Graeber Explained: What is Money?

The story of how money came to be.

Selam G.
12 min readJan 8, 2022

Read “Graeber Explained: A Series”, where I introduce this series and its main concepts, here.

What is money? Especially now, that money is no longer backed by gold or any real, concrete substance? This question is both easy and difficult to answer.

The easy answer is that money is the substance which governs many of our days, and even our whole lives. It is made tangible for us, in the form of bills, notes, and coins. We use it to acquire everything we need and more.

The difficult, yet more liberating, answer about money is that money is a social construct, and that money is not exactly the same as currency. Even I, who have spent most of my adolescent and adult years learning about how everything in society is a human-made structure, had difficulty fully grasping this before reading Graeber. Sure, money is a construct, but it’s still true that bad things happen when someone throws a wrench into the system. This social concept has real life consequences, and the financial system feels foreign, complicated, full of jargon. I couldn’t really understand what happened during 2008 until I watched The Big Short three times. And if there’s anything that movie can tell us, it’s about how money is inextricably linked to debt.

Take a look at this close-up of a bill issued by the National Bank of Ethiopia. It says, in Amharic and English, “Payable to the bearer on demand, One Hundred Birr”. Birr is Ethiopian currency. Surely that’s an odd way of putting it, after all, here is a 100 Birr bill, which we are already holding. What does this mean, that the person holding this 100 Birr bill has the right to be paid 100 Birr?

Let’s back all the way up to the central lie of economics I talked about previously:

The central lie of economics (or to say it the nicer way, the central myth), is the concept that human exchange began with bartering — Person A gives potatoes in exchange for Person B’s milk. In reality, that has never really happened in history. Graeber, an anthropologist and scholar, walks through in detail all the ways that this myth is false, and gets to the core of how human exchange really began — an understanding that in order for small, agricultural or hunter-gatherer communities to survive, humans had to help each other. This typically manifested in something more like Person A giving Person B potatoes, because Person A had extra potatoes. Later on, Person B has some extra milk, and remembering Person A’s kindness, gives them the milk. Note that this is not just based on “goodness” or “kindness” but also just a central practicality, compared to a theory that a complicated coincident had to occur (Person A needs milk, and has potatoes, at exactly the same time that Person B needs potatoes, and has milk).

So let’s return to Person A, who we’ll call Jessica, and Person B, who we’ll call Henry.

Let’s say that Jessica gave Henry the milk, not expecting anything for it at the moment, but Henry, determined to return the favor one day, gives Jessica an “IOU” note, promising her something equivalent to the milk. Certainly Henry can one day bring by some eggs, or a chicken, or anything else useful and Jessica will tear up the IOU note and that’s that.

Unless, Jessica also owes something to someone else. She might go to her friend Chris and say, “here, whatever Henry can give to me, just tell him to give it to you instead”. Then, when Henry finally returns the favor, or “pays” his “debt”, he settles his debt with Jessica who settles her debt with Chris.

Unless, Chris also passes the note on to another person they owe, who passes the note on to another, to another, to another. As you can see, soon, the IOU note starts to circulate somewhat like a currency. The currency is a piece of Henry’s debt to someone.

Of course, this might work in a little village where everyone knows each other very well. But for Henry’s little favors to accumulate and form IOU notes that support an entire town, city, or even a country, we can imagine that Henry must be very, very rich for everyone to have faith that Henry could actually pay the debt. In addition, if there’s enough of Henry’s debt circulating, couldn’t just anyone sign Henry’s name on a piece of paper and pretend it was Henry’s debt?

As Graeber writes, “All this would be much less of a problem, however if Henry were, say, Henry II, King of England, Duke of Normandy, Lord of Ireland, and Count of Anjou.”

The State and Credit Theories of Money

“All this would be much less of a problem, however if Henry were, say, Henry II, King of England, Duke of Normandy, Lord of Ireland, and Count of Anjou.”

I’ll do my best to describe the State and Credit theories of money that Graeber lays out in his book. These state and credit concepts rest on the fact that money is more like a unit of measurement, and currency is simply a representation of that unit (the IOU notes) rather than the money (Henry’s favors) itself. In that sense a dollar is not actually something with intrinsic value, it’s actually a measurement of value. I might say, “these eggs are worth $3”, but rather than paying me in three dollar bills, you could pay in me in $3 worth of milk.

