Money and the Origins of Debt
I’m Andy Temte and welcome to the Saturday Morning Muse! Start to your weekend with musings that are designed to improve financial literacy around the world. Today is May 24, 2025.
First off, I’d like to wish everyone a happy Memorial Day weekend. I hope you’re able to unplug and reconnect with family and friends. Most importantly, let’s all make time to honor the service members who gave the ultimate sacrifice while protecting our country, our rights as citizens, and our freedoms. Thank you.
Last week, we talked about the history of money. Money—however we agreed to define it—helped solve many of the challenges with the barter system of trade. For ancient trade networks to flourish, traders and governments struck coinage that acted as:
a medium of exchange—meaning that coinage was accepted as payment in transactions,
a unit of account—meaning that coins allowed for measuring and accounting for the value of different goods,
a store of value—meaning that a trader could save coinage to make purchases in the future, and
a standard of deferred payment—meaning that coinage could be used to enable borrowing, lending, and the settlement of deferred payment—what we call a credit transaction. This is where we’re going to focus our attention today—on the definition of, and history of credit.
But before we move on, I want to be clear that coinage played the role of money because market participants all agreed that coinage would serve as money. However, money doesn’t have to take the form of coins (or paper). Money is whatever we all agree is going to serve as money and whatever we end up calling money satisfies the functions and properties of money that we outlined last week.
Credit Transactions and Money
Let’s look first at the definition. A credit transaction is where the buyer of goods or services promises to pay the seller of those goods or services at a later date.
If we think about ancient economies like our hypothetical traders from FruitLand and ProteinLand, the availability of goods to trade was likely very ‘lumpy’ and inconsistent—meaning they’re not available in consistent quantities all year long. If we suppose that crops in FruitLand are harvested in the fall, but animals in ProteinLand are hunted in the spring, there’s a significant seasonal gap between the availability of these goods for trade. These seasonal gaps are a primary reason traders needed to enter into credit transactions.
What might this have looked like in practice? Let’s suppose it’s late spring and ProteinLand traders have lots of meat and fur pelts to sell. FruitLand traders don’t have any physical goods to give ProteinLand traders for meat and fur pelts because their fruit and crops won’t be harvested until the fall. Instead of waiting until the fall, FruitLand traders had to make promises to repay ProteinLand traders.
These promises were standardized through the use of money as a unit of account and the standard for deferred payment. The key thing to note is that the money that’s used in this transaction represents a debt that is to be repaid.
If we look at the same problem from the perspective of ProteinLand traders but we assume it’s now late fall, ProteinLand traders need fruits and grain from FruitLand traders who have an abundance of their product, but the ProteinLand traders have no meat and fur pelts to trade. All they have is the ability to enter into a credit transaction that’s denominated in the thing that both sides agree is money. Again, the money that’s used to track this transaction represents a debt that is to be repaid.
So here’s the key point: if I hold money, I’m holding someone else’s debt. In our simple economy, in the spring, fur pelts and meat are sent to FruitLand in return for money. Then in the fall, fruits and grain are sent to ProteinLand in return for money. FruitLand has the fur pelts and meat they need, and ProteinLand has the fruits and grains they need. Money is the tool that has been used to solve the seasonality problem with trade between these two economies. The “money” used to enable trade flows back and forth between these economies as a medium of exchange, store of value, unit of account, and standard for deferred payment.
For those who are interested, our example is rooted in the credit theory of money. Looking back into the historical record, the first credit transactions date back to ~3000 BCE in Mesopotamia, but verbal agreements similar to our hypothetical example almost assuredly significantly predate the written record.
So why is this so important? What’s the modern lesson? We’re going to talk a lot about credit and debt as we move forward. We live in a consumer-driven economy where debt is out of control on a number of levels. As of the date of this recording, our national debt is unsustainably high and stands at $36.8 trillion or $107,713 for every citizen (including minors), household credit balances are another $18.2 trillion or $53,278 for every citizen (including minors).
We’ll be talking about our issues with debt in much more detail as this series progresses, but for now, knowing where credit and debt got their start—with the advent of trade—is an important history lesson for everyone to understand.
Until next week…
Grace. Dignity. Compassion.
————————————
Reference sites:
