The Rise of States, Inequality, and Economics - part 4

In the last few posts we charted the course from competitive feasting rituals abound beer organized by "big men"where sedentary societies would intensify agricultural production. Labor is donated to the tribe, cooperate labor efforts center around beer feasting and building monolithic ritual stone centers where the movements of the sun and moon are tracked  dictating the harvest times, and central grain storehouses are constructed to feed the tribe in times of famine. In certain places, irrigation works are constructed. The headmen who supervise this construction and redistribute the surplus eventually develop into a hereditary class of rulers and administrators, possibly with a strong religious element as well, linking religion and the incipient state.

Eventually abundance eventually gives way to scarcity as the population increases. A landless proletariat of workers develops. People become dependent on society as the forests are felled, and the land is given over to agriculture and industry. Hunting and gathering is no longer possible, and there is a large class of landless laborers who are dependent upon the distributive largess of the state and the domesticated plants and animals produced under its aegis. When this happens, elites gain ever more power. In circumscribed area, they become hereditary despotic elites. They then assimilate tribes around them. The war chiefs morph into kings proper. The centralized leaders are now the chief coercive factor of social life. Distinctions between rich and poor begin to appear and are institutionalized through private property laws and customs (e.g. caste systems). Conquered neighboring people are compelled to provide tribute to the great leaders of the incipient empires, while prisoners-of-war are turned into slaves.

Surpluses are great enough to allow for an unproductive elite class, military specialization, and various artisans, poets, builders, craftsmen, and so forth. As these craftsmen move to cities, there is a great development of complexity, industry, and specialization of labor. Metalworking appears, first gold and silver, then copper, and quickly, bronze (and later, iron). We see "luxury" artifacts, from cups and jewelry to cloth and sculpture. Houses begin to differentiate social class.

Reciprocity and redistribution give way to corvee labor, taxes, and the household economy. We saw that as elites become kings, the extract "tribute" from the primary producers, leading to a tribute economy. Over time, as there are too many elites and too few producers, this shifts to an oikos (household) economy, the basis of oikonomia, or economics. In these cultures, an upper caste of kings, priests, bureaucrats, administrators and military leaders forms. Urbanization occurs leading to more social complexity. A priestly class appears linking religion and the state. The temples form the central storehouses and ritual centers, and become the focus of the social life of the various households.

So how do we get from that to money and markets that we are familiar with today?

The standard view is that money comes about because people in a village would barter items. To avoid the "double coincidence of wants" problem, a standard mutually agreed-upon item would be substituted instead as an intermediary to facilitate the buying and selling of goods in "free" markets. This item (usually precious metals) was considered "real" money, and everything since is just a layer of abstraction on top of this "real" money. This is the Metallism theory of money proposed by Carl Menger. Note that Menger's theory dismisses the state and only includes private individuals. Menger and other Austrian economists were dedicated to advancing the idea that money evolved without the state, and that economic interactions were voluntary exchanged based upon barter. He wanted to prove that money could arise spontaneously as "a market-led response to barter costs." This became one of the founding myths of economics. For more on this view, see: The Economist On Money and the State (Capitalism Magazine)

But as we've seen, that's not what happened at all. Like Hobbes "voluntary" theory of state formation, where "solitary" individuals agree to come together and form cities and invest power in a despot to prevent everybody from killing one another, it is a "Flintstonization" of history - a projection of contemporary conditions onto the past.

As vast trading network formed in the Bronze age and cultures entered into economic transactions with unrelated individuals, it's likely that some trade and barter did take place. But this was secondary to social life. Reciprocity, redistribution, corvee labor, tribute, and household production for local use formed the primary basis of economic transactions for nearly all people prior to the seventeenth century all around the world, as we've seen.

Money did not function as a way to replace barter. David Graeber makes this point in Debt, the First 5,000 years:

[David] Graeber shows how the idea of barter was created in exactly this way: as a thought experiment by economists trying to explain their discipline. But the myth of barter was never really compared against actual human societies. It was was simply assumed that barter must be what people do when they don’t have money and all sorts of imaginary scenarios were concocted, without reference to historical records, to explain the invention of money and gradually increasing complexity of this new thing they called “the economy”.

This doesn’t mean that barter doesn’t exist at all, but that it didn’t precede money or debt and it never formed the basis of trade within a society. Barter happens in two main situations: between people who are relative strangers who will probably never meet again, and in large societies accustomed to using money where money is temporarily in short supply. What these two scenarios have in common is that the parties entering the exchange expect it to be an unencumbered, even antagonistic affair, where everyone is acting primarily in self-interest.

