You are on page 1of 8

Economic History Association

The Role of Money in Economic History

Author(s): Wesley C. Mitchell
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:
Accessed: 27/10/2008 02:36

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at JSTOR's Terms and Conditions of Use provides, in part, that unless
you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you
may use content in the JSTOR archive only for your personal, non-commercial use.

Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed
page of such transmission.

JSTOR is a not-for-profit organization founded in 1995 to build trusted digital archives for scholarship. We work with the
scholarly community to preserve their work and the materials they rely upon, and to build a common research platform that
promotes the discovery and use of these resources. For more information about JSTOR, please contact

Economic History Association and Cambridge University Press are collaborating with JSTOR to digitize,
preserve and extend access to The Journal of Economic History.
TheRoleof Moneyin Economic
THE role money has played, and still plays, in the evolution of social
organizationand individualbehaviorremainsa darkarea thoughsome
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 commutationof dues in kind and
servicesinto money payments,the transformationof an agriculturalpeas-
antry into an industrialproletariat,the changingmethodsof governmental
financein war andpeace,the developmentof creditand banking,the spread
of bookkeepingand its refinementinto accounting,the diverseformsof busi-
ness enterprises,and the interrelationsbetweenmakinggoods and making
money.Some of the monographsI have read upon these and relatedtopics
are admirablepieces of work. But monographsare flashlights; they do not
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 spade-
work desirable for this job is far from completed; but even now well-
equippedstudentscoulddrawan authenticsketch of the processas a whole.
By so doing they would both stimulatedetailed researchand enlightenthe
thinkingof all who are concernedwith social organization,past and present.

