Economic History Association

The Role of Money in Economic History Author(s): Wesley C. Mitchell Reviewed work(s): Source: The Journal of Economic History, Vol. 4, Supplement: The Tasks of Economic History (Dec., 1944), pp. 61-67 Published by: Cambridge University Press on behalf of the Economic History Association Stable URL: http://www.jstor.org/stable/2113259 . Accessed: 30/05/2012 23:07
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History TheRoleof Money Economic in

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role money has played, and still plays, in the evolution of social organization individualbehaviorremainsa darkarea thoughsome and cornersbesidespricehistoryhavebeenstudiedintensively.You knowbetter than I how much has been written by anthropologists, numismatists,and historiansabout such matters as the differentforms of money men have used, the evolutionof coinage,the relationof gifts and piracy to the rise of regulartradeand organizedmarkets,the commutation dues in kind and of servicesinto money payments,the transformation an agriculturalpeasof antry into an industrialproletariat,the changingmethodsof governmental financein war andpeace,the development creditand banking,the spread of of bookkeeping its refinement accounting, diverseformsof busiand into the ness enterprises,and the interrelationsbetweenmakinggoods and making money.Some of the monographs have read upon these and relatedtopics I are admirablepieces of work. But monographs flashlights; they do not are give generalillumination. What we do not yet have, whatwe need,andwhat economic historians should supply is a coherent story of how monetary forms have infiltratedone human relation after another,and their effects uponmen'spracticesand habits of thought.I am well awarethat the spadework desirable for this job is far from completed; but even now wellequippedstudentscoulddrawan authenticsketch of the processas a whole. By so doing they would both stimulatedetailed researchand enlightenthe thinkingof all who are concerned with social organization, past and present. I PerhapsI can make my plea for undertaking this task morepoignantby recallingsome of the many ways in which the use of money has influenced the fortunesof successivegenerationsand conditionedtheir minds. Whenmoneyis introduced into the dealingsof men,it enlargestheir freedom. For example,when a personalserviceis commutedinto a moneypayment, the servitorhas a widerchoice in the use of his energyand the lord a widerchoicein the use of his income.By virtueof its generalized purchasing power, money emancipatesits users from numberlessrestrictions upon what they do andwhat they get. As a society learnsto use moneyconfidently it graduallyabandonsrestrictionsupon the places people shall live, the occupationsthey shall follow,the circlesthey shall serve,the pricesthey shall charge,and the goods they can buy. Its citizens have both a formal and a genuinefreedomin these respectswider than is possibleunderan organiza6i

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tion in whichservicesandcommodities bartered. AdamSmith's"obvious are and simple system of natural liberty" seems obvious and natural only to denizensof a money economy. But economicfreedom,like its sister, political freedom,brings responsibilities and dangersas well as opportunities. personalrelationshipsbeAs tweenmasterandmanweretransformed a cashnexus,frequentlaments into wereheardover the hardlot of the manywho did not knowhow to profitby their largeropportunities. Living by makingand spendinga money income requiresmental and moralabilities of a kind not inculcatedby a system of personalmasteryand dependence, far harderto acquirethanmost modand erns realize.In graspingthe advantagesof a money economy,society was unwittingly subjecting itself to a harsh new discipline which compelled people to becomemore calculating,more self-reliant,and more provident, that is, to acquirewhat the finishedproductsof this disciplinecame to call ''economic virtues." Individualswho possessedsuperioraptitude for makingmoney came to the fore in all walks of life, graduallygiving society a new groupof leaders to competeandcombinewith thosewhoseeminencederivedfromhigh birth, skills in war or intrigue,or the qualities that won prefermentin the church andsuccessin the arts.The old aristocracy, well as the old peasantry,had as its unadaptables the new order,and they suffered romanticdecline.The to a new leaders found many chances to exploit others and took advantageof them; but, broadlyspeaking,men who are trying to make money are the servantsof consumers-that is, of the whole society. For to make money,a man has to sell goods,and not very often can the seller forcepeople to buy. Usually he must dependuponpersuasion-he must offergoodspeoplewant at pricesthey are readyto pay. In this sense, the money economygradually put the task of makinggoodsunderthe directionof menwho providedmost efficiently what solvent consumerswished to buy, and whose continued leadershipdependedon maintainingtheir efficiency. The increasinguse of money acceleratedchangesin the methodsof producing and distributinggoods, and changes in the characterof products. Throughthe impersonalmechanismof the market, successful innovators could put pressureupon less enterprisingbusinessmento adopt improved methods.Forcedchangeis an uncomfortable, sometimesa cruel, readjustment, and a society unaccustomedto it puts obstaclesin its way. But the money economyofferedsuch incentivesto the ingeniousand energetic,and the effects of their innovationswere often so pleasing to consumersthat of oppositionto change could do no more than retard the reorganization

