evolved is intimately connected with the question of what money is. The present paper develops a simple search-theoretic model of decentralized economy which is capable of characterizing barter system, commodity money system, fiat money system, and gift system, all as different forms of its equilibrium. It demonstrates that while barter system requires a well-balanced distribution of abilities and needs among individuals and gift system requires an infinite memory for its member, monetary system, whether it uses commodity money or fiat money, requires no such "real" condition and no such "informational" requirement to support itself as equilibrium. Money is money simply because it is used as money. Indeed, it is this transcendence from "reality" and "information" that sets monetary system infinitely apart from both barter system and gift system, thereby throwing doubt on both economists' commodity theory explanation and anthropologists' gift exchange story. Moreover, the pure bootstrap nature of monetary system also throws doubt on economists' cartal theory as well. There is a fundamental limit on the power of the theory to explain the origin of money ex post facto. History thus matters essentially.