PerhapsI can make my plea for undertakingthis task morepoignantby
recallingsome of the many ways in which the use of money has influenced
the fortunesof successivegenerationsand conditionedtheir minds.
Whenmoneyis introducedinto the dealingsof men,it enlargestheir free-
dom. For example,when a personalserviceis commutedinto a moneypay-
ment, the servitorhas a widerchoice in the use of his energyand the lord a
widerchoicein the use of his income.By virtueof its generalizedpurchasing
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 oc-
cupationsthey 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 organiza-
62 WesleyC. Mitchell
tion in whichservicesandcommoditiesarebartered.AdamSmith's"obvious
and simple system of natural liberty" seems obvious and natural only to
denizensof a money economy.
But economicfreedom,like its sister, political freedom,brings responsi-
bilities and dangersas well as opportunities.As personalrelationshipsbe-
tweenmasterandmanweretransformedinto a cashnexus,frequentlaments
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,and far harderto acquirethanmost mod-
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
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,as well as the old peasantry,had
its unadaptablesto the new order,and they suffereda romanticdecline.The
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 pro-
ducing 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, readjust-
ment, 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
oppositionto change could do no more than retard the reorganizationof
The Role of Money in EconomicHistory 63
trade,farming,fabrication,and transportation.The time camewhenpublic
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 dif-
ferent denominationsand coins of differentmetals in concurrentcircula-
tion; how to preventcounterfeiting,clipping,and sweating of the coinage
by privatepersons,andhow to preventdepreciationof coinsby the sovereign
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 economyliveli-
hood itself dependsupon the orderlyfunctioningof an intricatesystem of
productionand distribution,whichin turndependsuponpricemargins,and
pricesare affectedin bewilderingways 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 mone-
tary systems we set up. They still do unexpectedand unpleasantthings to
us. Witness the difficultiesour own countryhas in preventingits war effort
frombeinghamperedby fluctuationsin commoditypricesat wholesaleand
retail, in wage rates, and in rents. Nor do our expertsagree about the best
way to designmonetarysystems,as reactionsto this summer'sconferenceat
A moresubtle difficultyis that our minds becomeobsessedby monetary
illusions.An individualgets richby makingmoney.Why does not the aggre-
gate of individualscalled a nation do the like? I need not dwell upon mer-
cantilist 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 dis-
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,
64 WesleyC. Mitchell
whateverthat shouldbe taken to mean.Money economyfosters inequality
in the distributionof income,and whereinequalityis markedno one con-
tends that what pays best is what the communityneeds most. A subtler
effect, though less noticed, may be scarcely less importantin directing,or
misdirecting,our energies.As denizensof a moneyeconomywe are proneto
pay far moreattentionto the relativelyfew factorsthat influenceourmoney
incomesin a way we can readilytrace than to the host of factors that influ-
ence our money expenditures.This twist in perspectiveexplains, for ex-
ample, why protectionistpromisesof larger markets, fuller employment,
and higherwagerateswin ourvotes, despitefree-tradedemonstrationsthat
high tariffsreduce"realincomes"by divertingenterprisefrom the lines for
which a nation is relativelybest equipped.In general,the highly technical
characterof money-makingenablesus to be farmorerationalin carryingon
that processthanwe can be in spendingmoney to satisfy competingdesires,
whichwe cannotreduceto a commondenominator.
I think moneyeconomyis responsiblealso for businesscycles. So far as I
have been able to tracethem, these recurrentalternationsof expansionand
contractionin economicactivity occuronly in communitieswherethe pro-
ductionand distributionof goods are carriedon mainly by businessenter-
prisesmanagedfor profit,and wheremost people get their livings by mak-
ing andspendingmoneyincomes.Communitiesotherwiseorganizedundergo
fluctuationsin fortune,andmay not enjoyso high a standardof living as the
most fortunatemoneyeconomies;but they seem to be exemptfromcyclical
contractionsin employment.
Money economyhas also a profoundeffecton man'seffortsto knowhim-
self. By giving economicactivity an immediateobjectiveaim, and by pro-
viding a commondenominatorin termsof which all costs and all gains can
be adequatelyexpressedfor businesspurposes,the use of moneyprovideda
technicallyrationalscheme for guiding economiceffort. It thereby paved
the way for economictheory; for technicallyrationalconductcan be rea-
sonedout, 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 ra-
tional,and whenthey triedto penetratebeneaththe moneysurfaceof things
they foundno absurdityin supposingthat men do psychic bookkeepingin
pains and pleasuresas they do pecuniarybookkeepingin outgo and income.
The Role of Money in EconomicHistory 65
On this basis they couldgo to the lengthof declaring,as Mill did,that money
merely enablesmen to do moreeasily what they would do without it. Fol-
lowingthe money-makingpattern,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 calcu-
lating 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 economicbehaviorremainsexceedinglysche-
matic, 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 preferencelays 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 as-
sumptionspreventsthem 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 testingspeculationsabout
the growthof populations.But Ricardocouldnot have foundadequatedata
for testing his "laws"of distribution,howeverhardhe tried.The humdrum
processesof producingandexchanginggoods,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
commoditieswas risingor falling.No methodof inquiryinto most economic
problemsother than speculativereasoningfrom assumptionsof uncertain
66 WesleyC. Mitchell
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 officialsneededeconomicinforma-
tion more extensive than their predecessorshad. How operatingrequire-
ments led to the collection and publicationof an ever-expandingarray of
data is a developmentthat economichistoriansshouldnot neglect.Onecon-
sequencewas that it becamepossible to test a wider range of explanatory
hypotheses.And that possibility encouragedeconomiststo formulatetheir
hypotheseswith an eye to empiricaltesting.Nowadayswe can beginlaying
the foundationfor a type of economicsthat will have a demonstrablerela-
tion 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-productsof earlierphases.

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.All the developmentsI
have mentioned,and many othersyou might add to my shortlist, are inter-
related.That is, their historicalevolutioncannot be adequatelyaccounted
for piecemeal.Monographswe need, more than we now have. They are in-
dispensable.But howevermany we may accumulate,monographswill not
give us understandingof the organizationwe receivedfrom our forefathers
and shall pass on with modificationsto our grandsons.Economic theory
makes a valuable contributionto the understandingof this institutional
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 economicorganiza-
tion to the largeropportunitiesopenedbeforeus 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
The Role of Money in EconomicHistory 67
materials that have to be crammedinto their general treatises. To cite
examples:readersof Cunningham'sand Clapham'sgreat 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 organizedmost 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,the firststep towardtrying
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 mate-
rial and culturalconsequencesto which it led, the rationalizationsand con-
demnationsit evoked,and the furtherchangesit seems to be undergoingin
our day. Not only would such a sketch contributetowardeffectivedealing
with the large problemsof social organizationthat are impingingupon us,
it wouldcontributealso towardthe planningof researchin economichistory
and the effectivepresentationof its findings.
TheNational Bureauof EconomicResearch WESLEY C. MITCHELL

Related Interests