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trade,farming,fabrication,and transportation. time camewhenpublic The opinion,which had condemnedbreachesof traditionin economicmatters, beganto take pridein themas "progress." To nations as to individualsmoney economybroughttroubleas well as gain. It exposeda nationto a novel set of dangersarisingfromthe technical exigenciesof monetarysystems. Men had to learnhow to keep coins of different denominationsand coins of differentmetals in concurrentcirculation; how to preventcounterfeiting,clipping,and sweating of the coinage by privatepersons,andhow to preventdepreciation coinsby the sovereign of authority; how to get preciousmetals for coinageand how to guardagainst the depletionof the monetarycirculationthroughexport. Later came the host of problemsconnectedwith the use of paper money of varioussorts. These technicalproblemswere urgentbecausein a money economylivelihood itself dependsupon the orderlyfunctioningof an intricatesystem of production distribution, and whichin turndependsuponpricemargins,and pricesare affectedin bewildering ways by money.Even the nationsthat had the best monetarysystems were gravely disturbedby fluctuationsin the supplyof silverandgold flowinginto Europefromdim outerregions.Nor is this entirelya story of the past. We have not yet fully masteredthe monetary systems we set up. They still do unexpectedand unpleasantthings to us. Witness the difficultiesour own countryhas in preventingits war effort frombeinghampered fluctuationsin commoditypricesat wholesaleand by retail, in wage rates, and in rents. Nor do our expertsagree about the best way to designmonetarysystems,as reactionsto this summer's conference at BrettonWoodssufficientlyprove. A moresubtle difficultyis that our minds becomeobsessedby monetary illusions.An individualgets richby makingmoney.Why does not the aggregate of individualscalled a nation do the like? I need not dwell upon mercantilist ideas about the peculiarimportanceof gold and silver as items of nationalwealth, or Adam Smith'srefutationof this teaching,or the flaws modernstudents find in his critique. Perhaps there is more likelihood of neglectingthe many schemes of "moneymagic"that have been presented for enrichingmankind,and the laments of moraliststhat money corrupts our sense of values. Certainly the age-old "desire for distinction"gets a pecuniarytwist in a money economy,as Veblen demonstratedto our discomfort. These subjectiveeffectshave their objectivecounterparts. Productionin a money economy is directed toward wares that promise a profit to the makers,not toward goods that will be most beneficialto the consumers,

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whateverthat shouldbe taken to mean.Money economyfosters inequality in the distributionof income,and whereinequalityis markedno one contends that what pays best is what the communityneeds most. A subtler effect, though less noticed, may be scarcely less importantin directing,or misdirecting, energies.As denizensof a moneyeconomywe are proneto our pay far moreattentionto the relativelyfew factorsthat influenceourmoney incomesin a way we can readilytrace than to the host of factors that influence our money expenditures.This twist in perspectiveexplains, for example, why protectionistpromisesof larger markets, fuller employment, and higherwagerateswin ourvotes, despitefree-tradedemonstrations that high tariffsreduce"realincomes"by divertingenterprisefrom the lines for which a nation is relativelybest equipped.In general,the highly technical character money-making of enablesus to be farmorerationalin carryingon that processthanwe can be in spendingmoney to satisfy competingdesires, whichwe cannotreduceto a commondenominator. I think moneyeconomyis responsible also for businesscycles. So far as I have been able to tracethem, these recurrent alternationsof expansionand contractionin economicactivity occuronly in communitieswherethe productionand distributionof goods are carriedon mainly by businessenterprisesmanagedfor profit,and wheremost people get their livings by making andspendingmoneyincomes.Communities otherwiseorganized undergo in fluctuations fortune,andmay not enjoyso high a standardof living as the most fortunatemoneyeconomies;but they seem to be exemptfromcyclical in contractions employment. II Money economyhas also a profoundeffecton man'seffortsto knowhimself. By giving economicactivity an immediateobjectiveaim, and by providing a commondenominator termsof which all costs and all gains can in be adequatelyexpressedfor businesspurposes,the use of moneyprovideda technicallyrationalscheme for guiding economiceffort. It thereby paved the way for economictheory; for technicallyrationalconductcan be reasonedout, and in that sense explained.But moneyeconomydoes this job of rationalizingconductonly in a superficialsense, and unwary observersof humanbehaviorfell into the trapit had set. Thoroughlydisciplinedcitizens of the money economyreadily assumedthat all economicbehavioris rational,and whenthey triedto penetratebeneaththe moneysurfaceof things they foundno absurdityin supposingthat men do psychic bookkeepingin in pains and pleasuresas they do pecuniarybookkeeping outgo and income.

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On this basis they couldgo to the lengthof declaring, Mill did,that money as merely enablesmen to do moreeasily what they would do without it. Followingthe money-making pattern,economictheorybecame,not an account of actual behaviorsuch as historiansattempt to provide,but an analysis of whatit is to the interestof mento do undera varietyof imaginedconditions. Fascinatingsystems of thought have been excogitatedin this fashion. They are not wholly lacking in verisimilitudein a nation where money economyis highly developed,andpecuniaryaccountingis the guideof many actions. But, after all, money economyhas not madehumannatureover in its ownimage.We cannotexplainoureconomicbehaviorin termsof a calculating pursuitof self-interestif for no otherreasonthanbecausemuchof our behavioris not guidedby calculations.So patent has this fact becomethat economictheorynow virtually rejectsthe theoryof value, whichused to be consideredthe cornerstoneof the entire structure.Today's fashion is to assumedemandschedulesor curvesof indifference, without inquiringwhat men's preferencesreally are, how they are arrived at, or how they are changed. But knowledgeof economicbehaviorremainsexceedinglyschematic, superficial,and technical when it rests on confessed ignoranceof what men are striving to get and what they are striving to avoid. To say merelythat men havescalesof preference lays a foundationfor speculations that apply logically to Esquimauxand Londonbankers,to men of the tenth and men of the twentiethcenturies,to peoplesat war and peoplesat peace. The very generalityof the conclusionsthat can be deducedfrom such assumptionspreventsthem fromfittingthe facts of any placeand time. Pretty much all that economic historians try to learn is barred from economic theoryof the currentabstracttype. Not only did the money economymake it plausibleto explaineconomic behavioras a calculatingpursuit of self-interest,it also long kept a more scientifictreatmentvery difficult.Even in the first decadeof the nineteenth century,a realistlike Malthuscouldfinddata for testingspeculations about the growthof populations.But Ricardocouldnot have foundadequatedata for testing his "laws"of distribution,howeverhardhe tried.The humdrum processesof producing exchanging and goods,of payingandreceivingmoney were recordedin privateaccountbooks,but studentshad no access to these basic sources,and virtually no summariesof them were compiled.As Mr. Hamilton points out, until Jevons publishedhis index numbersin i863, economists did not even know whether the trend of wholesale prices of commodities risingor falling.No methodof inquiryinto most economic was problemsother than speculativereasoningfrom assumptionsof uncertain

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factual validity was feasibleso long as observationsof what occurredwere scanty and the methods of using such observationsas could be had were crude.But in the courseof their expansion,the moneyeconomiesreacheda stage wherebusinessmen, investors,and officialsneededeconomicinformation more extensive than their predecessorshad. How operatingrequirements led to the collection and publicationof an ever-expanding array of data is a development that economichistoriansshouldnot neglect.Oneconsequencewas that it becamepossible to test a wider range of explanatory hypotheses.And that possibility encouraged economiststo formulatetheir hypotheseswith an eye to empiricaltesting.Nowadayswe can beginlaying the foundationfor a type of economicsthat will have a demonstrable relation to the actual conditionswith whichmen have to deal, becauseit can be based upon an analytic study of actual behavior.This empiricalscience, whosebirth pangswe are witnessing,will be as definitelya by-productof a later phase of money economy as mercantilismand the speculations of Ricardowereby-products earlierphases. of III To the best of my knowledgeand belief, I have said nothingnew. What I have tried to do is to suggest how diverse are the cumulativechanges to which the adoption of monetary institutions has led. For that purpose, familiaritems are the most telling illustrations.I have one more remarkto make, and that is as familiar as its predecessors. the developmentsI All have mentioned,and many othersyou might add to my shortlist, are interrelated.That is, their historicalevolutioncannot be adequatelyaccounted for piecemeal.Monographs need, more than we now have. They are inwe dispensable.But howevermany we may accumulate,monographs will not give us understanding the organization receivedfrom our forefathers of we and shall pass on with modificationsto our grandsons.Economic theory makes a valuable contributionto the understanding this institutional of complex; but it will not give us insight into the way our organizationhas changedthroughthe centuriesand is changingtoday.And such insight into the way social organizationevolves is imperativenow that we are striving moreconsciouslyand daringlythan ever to readjustour economicorganization to the largeropportunities openedbeforeus by the applicationof science to the workof the world. While serving society by focusing attention upon this theme, economic historianswould at the same time be meetingone of their own professional needs.They are painfullyawarehow hardit is to organizethe vast arrayof

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materials that have to be crammedinto their general treatises. To cite examples:readersof Cunningham's Clapham's and great books can hardly see the forest for the trees. What I have been saying leads to a suggestion for overcomingthis difficulty.The nationswith which economichistorians are chiefly concernedorganizetheir economicactivities under the form of making and spendingmoney. This practice supplies the basic framework for economictheory.Cannoteconomichistorybe organized most effectively around the evolution of pecuniaryinstitutions? If the activities studied have a definiteschemeof organization, shouldnot a history of them follow that scheme? If this suggestionmeritsseriousconsideration, firststep towardtrying the it out in practicewouldbe to framethe best accountnow feasibleof the way men came to organizetheir dealingswith one anotheron the basis of money payments,the way this schemespreadfromone sphereto another,the material and culturalconsequences which it led, the rationalizations conto and demnationsit evoked,and the furtherchangesit seems to be undergoing in our day. Not only would such a sketch contributetowardeffectivedealing with the large problemsof social organizationthat are impingingupon us, it wouldcontributealso towardthe planningof research economichistory in and the effectivepresentationof its findings. TheNational Bureauof EconomicResearch
WESLEY

C. MITCHELL