Many ancient civilizations actually operated this way, like Mesopotamia, which had huge temple-palaces that could make use of just about anything. In Mesopotamia, there were taxes and loans just as now — taxes payable to the grand temple-palaces, and “public” loans payable to either the temple-palaces or commercial/private loans between individuals.

There was gold and silver, and it was valuable, but it was mostly just kept in heavily guarded vaults. Though residents may have owed taxes or loans in silver pieces, they did not actually have to pay in silver pieces, and there was a complicated record of reconciling the “exchange rate”, as it were, between silver pieces and barley, milk, eggs, livestock — but the most important of these was fixing a unit of silver pieces to a unit of barley, as many of the residents would actually “pay” in barley. Thus, currency rarely circulated, but there was still money and complex human exchange, in the form of debts payable in multiple forms.

This brings us to the state part of state and credit. I think this is best explained by Graeber himself:

Modern banknotes actually work on a similar principle, except in reverse. Recall here the little parable about Henry’s IOU. The reader might have noticed one puzzling aspect of the equation: the IOU can operate as money only as long as Henry never pays his debt.

In fact this is precisely the logic on which the Bank of England — the first successful modern central bank — was originally founded. In 1694, a consortium of English bankers made a loan of £1,200,000 to the king. In return they received a royal monopoly on the issuance of banknotes. What this meant in practice was they had the right to advance IOUs for a portion of the money the king now owed them to any inhabitant of the kingdom willing to borrow from them, or willing to deposit their own money in the bank — in effect, to circulate or “ monetize” the newly created royal debt.

This was a great deal for the bankers (they got to charge the king 8 percent annual interest for the original loan and simultaneously charge interest on the same money to the clients who borrowed it) , but it only worked as long as the original loan remained outstanding.

To this day, this loan has never been paid back. It cannot be. If it ever were, the entire monetary system of Great Britain would cease to exist. (p.49)

I bolded this last sentence because there is often a general misconception about what government debts actually are. If a debt owed by Great Britain cannot be repaid without the collapse of the financial system, does that not make us reconsider completely what the words “federal deficit” mean? This discussion is on page 49 of Graeber’s book, and it was probably at that moment that I understood how fundamental this knowledge was. Simultaneously, I was incredibly dismayed and confused that this was not necessarily widely known outside of academic or highly educated circles, when we had known about these systems and theories for…centuries.

And now, hopefully, it’s easy to understand why the Ethiopian bank note says “payable to the bearer upon demand, one hundred birr”. This statement is an acknowledgement. Even in modern times, money is created by selling government treasury bonds, in other words, government debt. For fun, you can Google “quantitative easing”.

Back to the taxes of ancient kingdoms, and the central lie of economics. Obviously, after Mesopotamia, taxes were commonplace, and started to require an officially-minted currency more frequently.

Graeber writes, “…what exactly was the point of taking control of a gold or silver mine, stamping one’s picture on it, causing it to circulate among one’s subjects — and then demanding that those same subjects give it back again?”

In particular, what is the point in light of the central lie, if gold and silver became money “naturally” and markets emerged “spontaneously”, à la Adam Smith? King Henry could simply take control of mines and have all that spontaneously-emerging-money to himself.

In reality, markets do not magically appear, they are created by a centralized authority, the ruler or government. The simplest and most efficient way to bring about the markets is to bring about a central currency, via taxing the population.

If the population must pay a tax in the currency, then they must acquire the currency. If they must acquire the currency, they must trade something for it — milk, eggs, barley. If they are trading something for it, someone must be paying for it. That “someone” is usually the government’s employees or agents — and in ancient times, this primarily meant armies.

“Say a king wishes to support a standing army of fifty thousand men. Under Ancient or medieval conditions, feeding such a force was an enormous problem. Such a force would likely consume anything edible within ten miles of their camp in as many days; unless they were on the march, one would need to employ almost as many men and animals just to locate, acquire, and transport the necessary provisions. On the other hand, if one simply hands out coins to the soldiers and then demands that every family in the kingdom was obliged to pay one of those coins back to you, one would, in one blow, turn one’s entire national economy into a vast machine for the provisioning of soldiers, since now every family, in order to get their hands on the coins, must find some way to contribute to the general effort to provide soldiers with things they want.