Economists imagine that complications arising from barter are what gave the impetus for creating money. For example they describe something called the double coincidence of needs: you and I both have to need what the other has for a direct trade to work. But the truth is much simpler. Barter doesn’t work in a small village or tribal setting because it presumes antagonism between the people involved in the exchange. If we live in a village where we see each other on a daily basis though, we can’t afford this kind of antagonism. I can’t seek my own gain at your loss because we are in a long-term relationship. Instead we will come up with a way of accounting for debts. When you need wheat I will give it to you with the understanding that when I need ham you will return the favor.

This is what we actually see happening in ethnographic study and in the historical record. Means of accounting for credits and debts arose first. Money came later as a way to make these debts transferable and barter only happens on the fringes, between people of different tribes where a direct one-time exchange makes sense, or alternatively in societies like ours where we are so accustomed to trade being conducted in self-interest or where we trade so often with people with whom we have no long-term relationships that when money is scarce we resort to barter.

Debt: The Myth of Barter (Two Friars and a Fool)

Here's Graeber himself:

The story goes back at least to Adam Smith and in its own way it’s the founding myth of economics. Now, I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now. After all people have been looking since 1776, when the Wealth of Nations first came out. But if you think about it for just a second, it’s hardly surprising that we haven’t found anything.

Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one. Quite often people don’t even engage in exchange at all – if they were real Iroquois or other Native Americans, for example, all such things would probably be allocated by women’s councils.

So the real question is not how does barter generate some sort of medium of exchange, that then becomes money, but rather, how does that broad sense of ‘I owe you one’ turn into a precise system of measurement – that is: money as a unit of account?

By the time the curtain goes up on the historical record in ancient Mesopotamia, around 3200 BC, it’s already happened. There’s an elaborate system of money of account and complex credit systems. (Money as medium of exchange or as a standardized circulating units of gold, silver, bronze or whatever, only comes much later.)

What is Debt? – An Interview with Economic Anthropologist David Graeber (Naked Capitalism)

And here's economist Randall Wray:

Anthropologists note that the typical case in tribal society is one of chronic underproduction: there is little attempt to produce much beyond a subsistence level, nor to hoard for unforeseen natural disasters. The attitude commonly found in tribal society is one of confidence that biological needs will be satisfied. In these societies, there is little concern for personal possessions; indeed, personal accumulation of property is normally viewed with disdain, and is made nearly impossible by the aforementioned redistribution and sharing. Similar conditions prevail in those societies based on a central authority (whether chief, king, or priest), who receives obligatory transfers and then redistributes some of this to the community. While such societies certainly are not communistic, the redistributive function tends to ensure some minimal satisfaction of material wants. Finally, within the feudal manor one again finds a nearly self-sufficient economic unit whose redistributive process is designed to meet subsistence requirements.

From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy (Randall Wray, The Levy Instite, PDF). Remaining citations from here UNO. Notes in original.

So, then, how did markets and money appear? Based on anthropological and archaeological research, money began as a standard unit of account set by temples to determine equivalency of debits and credits under the community. These were originally set according to measures of wheat and barley. These unites of account were eventually quantified in terms of precious metals (or sometimes clay, or certain other items), and these items circulated in the market as a type of "money." Thus, debits and credits became quantified, such that everything was made equivalent to everything else (100 bushels of barley = 2 cows = a pound of silver, etc.) so that the central repository could function and items could be redistributed. Written records began to keep track of the debits and credits. In other words, money began as credit. This is known as the Credit Theory of Money, and it long predates coins of paper money. Once debt markets were formed, private individuals usurped the role of the temples.
We've seen that voluntary corvee labor was supplied as ones' "debt" to the overall community in return for a portion of the feasting surplus. We've also seen that the conquering of neighboring tribes and hunter-gatherer peoples caused the rise of chattel slavery, where people were bought and sold on the market. Now a new type of slavery  emerged: debt slavery. If one cannot pay one's debts, he or she becomes the property of the lender, compelled to surrender their freedom of agency and work for the lender without recompense until the debt is repaid. These are three of the four major modes of slavery (wage slavery being the fourth).

