As modern monetary theory (MMT) gains prominence in the political sphere, it has revitalized interest in some older theories about the origin of money—namely, the state and credit theories of money.

The credit theory of money says that money is simply a unit for measuring debt. And the state theory of money, or chartalism, as it is often known, says that this measurement was created by the state. These days, the two theories are often combined and championed by proponents of MMT who argue that most of the economic constraints put on government are imaginary because the government can simply create money.

The MMT debate is about the nature of money itself, and these theories about the origin of money are central to understanding this alternative way of thinking that’s gaining popularity on the progressive left. However, when one looks, it’s clear that both the theory and history presented as evidence for the state and credit theories of money don’t hold up, especially when compared to the Austrian alternative.

Readers of this website are likely familiar with the Austrian theory of the origin of money, developed by Carl Menger and synthesized by Ludwig von Mises. But to review it quickly, money developed as a way to make trade easier. At some point in the past, humans began using their property to produce goods beyond what the natural environment had provided.

Certain goods became valued, not just for direct consumption but also because of their salability. In other words, people started wanting certain goods because they knew others would trade for them. A good used in this way is called a medium of exchange. Thanks to the network effect, one or a small number of media of exchange would become nearly universally accepted among a society. That’s when it becomes a money.

Historically, precious metals became monies. Currencies were simply a unit of weight in a precious metal. Once a money had been established, people could specialize their labor, and the number of prices—that is, records of past exchange ratios—to keep track of was greatly reduced. That makes entrepreneurship, production, and therefore civilization as we know it possible.

The important insight here is that money gets its value as a money from what it’s able to buy and that it, therefore, must have originated out of a good or commodity produced for some other purpose that was then found to be particularly saleable.

The state and credit theorists reject this entirely as bad theory disproven by the historical record. They instead frame money as a unit of debt.

Debt, credit theorists say, is something that has been around far longer than money. It’s the obligations people have to one another. If a person gives a neighbor some livestock, that neighbor is then obligated to repay the benefactor in kind at some point in the future. They are in debt. Similarly, if one assaults someone else or destroys their property, they are obligated to pay restitution to the victim—or the victim’s family—and are therefore in debt.

Credit theorists argue that money is simply a unit that governments invented to quantify debt. Some say it arose as early states attempted to quantify restitution payments for violent crimes. This unit of debt is then imposed on everyone by the government through taxes. Only then are these state-created IOUs used as a medium of exchange.

In contrast to the Austrians, these theorists see money not as a social institution developed through cooperation but as a state institution imposed on people through violence. It’s not only a disturbing and rather sad view of people and society, it’s also bad theory.

What credit theorists define as natural or primordial, debt is really a conflation of intertemporal exchange and legal restitution. The Austrian tendency to keep exchanges in the same time window when explaining the theory of money is simply a way to be concise. The fact that many exchanges are between present goods and future goods doesn’t disprove the Austrian theory.

Restitution for crimes is simply a different thing. If all economic transactions were a form of restitution, we would be perpetually returning to a starting state, and the economy would never grow.

Regarding chartalism, no, some early king giving people tokens and then threatening to hurt them if they didn’t give some of them back later is not enough to make that token a universally accepted medium of exchange. At most, it would encourage people to gather enough tokens to pay off the government when the tax is due.

To dig deeper into these issues, look to this article by Michael Szpindor Watson which takes on the credit theory and this recent paper by Per Bylund which refutes the state theory, or chartalism.

There is also an argument that the historical evidence supports the state and credit theories. Economic anthropologist David Graeber made this claim most famously in his book Debt: The First 5,000 Years.

Graeber builds his argument around the fact that no “land of barter” has ever been found in the historical record. But this is a misreading of the Austrian argument. The claim isn’t that vast economies were built up through barter only to later switch to money, but that what we think of as an economy—where people work jobs to produce things that can later be exchanged—only really became possible after people transcended barter and exchanged indirectly. The truth is this probably happened quite quickly. And on top of that, it makes sense that only societies that had developed money were large enough and wealthy enough to make their mark on the historical record. Any true premoney barter “economy” would have been tiny and short-lived.

Still, as Graeber admits, the precise moment when money first appeared happened sometime before the historical record began in Mesopotamia 5,500 years ago, but that doesn’t stop him from citing the earliest civilization as evidence for the state and credit theories of money. However, what he describes in his book fits even better with the Austrian story.

Hans-Hermann Hoppe points to the Neolithic Revolution, which occurred around 11,500 years ago, as humanity’s transition from parasitically living off the land to producing goods beyond what was naturally available. People started to produce their own food through agriculture and animal husbandry, which led to the recognition of land as private property and the emergence of the family as the institution we know today. In other words, households began producing goods they owned and could trade. So according to Austrian theory, the conditions for the emergence of money first came together just over eleven thousand years ago.

About six thousand years later, when the curtain of history was lifted, ancient Sumer, as described by Graeber, was already a rather advanced money economy. City-states were organized around temples, where the authorities held silver and barley. A shekel was a specific weight in silver that was also tied, by law, to a specific amount of barley. The government held stockpiles of silver which it used to trade with the people of “faraway lands,” while the local Sumerians tended to trade with barley.

So not only was silver already an internationally recognized money, but the earliest recorded states were already corrupting domestic money markets. Just as more modern governments would do thousands of years later with gold and silver, these Sumerian authorities mandated a fixed exchange rate between the two commodities, leading people to use the artificially overvalued one—in this case, barley—while the government hoarded the other.

None of this disproves the Mengerian-Misesian insights into the nature of money. In fact, the historical account cited by Graeber fits quite nicely with what Austrian theory would have us expect.

Progressives and social democrats are so desperate to cast off any limits on government that they will latch on to anything that justifies their ambitions. The state and credit theories of money are one example. But bad theory is bad theory, no matter how deeply you want it to be true.