The Barter

The third of the institutions begins, like the first two, with a problem so basic we no longer see it — the problem of barter — and with the question that has puzzled every student of money: why does anyone accept it? For money, in its modern form, is intrinsically worthless: a scrap of printed paper, a line in a ledger, a token good for nothing in itself. And yet a stranger will hand over bread, or labor, or a day of his life, to get it. The volume opens with the friction money removes, and with the beginning of an answer to why the worthless thing is taken.

Imagine a world without money, where goods trade only for goods. To make any exchange, you must find someone who has what you want and wants what you have — a double coincidence of wants, and a rare one. The baker who wants shoes must find a cobbler who wants bread; if the cobbler wants meat instead, the baker must first find a butcher who wants bread, trade for meat, and carry the meat to the cobbler — a chain of exchanges to accomplish a single purchase. The cost of finding these coincidences, of matching want to want, is the great friction of a barter economy, and it strangles trade: most of the exchanges that would benefit both parties never happen, because the double coincidence cannot be found. Barter does not scale; a complex division of labor, in which each produces one thing and consumes many, is impossible under it, for no one could find all the coincidences his consumption would require. The world of barter is a world of few trades, little specialization, and great waste of effort in the mere search for a partner.¹

How is the difficulty overcome? Carl Menger showed that money need not be invented or decreed; it emerges, spontaneously, from barter itself. For in any barter economy, some goods are more saleable than others — more widely wanted, more easily traded, more readily passed on. A clever trader, unable to find someone who wants his shoes and has the bread he wants, will accept in exchange not what he wishes to consume but what he knows he can easily re-trade — a more saleable good, taken not for itself but as a stepping-stone to what he wants. And once some traders begin accepting a good for its saleability rather than its use, the good becomes more saleable still, for now it is wanted both by those who would consume it and by those who would re-trade it; and this draws yet more traders to accept it, in a self-reinforcing spiral, until the most saleable good of all becomes a good that everyone accepts — not to consume, but to pass on. That good is money: not designed, not decreed, but grown, the spontaneous crystallization of a medium of exchange out of the search for saleability. Money is, in Menger's account, the great undesigned institution — like language, the product of human action but not of any human design.²

What money does, in emerging, is to break every trade in two, and so dissolve the double coincidence. With money, the baker need not find a cobbler who wants bread; he sells his bread to anyone, for money, and buys shoes from anyone, with money. The single barter exchange, which required a coincidence of wants on both sides, becomes two monetary exchanges, each requiring only a single coincidence — a buyer for what you sell, a seller of what you buy — which is vastly easier to find. This is money's defining function: to be the medium of exchange, the universally accepted thing that stands on one side of every trade, so that no one need ever find a partner who both has what he wants and wants what he has. And the gain is not merely convenience but the very possibility of a complex economy: for once money breaks the double coincidence, the division of labor can extend without limit, each producing one thing and selling it for money, then buying with money the thousand things he consumes from the thousand others who made them. Money is what lets specialization scale — what lets a person spend his life making one thing, confident he can exchange it, through the medium of money, for everything else he needs.³

But Menger's account, in solving one puzzle, sharpens another — the puzzle the whole volume circles. If money is accepted not for its own use but to be passed on, then each person accepts it only because he expects others to accept it from him. The baker takes the coin because he is confident the cobbler will take it; the cobbler because he is confident the butcher will; and so on, each link in the chain resting on the next. Money's acceptability is thus self-referential, a belief that sustains itself: money is accepted because it is accepted, valued because it is valued, in a circle that has no bottom in the intrinsic worth of the thing. This is the source of money's power — for it means money can be made of anything, even worthless paper, so long as the expectation of acceptance holds — and the source of its fragility, for an expectation that sustains itself can also collapse on itself: let each come to doubt that others will accept the money, and each will refuse it, and the circle that made it valuable will unmake it in a rush. The self-fulfilling belief that is money's foundation is, the volume will find, both the secret of its strength and the seed of its ruin.⁴

Menger's spontaneous money — the saleable commodity that became the universal medium — is the beginning of the story, not the end, and the volume must press beyond it. For the account explains how a commodity money might emerge from barter, but most money today is no commodity at all: it is the state's paper, or the bank's deposit, things with no saleability of their own, accepted on confidence alone. The spontaneous, market-grown money of Menger is only one source; the state, the next plate will argue, is another, giving its money value not through saleability but through the taxes that must be paid in it. And the deeper nature of money — what the worthless paper and the bank's deposit and the ancient coin all share — the volume will find to be not saleability but something else: that every money is a promise, a debt that circulates, trust made transferable. But that is the flagship's argument. The nearer business is the medium money provides and the measure it becomes; and the next plate but one turns to the measure. The next plate, though, takes up the state, and the question Menger's market account leaves open: what gives the state's paper, which no one would barter for, its worth?⁵

The barter, then, is the world money was made to escape: the world of the double coincidence of wants, where every trade required a partner who both had what you wanted and wanted what you had, and where the search for such partners throttled exchange and forbade the division of labor. Menger showed that money need not be invented to escape it — that money grows, undesigned, from barter itself, as the most saleable good becomes the good all accept, the spontaneous crystallization of a universal medium. And money, so emerged, breaks every trade in two and lets specialization scale without limit. But the account leaves the deepest question open and even sharpens it: money is accepted only because it is expected to be accepted, a self-fulfilling belief resting on no intrinsic worth — the secret of its strength and the seed of its fragility. What gives the worthless thing its worth, and what that worth rests on, the rest of the volume must say. The next plate turns from the market that grew money to the state that backs it — and asks what makes a paper no one would barter for worth anything at all.