On the Origins of Money

The widely accepted account of the origin of money (Menger, 1892), is that money grew out of barter in order to solve a double coincidence of wants problem. This efficiency view of the origin of money, however, does not square well with the historical and anthropological evidence that money often grew out of the destruction of some fairly sophisticated credit arrangements, and that its introduction was not necessarily associated with an increase in prosperity. In this paper, we develop a model of the origin of money that is consistent with the facts that trade can flourish without money and that the use of money need not trigger prosperity. We show that the introduction of money can be explained by the fact that governments may be able to better tax agents if trade is conducted through money instead of a credit system even if the credit system is more efficient than the monetary system.