The Implausibility of the Barter Narrative & Credit Money in Ancient Babylon

By R. D. Baker
The Developing Economist
2014, Vol. 1 No. 1 | pg. 2/3 |

IV. Credit and Barter – Historical Difficulties

The problem with evaluating whether money ever emerged according to the barter narrative is that the conditions a historical society would have to meet to be a barter economy are strict already, and the three function definition of money excludes devices, like credit, which solve some of the essential problems but are not themselves media of exchange. Evidence proving the barter narrative would have to show two things:

  1. An economy dominated by barter, meaning direct simultaneous exchange of goods;
  2. The emergence of a commodity in that economy which fulfills the unit of account and store of value function, but removed the coincidence of wants problem through the medium of exchange function.

Of these two requirements perhaps the hardest one to substantiate historically is that a barter economy based on simultaneous direct exchange ever existed.

"Barter is at once a cornerstone of modern economic theory and an ancient subject of debate about political justice, from Plato and Aristotle onwards. In both discourses, which are distinct though related, barter provides the imagined preconditions for the emergence of money. Why should anthropologists be interested in logical deductions from an imagined state? No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing. Nevertheless, there are economies today which are dominated by barter" – Humphrey, 1985

While there have certainly been societies that used barter, there are no examples of economies relying on barter for trade between neighbors. Barter ordinarily "takes place between strangers, even enemies"( Graeber, 2011). In a way, barter is an extreme case of credit where the loan is repaid instantly. For interactions between family members or neighbors, there is no need for this kind of strict requirement since debts can be repaid in a variety of ways over a flexible time span. Between strangers and enemies however, each party must be wary that the other is not going to murder, steal, or both. Barter is thus ritualized, and pushed into the margins of societal activity.

V. Four Merchant Model

Using four players in a simple connected network, a variety of outcomes relevant to the functions of money can be demonstrated. One important result is that using a system of credits (loans) no more complex than those written onto clay tablets in the Ur III dynasty of Old Babylon (2000 1600 BC), it is possible to gain all three functions of money. The loan contract by definition fulfills the unit of account function and is a store of value, and when traded becomes a medium of exchange. This is particularly relevant to the barter story because while there are no historical economies based around barter as a primary mode of exchange, ancient Babylon contained a wealth of sophisticated banking operations inside their temples, leading to a widespread use of contract loans throughout the society and the legal codification of contract law to go with it. The model that follows uses four merchants in a network structure because it is relatively simple to model the standard problems with barter, the use of credits to solve them, and can be used to simply analyze the profitability of becoming a middleman due to the complementarity of the goods being traded.

VI. Model Overview

There are four producers of goods in a primitive economy, situated in a circle around a treacherous mountain. In their native tongue they are named after what they produce (the grain producer is named ‘Grain', and so on). Each player can talk only to a neighbor a quarter of the way around the mountains: the mountains permit noone to pass them and thus it is impossible for a player to either communicate or enforce contracts with the player opposite (over the mountains, see fig. 5 ). Each player specializes in the production of a specific unit goods vector: W,G, B or S. For instance, when Wood makes a unit of output I refer to it as W = (1, 0, 0, 0). Similarly, when he produces x units of output, I refer to it as xW = (x, 0, 0, 0).

Now, for simplicity take the case of homogeneous preferences. Let the utility of every producer be dependent on their holdings vector h = (h1, h2, h3, h4) in the same way:

 

The benefits of this utility function are that (1) it is easy to compute and (2) it fulfills the usual conditions of utility: