Smith and Keynes on the history of money

In The Wealth of Nations Adam Smith writes that after division of labor is established, people begin to save a bit of some commodity to trade for things they need. This could have been cattle, salt, shells, cod, tobacco, hides, nails, and so on, but "In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity." (Smith, p. 127) Metal was preferred because it's not perishable, can be divided into parts, and can be fused together. Eventually, people started making coins to prevent having to weigh the metal for every transaction, the public office of the mint was created to stamp money, William the Conqueror introduced the custom of paying taxes in money, avaricious and unjust princes would consistently reduce the metal in the coins, and so on. "It is in this manner that money has become in all civilized nations the universal instrument of commerce, by the intervention of which goods of all kinds are bought and sold, or exchanged for one another." (p. 131) It all sounds fine, I believed that story for about a decade. But it is so obviously wrong.

Money started when humans organized into states and those states started requiring money for taxes -- whether that money was in the form of corn, cows, or coin.

An excerpt from Carter's The Price of Peace, showing what Keynes discovered about the history of money (p. 187-8):

"Keynes had discovered an ancient history that upended some basic tenets of economics going back to Adam Smith and undermined nearly tree centuries of Enlightenment political theory. Ever since Thomas Hobbes had published Leviathan in 1651, most European philosophers had imagined government as an artificial imposition on what Hobbes called "the state of nature." For Hobbes, the state of nature was a nightmare of violent disorder where life was "nasty, brutish and short," making government--especially monarchy--a source of human salvation. Even thinkers who rejected Hobbes' politics accepted his history. In The Wealth of Nations, Smith had presented markets for trade as a primordial force that came into being long before the development of the political state. Commercial life had started with people bartering goods, trading goats for wheat or cloth for buttons. They eventually adopted money as a medium of exchange, since passing tokens to each other proved to be more convenient than toting wagonloads of cumbersome goods. All of this activity had taken place among free individuals undisturbed by the machinations of capricious, meddling sovereigns, who entered the scene much later. The market was natural, while the state was a relatively recent artifice that intervened in or distorted the independent rhythms of trade. 

"Studying Athens, Babylon, Assyria, Persia, and Rome, Keynes concluded that this history was all wrong. Capitalism itself was an ancient creation of government, dating back at least as far as the Babylonian Empire of the third millennium B.C. "Individualistic capitalism and the economic practices pertaining to that system were undoubtedly invented in Babylonia and carried to a high degree of development in epochs more distant than the archaeologists have yet explored," he wrote--one of several startling observations recorded in seventy pages of unpublished notes and fragmentary argument from his 1920s research. Money, moreover, was not a custom developed by local traders for convenience but a sophisticated tool or rulership that had emerged simultaneously with other developments of the state, including written language and standardized weights and measures. 

"Smith and other thinkers had been led astray by confusing the development of coinage with the invention of money. Coinage, according to Keynes, was "just a piece of bold vanity ... with no far-reaching importance"; money had existed in "representative" form much longer. Its real significance was as a "unit of account"--the demarcation of debt and "the legal discharge of obligations," which governments had been maintaining in ledger books, scrolls, or clay tablets for millennia. Powerful, economically sophisticated empires had developed without using coinage at all.

"States, moreover, had always maintained a policy of active monetary management as a basic condition of rulership. They created and abolished debts as reward or punishment and reformed units of measurement, depreciating or debasing their currency not merely as a trick on unsophisticated subjects but to stimulate trade and ease social tension. Inflation--viewed by orthodox economists of the 1920s as an underhanded sovereign's subversion of the natural order--had instead been a near-constant condition "throughout almost lal periods of recorded history."

"... Money, he argued, was an inherently political tool. It was the state that determined what substance--gold, paper, whatever--actually counted as money--what "thing" people and the government would accept as valid paymnt. The state thus created money and had always regulated its value. "This right is claimed by all modern states and has been so claimed for some four thousand years at least." ... The true source of monetary stability was the public legitimacy of the political authority."