Once there is a division of labor, inequality, and private property, there is uncertainty over the ability to supply all of ones' own needs, or the needs of one's family. Every household, no matter how prosperous or productive, is going to need something it does not produce internally at some point. Thus, it needs to go to the central store. Once the household economy forms, one's loyalty is to the household rather than the tribe, and reciprocity and redistribution recede in importance. The embedded social relations that determine the village economy disappear along with the social obligations, leading to the need for a new type of economic relation:

However, with the development of private property in land, one (usually, the individual household) becomes personally responsible for meeting material wants. As productive activities become increasingly divorced from other social activities, that is, as reciprocity and redistribution come to play a very small role in economic processes ... existential uncertainty is created because the social assurance of a minimal level of subsistence disappears. Individual insurance could then only be built up by producing and holding a margin of security in the form of excess production over minimum needs.

The “existential uncertainty” that is generated by the introduction of private property is thus a crucial element in the alternative explanation of the passage from ceremonial to market exchange. In tribal society, reciprocal and redistributive modes of social integration ensure that the material needs of any particular individual in society will be met according to the ability of the tribe to do so. This does not mean that one will never go hungry, but that there is no distinction between the economic conditions of the individual and the society as a whole.

This brings about the introduction of loans, or credits, from one household to another to meet their needs:

The role of existential uncertainty can be seen in the behavior of individual landowners who are unable to meet their needs from their own personal productive efforts. Their existence thus depends on being able to borrow means of subsistence from other individuals. Heinsohn and Steiger postulate that this is the basis of the first economic exchange, and it takes the form of a loan in which one private producer extends physical product which he has accumulated as his margin of security to a borrower who, in exchange, promises to furnish his labor whenever the lender should require it in order to ensure his own survival.

Thus, the earliest form of economic exchange produced forward contracts which, in the extreme, took the form of debt bondage in which the “debtor initially rendered himself in the power of the creditor as a debt serf and the creditor at any time during the credit term could call upon the debtor—even up to his extermination”.

When debt bondage was abolished, the creditor faced existential uncertainty during the period of the contract. This uncertainty was over the lender’s ability to survive periods of depressed production. For running this risk, the lender required payment in the form of interest. Note that this is not risk of failure of repayment, but the risk of the lender failing to survive a change in his circumstances as a result of not having his emergency surplus available. The abolition of bondage created the conditions under which loans must include interest. These loans, and interest, were initially “in kind,” and in many cases, the interest could be paid out of the natural fecundity of the loaned item. For example, the loan of a bushel of wheat today can be repaid with two bushels at the end of next year. However, as the types of loans expanded, and as the terms of repayment became standardized, repayment would take a standard form—denominated in a unit of account, or a “money of account.” The first money of account was a wheat unit. Temples seem to have played a role in standardizing the unit of account. The creditor and debtor required a neutral witness to, and enforcer of, private contracts. In return for this service, the temple would receive a portion of the interest on loans.

These in-kind fees (plus tribute paid to the temple) led to the accumulation of large stocks of grain, animals, and other goods with significant carrying costs. In order to reduce such costs, the temples encouraged the development of a standardized wheat unit of account. This was also to the advantage of borrowers and lenders, for now repayment was not necessarily linked to the natural fecundity of loaned items. Thus, the original wheat money of account began to serve as the means of payment allowing repayment to take many forms (a cow loan is repaid with wheat). The barley grain was later substituted because of its invariable unit weight. Of course, even barley grains entail large transactions and storage costs. After temples began to act as depositories for creditors (by holding for them the payments of debtors), transactions costs could be reduced by substituting stamped metal for barley on withdrawal. Storage costs were reduced when the temple accepted the stamped metal in payment of tribute or fees for its service as witness in private contracts. In order to deal with counterfeiters, temples eventually switched to stamped precious metals.

Thus, the temples serve as the "banks" making loans to people in times of hardship, as well as the clearinghouses certifying the debt/credit relationships among disparate households (all under the watchful eye of the gods). Eventually, this debt relationship becomes quantified as a sort of accounting trick so that items of different quality can be exchanged in debt relationships. This becomes the "standard of account" which begins to function as money. The equivalence is set by the community as a whole. But for most people, their needs would have been modest and met within the household, and trade was mainly engaged in by elites for certain exotic items which could not be produced locally.

The origins of money are not to be found, then, in a hypothesized exchange society based on barter. Instead, money develops as a unit of account, or, as the terms in which debts are written: “A money of account comes into existence along with debts... Money proper in the full sense of the term can only exist in relation to a money of account”. When private loans are made, the lender gives up private property in exchange for an IOU issued by the debtor, which represents a forward contract. This private contract must include an interest premium, the size of which is determined by the estimate of the existential uncertainty faced by the lender who has given up reserves that provide security in the face of an unknowable future. Thus, all forward contracts involve “wheat now for more wheat later” propositions, which are monetary propositions, with money serving as a unit of account.

Note, we have a  distinction made  between “money” and “assets denominated in the money of account.” This may seem simple, but it is crucial. It was the central authorities, the temples, who set the necessary units of account:

It has long been recognized that early monetary units were based on a specific number of grains of wheat or barley. As Keynes argued, “The fundamental weight standards of Western civilization have never been altered from the earliest beginnings up to the introduction of the metric system”. He shows that the early money of account in Babylonia was the mina, a unit of measurement consisting of 10,800 grains of wheat. These weight standards were then taken over for the monetary units, whether the livre, sol, denier, mina, shekel, or later the pound. As another example, the Roman pound was equal to 6912 grains of wheat. Furthermore, “all weight standards of the ancient and also of the medieval world...have been based on either the wheat grain or the barley grain”. Of course, weight units pre-exist money—they were already in use to measure tribute paid to temples. These weight units were carried over into the monetary units in which credit money and, later, commodity money was denominated.

It is significant that the standard coins of Greece and Babylonia (the stater and shekel, respectively) each had a weight equivalent to 180 barley grains— implying that the unit of account came before the coin. Hudson (2004) explains that the early monetary units developed in the temples and palaces of Sumer in the third millennium BC were created initially for internal administrative purposes: “the public institutions established their key monetary pivot by making the shekel-weight of silver (240 barley grains) equal in value to the monthly consumption unit, a ‘bushel’ of barley, the major commodity being disbursed” .

Hence, rather than the intrinsic value (or even the exchange value) of precious metal giving rise to the numeraire, the authorities established the monetary value of precious metal by setting it equal to the numeraire that was itself derived from the weight of the monthly grain consumption unit. This leads quite readily to the view that the unit of account was socially determined rather than the result of individual optimization to eliminate the necessity of a double coincidence of wants.

David Graeber describes the emergence of centralized states in Mesopotamia and Egypt. Writing comes into the picture as means of describing debt relations. When writing comes in, we have the beginnings of "history" as we know it. By this time, thousands of years had already passed since mankind had lived as hunter-gatherers. In the grain-based cultures of Mesopotamia and Egypt, the economic relations had transformed to debt/credit relations mediated by the temples.

...[W]hat you found in Egypt [was]: a strong centralized state and administration extracting taxes from everyone else. For most of Egyptian history they never developed the habit of lending money at interest. Presumably, they didn’t have to.

 For example, see: Ancient Egyptian Tomb Builders Had State-Supported Health Care (Slate)

Mesopotamia was different because the state emerged unevenly and incompletely. At first there were giant bureaucratic temples, then also palace complexes, but they weren’t exactly governments and they didn’t extract direct taxes – these were considered appropriate only for conquered populations. Rather they were huge industrial complexes with their own land, flocks and factories. This is where money begins as a unit of account; it’s used for allocating resources within these complexes.

Interest-bearing loans, in turn, probably originated in deals between the administrators and merchants who carried, say, the woollen goods produced in temple factories (which in the very earliest period were at least partly charitable enterprises, homes for orphans, refugees or disabled people for instance) and traded them to faraway lands for metal, timber, or lapis lazuli. The first markets form on the fringes of these complexes and appear to operate largely on credit, using the temples’ units of account. But this gave the merchants and temple administrators and other well-off types the opportunity to make consumer loans to farmers, and then, if say the harvest was bad, everybody would start falling into debt-traps.

This was the great social evil of antiquity – families would have to start pawning off their flocks, fields and before long, their wives and children would be taken off into debt peonage. Often people would start abandoning the cities entirely, joining semi-nomadic bands, threatening to come back in force and overturn the existing order entirely. Rulers would regularly conclude the only way to prevent complete social breakdown was to declare a clean slate or ‘washing of the tablets,’ they’d cancel all consumer debt and just start over. In fact, the first recorded word for ‘freedom’ in any human language is the Sumerian amargi, a word for debt-freedom, and by extension freedom more generally, which literally means ‘return to mother,’ since when they declared a clean slate, all the debt peons would get to go home.

...eventually the Egyptian approach (taxes) and Mesopotamian approach (usury) fuse together, people have to borrow to pay their taxes and debt becomes institutionalized.

As Michael Hudson describes:

We have all sorts of documents around the 14th and 13th centuries, especially about the hapiru, bands of debt fugitives and others, who some people translate as Hebrews. Rome was said to have been founded by exiles and runaways, mainly runaways from debt who created their own society there. Flight from debt goes way back.

You could say that the progress of civilisation for the last thousand years, since feudal times, has been a dissolution of autocratic feudal power toward more democratised power. The problem is that land has been democratised on credit. So instead of owing money to landlords, homeowners now owe money to their bankers.

When the Hebrews demanded freedom from slavery in Egypt, was it really debt slavery they were fleeing? Note that they instituted the Jubilee as part of their law code. Interestingly, the Hebrews follow the evolution charted earlier, from charismatic leader and high priest (Moses and his brother Aaron) to his (unrelated) successor Joshua, to the period of the ad-hoc chieftains known as the Judges, and the itinerant prophets, to the establishment of formal kingship under King Saul and a formal priesthood, culminating with the building of the massive stone temple under King Solomon as the "official" place of worship. The Bible charts very closely the outline of power I described in part one. But I digress...

This is the Credit Theory of Money, and it is likely that this is the true origin of monetary relations, not some use of gold to create markets so people could haggle over what they wanted from someone else. That didn't happen - communities met their own people's needs. The Credit theory of Money, was developed by A. Mitchel Innes:

Mitchell Innes used his wide knowledge of history to demonstrate that creditor/debtor relationships had long pre-dated the development of coinage, and had given birth both to money, as a unit of account, accounting and (probably) writing, as a way of keeping score. Money preceded and facilitated free markets, not vice versa. Moreover, even when coinage was developed, it was almost always less than full-bodied, often mere tokens....money was brought into being by growing specialisation, notably that between professionals, especially engineers (controlling water flow in Egypt, bridge building in Rome), and ordinary farmers. The professionals had, (and have), a monopoly of specialist knowledge, and used this to metamorphose into religious and dominating castes, who used their positions to exact taxation from the general public.

www.epicoalition.org/docs/Credit_and_State_Theories.pdf See also: Was Money Created To Overcome Barter? (Naked Capitalism)

In fact, there is ample evidence from the ancient world that this was how money worked, with coins being a mere sideshow.

In ancient Rome, for example, we tend to think of the coins issued as the major form of money. But this is not the case. In ancient Rome, trade, credit and banking systems tied the Mediterranean economy together, not coins. In no way could "debasing" of coinage lead to  a fall of the Roman Empire. Here's Financial Times columnist Izabella Kaminska describing the Roman Economy based on a paper by a professor of Roman history:

[H]aving explained why it’s not necessarily fair to blame Roman coinage debasement for third century hyperinflation and the ultimate fall of Rome — which, ironically, was much more likely the result of technological stagnation and political upheaval ... — it’s worth delving a little deeper into how the Roman monetary system really worked, and what it might genuinely teach us about our modern day economy...So let’s begin with evidence for a credit economy in the first place and the idea that the standard definition of money “pecunia” is much far reaching than many suppose, starting with Republican times.

[W.V Harris of Columbia University] notes in his 2006 paper [A Revisionist View of Roman Money] that this is fairly easy to establish:

    "How did Cicero transfer the 31⁄2 million sesterces he paid for his famous house on the Palatine (Fam. 5.6.2 — this was by no means the largest property price we know of in the classical city of Rome), at a time when Rome had practically no gold coinage? It seems singularly unlikely that his slaves counted out and loaded 31⁄2 tons of silver coins and transported this cargo through the streets of Rome (not that Roman ideas of inconvenience were necessarily the same as ours). When a certain C. Albanius bought an estate from a certain C. Pilius for 111⁄2 million sesterces (Cic., Att. 13.31.4), did he physically send him this sum in silver coins? Without much doubt, these were at least for the most part paper, or rather documentary, transactions (the crucial documents will have been waxed tablets). "

As for bullion:

   " It is frequently imagined that, under the Republic at least, large payments were made in gold bullion, and there was indeed bullion in circulation; but there is no evidence in Cicero’s extensive writings or elsewhere that gold was a regular means of payment before the minting of gold under Caesar’s dictatorship. Expert scholars have sought for evidence that individuals bought things with gold or silver bullion under the Republic, and have found none. ..as Andreau points out, the archaeology of the Vesuvian cities, which has produced every imaginable kind of find, has never produced a single ingot of gold or silver. Of course we do have some explicit evidence of gold bullion in private hands under the Republic (Cic., Cluent. 179), but it was apparently a store of wealth, to be exchanged against more spendable assets in times of emergency. ‘Gold’ was what a very rich man such as Rabirius gave to a friend such as Cicero who was scurrying into exile ...but this has nothing to do with ordinary business life. In imperial times, once again, we sometimes find gold bullion in private hands (e.g. Ulpian in Dig. 12.1.11.pr.), but it is implicitly not counted as pecunia, and seldom used in business or property transactions, as far as we know. There was an important exception, which does not invalidate the general conclusion: bullion sometimes had to be used to buy things from across the frontier, the eastern frontier at least: hence it was sometimes on sale at Coptos and Alexandria."

