The explanation for the origin of money most of us have heard is that it was created through bartering crops, animals, and other products. The story is that people couldn’t carry these objects and animals around, so they kept metal coins to exchange for what they needed.

Adam Smith proposed the “Commodity Theory” of how money originated. He said money resulted from barter among individual producers and consumers. According to this theory, metal emerged as the most desirable medium for trade because of the following features:

Metal is a good 1. compact and uniform store of value (saves purchasing power), saves space and does not spoil. 2. convenient means of payment, divisible into standardised fractional weight units. 3. measure of value.

However, research into Assyria and ancient Mesopotamia in the Bronze Age—5000 years ago—where anthropologists believe money originated from, reveals that this is not how it happened. Money originated from grain stored in Babylonian temples.

According to economic anthropologist Michael Hudson, Babylonians had an abundance of grain but did not use it as a means of exchange because of the time gap between planting and harvesting. When someone went to the market, he did not pay by carrying grain in his pockets.

So, the ancients opened an account at the market, which they would settle at harvest time. Anyone with such an account at a market would pay with his grain, and the markets would take this grain to the palace to repay any grain taken out throughout the year.

A slightly complicated system, yes, but the point is that it is untrue that the earliest transactions were direct, on-the-spot barter contracts where one party gave a sheep in exchange for grain. Instead, they were financial in that they used the grain as money.

The monetised grain was then used to settle debts accumulated throughout the year. So, the accountants in the palaces and temples originally developed grain as money as an administrative tool for economic planning and resource allocation.

The earliest forms of money were not physical but fiscal, i.e. “money” was public debt. Money was not pieces of gold or silver that people carried around. It was all the accumulated debts that needed to be repaid at a specified time.

The accountants at the temple determined how much each person or trader had to pay back—what we think of as ‘price’ today. The temples were the authorities that regulated this value: the required weights, measures, and purity standards to accept this ‘grain money’.

Ancient Mesopotamian palaces regulated the economy by employing large numbers of people who were remunerated in crops and wool grown at the palaces and temple lands. Tenants at the temples also paid grain rent. These operations were on a large institutional scale.

Temple activities also included building public infrastructure, which required feeding and supplying labourers with food, tools, beer, and ceremonies. Again, because the harvest was once a year, they had to plan budgets and determine future surpluses or shortfalls.

The palaces and temples were busy financial centres. They assigned traders to obtain foreign silver, copper and other raw materials. The scale on which the Mesopotamian institutions operated required planning to schedule and track the flow of food and raw materials.

How would the Mesopotamians keep track of all the transactions? They needed to assign standardised values to basic commodities. So, they created a system of prices in round figures to simplify calculation and account-keeping.

A quart of grain was set to equal one shekel (8 grams) of silver. So, a person could, at harvest time, pay his account at the market with either a quart of grain or 8 grams of silver. Sellers followed this system and charged accordingly for their goods and services.

This ‘bi-monetary’ system was helpful for paying the palace and temples and as a reference point to value unrelated commodities and functions. If it was difficult to exchange grain for metal, now there was a standard: X amount of grain = X amount of metal = X amount in wages.

To provide a standard value and serve as the means of payment, grain and silver needed to be measured and weighed in standardised units. These units were based on a calendar that the temples created to allocate resources regularly and monthly.

They introduced a calendar with standardised 30-day months to equate grain to silver to labour time/wages. They could calculate how much grain it cost to produce textiles or bricks, build public structures or dig canals over time.

The same principle was applied to silver and other metals where the standard of measure of the time, the mina, was divided into 60 shekels. A new standard was created to calculate labour costs: one day of work = 1/30 of a gur of grain = 2 shekels. What about foreign trade?

When trading with foreign nations, the Mesopotamians simply switched to silver from grain. Gold was used much less because its price varied between cities and periods. Also, any fluctuation in price was undesirable because “money” meant payment at guaranteed prices.

Monetary values needed stability for producers to plan and minimise the risk of price shifts to pay their debts. Monetary stability was so important to the Mesopotamians that they wrote into Law the importance of price stability.

Hammurabi’s laws (c. 1750 BC) specified that any citizen who owed barley or silver to a trader (including the palace) could pay off the debt in goods of equivalent value, e.g., grain, sesame or some other commodity using the official standard price grid.

Of course, price changes occasionally occurred during crop failures, droughts or floods. However, these increases resulted from scarcity because of natural causes; they were not built into the system.

The Mesopotamians understood that arrears from unpaid debts would lead to economic chaos. So, to maintain economic balance, each new ruler would wipe out all debt from personal debtors when circumstances made them unpayable (commercial debts were, however, left in place).

Mesopotamia’s bi-monetary (grain and silver) economy was stable. When entrepreneurs in the agricultural sector needed to pay official debts in grain at harvest time, it was part of a structured, stable relationship.

Unlike today, Bronze Age temples and palaces did not create money from nothing to spend on the economy, and there was no monetary inflation. Prices and values remained the same for lifetimes. Wool prices varied in response to market conditions but remained fixed for 150 years.

Like every academic topic, there are different theories of the origin of money, each affecting how we view money today. What I described above is the State Theory of the birth of money. In this theory, the Government regulated money for administrative purposes.

To emphasise this, Aristotle wrote that money “is called customary currency because it does not exist by nature but by law,” and that it is “accepted by agreement”. Mr Aristotle added, “it is in our power to change the value of money and make it useless.”

The State Theory of Money asserts that money originates from the need to settle debts, whether to pay taxes or private debt. It does not arise as a commodity for personal and purely commercial gain.

At the start of the post, I described the most common theory of the origin of money: the Commodity Theory of money. According to this theory, money became the measure of value and means of payment without any State (palace or temple) oversight.