Markets are brought into existence as a side effect.

This is a bit of a cartoon version, but it is very clear that markets did spring up around ancient armies; one need only take a glance at Kautilya’s Arthasasatra, the Sassanian “circle of sovereignty,” or the Chinese “Discourses on Salt and Iron” to discover that most ancient rulers spent a great deal of their time thinking about the relation between mines, soldiers, taxes, and food.” (p.51)

The relationship between money and military power has a clear and obvious presence within this discussion. I will not dive into it today, but I will note that, of course, an element of force is required here as well. The populace paid their taxes most likely under the threat of force. In fact, because money is a social construct and created by governments, governments and their armies can also simply force things to be true.

I will also say, on an optimistic note, that Graeber does showcase a pattern in which the decline of gold and silver-backed currencies, or physical currencies in general, alongside the increase in the use of credit money, typically leads to more peaceful times for a region, and we are currently in a time of credit money (I actually could not locate a single physical U.S. dollar bill when photographing my various currencies for the cover photo of this blog post). While this is not a prediction, it could be a hopefully positive indicator.

This is just a short summary of the history and logic around how money came into being in Graeber’s book. Certainly, if by now I’ve gotten you hooked and convinced to read this book with its full detail, please go ahead! But as I said on the outset of this project, my main goal is to make this knowledge more accessible to the general public, or at least within my circle of influence (Graeber himself also wrote many shorter articles that you can search for online, to this end).

I want to summarize the main points:

  • Money and currency are not identical. Currency is a physical representation of money, which can be thought of as a unit of measurement for “value”. I can say “you owe me $3”, but it’s possible for you to “pay” me in a thing or a service worth $3 instead. This doesn’t happen at a large scale (at least not within the US) anymore, but it does still happen at a small scale (friends covering each other for brunch back and forth, for example.)
  • Money, currency, and markets did not spontaneously emerge. They were created by governments and rulers. This is proven both by the historical record and by the logic of taxation used by ancient rulers.
  • Governments created markets by circulating currencies and demanding taxes. They distributed currency to their employees (in the past, armies), which paid the populace for goods and services, and the populace paid their taxes in the government currency. The markets arose as a side effect once everyone got used to the pattern of exchanging goods and services for currency.

I also want to summarize this in a different way — anyone in my generation who has planned a group trip somewhere while a relatively broke college student probably knows the credit theory of money well, particularly if it was sorted out without the various payment apps we have now. There’s a typical friendship accounting that goes, “I paid for her lunch and you paid for my dinner, so why doesn’t she pay for your brunch and we’ll all be settled”. Furthermore, I’ve noticed that sometimes, even with the convenience of Venmo, Cashapp, SplitWise — friends do not always want to be so precise in their accounting with each other. Even in America where it’s widely acceptable and little payments are still done often, there’s a certain point where charging your friend $0.57 is painted as “cheap” or classless, or essentially communicates that you don’t really see them as a friend. Friendship is, after all, the accumulation of little favors and some big ones, and friendship does not require accounts to be settled at the end of every day. In a community, it’s a trust that “what goes around comes around”, a belief that if you will be there to support someone, another will be there to support you. You help your friend move, and they “pay” you in pizza.

Another concept in Graeber’s book is the idea that in human exchange, having a debt settled completely and precisely is another way of saying, “we don’t need to have anything more to do with each other”, and even in the modern world, is the way we treat strangers and craigslist buyers more often than the way we treat our close relations. While the logic and theories of markets are one part of the book, the other is about how at the end of the day, money is a social construct and a social construct is social. It is never completely divorced from our thoughts and feelings, our humanity, as much as modern economics tries to raise that partition.

References & Additional Reading

  1. Debt: The First 5000 Years by David Graeber The edition that I reference with page numbers is the October 2014 paperback, ISBN 978–1–61219–419–6.
  2. The truth is out: money is just an IOU, and banks are rolling in it” — a shorter article by Graeber for The Guardian.
  3. Money Creation in the Modern Economy” — a paper written by three UK economists, referenced in [3]. Includes discussions on quantitative easing.