So, what you had for the most part was a wealth system made up of land, property, slaves, loan assets and bullion, for store of value and emergency use only — that is, to be used when your credit was shot or unknown to your counterparty.

[...]

As to those who question how Rome could have operated a credit economy without a viable clearing system, Harris says:

   " When economists define credit-money, they sometimes, admittedly, make matters more complicated than I have made them in this account, but that is because they quite naturally have recent and current conditions in mind, and not the world that existed before the invention of clearing banks. ‘A credit money system presupposes the existence of the institutions of private property, contracts, enforcement, and clearing’, says one. But historically speaking, as we shall see, the last of these four elements is a wonderful convenience but not in fact a necessity."

    "In the Roman scheme of things what you paid with was commonly pecunia, though other words such as nummi were also standard. It is therefore quite important that pecunia could have a very wide meaning. ..Ulpian claims that ‘the term pecunia includes not only coinage but every kind of money whatsoever, that is, every substance (omnia corpora); for no one doubts that substances are also included in the definition of money’ (Dig. 50.16.178). Clearly it is not Ulpian’s intention here to deny that documents could represent money but simply to assert that such things as wine and wheat could indeed count."

   ' The important point for us in any case is that pecunia could include loans. And in fact Cicero in a published speech simply takes it for granted that nomina were a form of pecunia, that is to say that credit, at least in a certain form, was money ...For Tacitus, it is reasonably clear that pecunia included credit...Then comes the question of safe assets and investable loans. Harris notes that whilst temples and cities where known to provide loans, on the whole the Roman credit market was based on credit and debt transactions between private individuals:

    "But these [city and temple loans] are probably minor phenomena, whereas debt was in fact the life-blood of the Roman economy, at all levels. The normality of nomina (i.e. outstanding loans) among the assets of the rentier class has already been commented on: nomina were a completely standard part of the lives of people of property, as well as being an everyday fact of life for great numbers of others. Nothing could be further from the truth than a scholar’s contention that it was only under extraordinary circumstances that the creation of credit-money took place. In a modern economy the standard cautious investment for the well-to-do is, or at least used to be, government bonds; in the virtual absence of bonds, governmental or otherwise, the Roman well-to-do relied heavily on nomina. Describing the credit crisis of a.d. 33, Tacitus (Ann. 6.16.3) remarks that all senators were more extensively involved in money-lending than the law allowed (‘neque enim quisquam tali culpa vacuus’). We know that by the late Republic virtually every aristocrat whose affairs are attested in the sources lent money, and it was normal for the less illustrious senators to do so too. Augustus was evidently regarded as something of a stickler for having tried to keep the equites up to old-fashioned aristocratic standards by punishing those among them who borrowed money at lower rates of interest in order to lend it at higher ones (Suet. 39)."

And as Harris says, there’s no reason why this pattern of lending should have changed much under the Empire. A point emphasized by the fact that Roman statutes reference practices and procedures for dealing with loan recoveries. And it was in this context that early banks came into being, catering as much to the elite as to the lower classes, according to Harris.

What have the Romans ever done for us? (FT Alphaville)

And while we consider "financial innovation" to be an exclusive invention of the modern world that drives our prosperity (and not, for example, fossil fuels), it turns out that such financial products were just as common thousands of years ago:

In general, we know few details about economic life before roughly 1000 A.D. But during one 30-year period — between 1890 and 1860 B.C. — for one community in the town of Kanesh, we know a great deal. Through a series of incredibly unlikely events, archaeologists have uncovered the comprehensive written archive of a few hundred traders who left their hometown Assur, in what is now Iraq, to set up importing businesses in Kanesh, which sat roughly at the center of present-day Turkey and functioned as the hub of a massive global trading system that stretched from Central Asia to Europe. Kanesh’s traders sent letters back and forth with their business partners, carefully written on clay tablets and stored at home in special vaults. Tens of thousands of these records remain...

