My last two posts covered the origins of money. I discussed the two leading theories of why money exists: the emergent theory, which holds that money is a spontaneous product of exchange relationships, and the chartalist theory, which holds that money is a “creature of the state,” arising because strong groups imposed debt obligations on weak groups.

It turns out that much chartalist history is good and valid, but as a theory, it cannot actually explain what it purports to. Within well-defined social groups, gift exchange and credit systems work great. But to facilitate exchange with the Other — between groups, where individuals often do not know each other personally — money is the way to go.

Chartalists vs. emergent theorists

I believe that the debate over the origins of money is an interesting historical question in its own right, and it can shed light on the efficacy of spontaneous order processes to generate beneficial social outcomes. But in terms of implications for contemporary monetary economics, especially contemporary monetary institutions, I don’t think it much matters which side is ultimately right.

In his new book, The Ontology and Function of Money, Leonidas Zelmanovitz rightly notes that hard-line proponents of either theory are often guilty of the genetic fallacy. They incorrectly reason that the origins of money determine how current monetary institutions must operate.

The genetic fallacy

Here’s an example of the reasoning: if money historically arose due to state power, it must be the case that the state is necessary for a well-functioning monetary economy. Contrariwise, if money historically arose due to spontaneous exchange processes, the state is necessarily a hindrance.

Both of the preceding sentences contain conclusions that do not follow logically from the premises. Even if the chartalists are right, a free market in money and credit may be the best system today. Even if the emergent theorists are right, the heavy hand of the state may be best in sustaining a well-functioning monetary order.

Finding a clear winner


It’s a good thing that we don’t need to pin down precisely money’s origins to do good work on contemporary monetary institutions, such as the question of central banking vs. free (laissez-faire) banking. If my colleague Will Luther and I are right, both dynamics — political coercion and market cooperation — played a role in determining what goods became the media of exchange throughout history. This makes finding a clear winner — or at least sufficiently clear to persuade well-intentioned critics who hold opposing views — extremely difficult.

Don’t get me wrong: this is a valuable research area. But it does not constrain or in any way determine what is permissible in debates over what money, and its associated institutions, ought to look like today. Those are two separate conversations. One can contribute to both, but it’s important not to mistake the latter as being reducible to the former.