The traders of Kanesh used financial tools that were remarkably similar to checks, bonds and joint-stock companies. They had something like venture-capital firms that created diversified portfolios of risky trades. And they even had structured financial products: People would buy outstanding debt, sell it to others and use it as collateral to finance new businesses. The 30 years for which we have records appear to have been a time of remarkable financial innovation...Over the 30 years covered by the archive, we see an economy built on trade in actual goods — silver, tin, textiles — transform into an economy built on financial speculation, fueling a bubble that then pops. After the financial collapse, there is a period of incessant lawsuits, as a central government in Assur desperately tries to come up with new regulations and ways of holding wrongdoers accountable (though there never seems to be agreement on who the wrongdoers are, exactly). The entire trading system enters a deep recession lasting more than a decade. The traders eventually adopt simpler, more stringent rules, and trade grows again.

The V.C.s of B.C. (The New York Times)

A second, and related, theory, is the State Theory of Money. this idea stems from the fact of people owing a sort of "primordial debt" to the state, simply by means of our existence. The means to pay off this debt become a standard circulating unit of money. It doesn't matter what money is, as long as it can pay off the debt to the state it counts as money - wampum, cowrie shells, quetzal feathers, gold bars, pieces of paper, bits in a computer. It the requirement of taxes that "legitimates" money, not legal tender requirements or tradition.

This stems from the ancient practice of wergild - an ancient Germanic legal code where compensation is provided to the victim of a crime by the perpetrator to maintain social justice. This allowed an exact "price" to but put on everything (including human life) to determine equivalencies in the payment of restitution. This, not impersonal markets, is where prices began. These "prices" were debts that the society could impose on individuals who transgressed against the collective. To get back into good graces with society, the debts needed to be paid.

Weregild (also spelled wergild, wergeld, weregeld, etc.), also known as "man price", was a value placed on every being and piece of property in the Salic Code. If property was stolen, or someone was injured or killed, the guilty person would have to pay weregild as restitution to the victim's family or to the owner of the property. Weregild payment was an important legal mechanism in early Germanic society; the other common form of legal reparation at this time was blood revenge. The payment was typically made to the family or to the clan.

https://en.wikipedia.org/wiki/Weregild

The debt owed to that state means that the unit of account used by the state becomes the money that circulates in the economy as a universal means of payment. This is known as the "State Theory of Money," or Chartism.

[T]he chartalist—or state money—approach...emphasizes that money evolves not from a pre-money market system but rather from the “penal system” based on the ancient practice of wergild...Hence, it highlights the important role played by “authorities” in the origins and evolution of money. More specifically, the state (or any other authority able to impose an obligation) imposes a liability in the form of a generalized, social unit of account—a money—used for measuring the obligation. This does not require the pre-existence of markets, and, indeed, almost certainly predates them.

Note that the state can choose anything to function as the “money thing” denominated in the money of account:  “Validity by proclamation is not bound to any material” and the material can be changed to any other so long as the state announces a conversion rate (say, so many grains of gold for so many ounces of silver). The state chooses the unit, names the thing accepted in payment of obligations to itself, and (eventually) issues the money-thing it accepts. In (almost) all modern developed nations, the state accepts the currency issued by the treasury...The material from which the money thing issued by the state is produced is not important (whether it is gold, base metal, paper, or even digitized numbers at the central bank). No matter what it is made of, the state must announce its nominal value (that is to say, the value at which the money-thing is accepted in meeting obligations to the state) and accept it in payments made to the state.

I'll interject here to say that it's probably not true that the state could require anything to act as money. For example, apples would probably not work. Nor would pieces of paper that anyone could make with an inkjet printer. It needs to be something reasonably rare, secure, and not counterfeitable. This is probably why gold and silver were used - they are chemically stable, rare, resistant to destruction, and verifiable.

Assume that the State chooses something that anyone can reproduce, supply or counterfeit very easily, say earth-worms or dead flies. Then the supply of money would shoot up, hyperinflation would ensue, and the monetary system would become useless. Many of the early monetary units, e.g. tally sticks, coins purposefully broken in two parts, clay tablets within casings, had no intrinsic value, but their credit/debt value could be uniquely confirmed. One of the problems of electronic money is the perceived danger of hacking and fraud. I have always contended that the margin between the intrinsic (bullion) worth of coinage and its nominal value will be a function of the power of the State authority.

www.epicoalition.org/docs/Credit_and_State_Theories.pdf

Back to Wray's account:

Whether the government’s IOU is printed on paper or on a gold coin, it is indebted just the same. What, then, is the nature of the government’s IOU? This brings us to the “very nature of credit throughout the world,” which is “the right of the holder of the credit (the creditor) to hand back to the issuer of the debt (the debtor) the latter’s acknowledgment or obligation” (. The holder of a coin or certificate has the absolute right to pay any debt due to the government by tendering that coin or certificate, and it is this right and nothing else which gives them their value. It is immaterial whether or not the right is conveyed by statute, or even whether there may be a statute law defining the nature of a coin or certificate otherwise.

Hence, we can integrate the state money and credit money approaches through the recognition of the “very nature of credit,” which is that the issuer must accept its own IOUs...Typically, the money-thing issued by the authorities was not gold-money, nor was there any promise to convert the money-thing to gold. Indeed, as Innes insisted, throughout most of Europe’s history, the money-thing issued by the state was the hazelwood tally stick...Other money-things included clay tablets, leather and base metal coins, and paper certificates.

Why would the population accept otherwise “worthless” sticks, clay, base metal, leather, or paper? Because these were evidence of the state’s liabilities that it would accept in payment of taxes and other debts owed to itself. The key power of the state was its ability to impose taxes: “the government by law obliges certain selected persons to become its debtors.... This procedure is called levying a tax, and the persons thus forced into theposition of debtors to the government must in theory seek out the holders of the tallies or other instrument acknowledging a debt due by the government”.

Contrary to orthodox thinking, then, the desirability of the money-thing issued by the state was not determined by intrinsic value, but by the nominal value set by the state at its own pay offices. Nor was the government’s money forced onto the public through legal tender laws. It is certainly true that governments often do adopt legal tender laws, but these are difficult to enforce and hence often ineffective. The power of government to impose a tax and to name what will be accepted in tax payment is sufficient, and certainly trumps legal tender laws.

Once the state has created the unit of account and named what can be delivered to fulfill obligations to the state, it has generated the necessary pre-conditions for development of markets. As Innes argued, credits and debts preceded markets, and indeed, created the need for markets. The primordial debt is the tax obligation, which then creates the incentive for private credits and debts and then for markets. Indeed, evidence from early Babylonia suggests that early authorities set prices for each of the most important products and services—perhaps those accepted to meet obligations to the authorities.

Once prices in money were established, it was a short technical leap to creation of markets. This stands orthodoxy on its head by reversing the order: first money and prices, then markets and money-things (rather than barter-based markets and relative prices, and then numeraire money and nominal prices). The next step was the recognition by government that it could issue the money-thing to purchase the mix it desired, then receive the same money thing in the tax payments by subjects/citizens. This would further the development of markets because those with tax liabilities but without the goods and services government wished to buy would have to produce for market to obtain the means of paying obligations to the state.

Note how this debt owed to the state is very similar to the corvee labor debts that ancient people volunteered to build the giant stone monuments. People provided labor in return for the debt of being granted land to farm by the whole community. That is, they repaid their ownership of communal land by payment of labor debt to a centralized authority that supervised the collective redistribution and beer feasts. This "primordial debt" becomes the foundation for centralized money.

Today, we pay our obligations to society in money rather than labor, and we provide labor to get the money to pay our obligation to the state. In return, the state defends us, settles disputes via the courts, and keeps order (similar to a feudal lord). The state also provides in times of scarcity from "central stores." i.e. social insurance. It also redistributes (just like ancient societies). And, most importantly, the state creates the market economy. This is exactly what David Graeber, and earlier, Karl Polanyi, pointed out.

This "primordial debt" is similar to the "hut tax" imposed in British colonies. Authorities would impose (by violence) a "hut tax" on the huts in a village. The payment demanded for this tax was in the currency used in the colony. The only was to get this money to pay the tax was to work for wages for an employer. This caused the villagers to leave the reciprocal economy and go to work in the money economy for wages for the colonail masters, providing a ready source of labor. Or, they had to sell their crops to the colonail masters for export to gain the currecny needed to pay the tax.  Thus, the colonialists created "markets" in villages where none before existed.

The hut tax was a type of taxation introduced by British colonialists in Africa on a per hut or household basis. It was variously payable in money, labour, grain or stock and benefited the colonial authorities in four related ways: it raised money; it supported the currency; it broadened the cash economy, aiding further development; and it forced Africans to labour in the colonial economy. Households which had survived on, and stored their wealth in cattle ranching now sent members to work for the colonialists in order to raise cash with which to pay the tax. The colonial economy depended upon black African labour to build new towns and railways, and in southern Africa to work in the rapidly developing mines.

https://en.wikipedia.org/wiki/Hut_tax 

Once money enters the picture, only then can markets form. But as we'll see, markets are just as much creations of the state as money.