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Economic History Association

The Role of Money in Economic HistoryAuthor(s): Wesley C. MitchellSource: The Journal of Economic History, Vol. 4, Supplement: The Tasks of Economic History(Dec., 1944), pp. 61-67Published by: Cambridge University Press on behalf of the Economic History AssociationStable URL: http://www.jstor.org/stable/2113259

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TheRoleof Moneyn Economicistory

THE role moneyhas played, and still plays, in the evolutionof social

organization ndindividualbehaviorremainsa dark areathoughsomecornersbesidespricehistoryhavebeenstudied ntensively.You knowbetter

than I how much has beenwrittenby anthropologists,numismatists,and

historians about such matters as the differentforms of money men have

used,theevolutionof coinage,the relationof gifts andpiracy to the rise of

regular radeandorganizedmarkets,the commutationof duesin kind and

services nto moneypayments,the transformation f an agriculturalpeas-

antryinto an industrialproletariat, he changingmethodsofgovernmentalfinance nwarandpeace, thedevelopment f creditand banking, hespread

of bookkeeping ndits refinementntoaccounting,he diverse ormsof busi-

ness enterprises,and the interrelationsbetweenmakinggoods and making

money. Someof the monographs have readupontheseand related topics

areadmirablepiecesof work.But monographs re flashlights;they do not

givegeneral llumination.What wedo notyet have,what weneed,and what

economichistoriansshould supply is a coherentstory of how monetary

formshave infiltratedone humanrelation after another,and their effectsuponmen'spracticesandhabits of thought.I am well aware hat the spade-

work desirable for this job is far from completed; but even now well-

equipped tudentscoulddrawan authenticsketch of the processasa whole.

By so doingthey would bothstimulatedetailedresearchandenlighten the

thinkingof allwho areconcernedwith socialorganization, ast andpresent.

I

PerhapsI canmake my plea forundertaking his taskmorepoignantby

recallingsome of the manyways in whichthe use of money has influenced

the fortunesof successivegenerationsandconditioned heirminds.

Whenmoney s introducednto thedealingsof men, t enlarges heir free-

dom.Forexample,whena personal erviceis commutednto a money pay-

ment,theservitorhasa widerchoicein the use of his energyand the lorda

widerchoice n the useof his income.By virtueof its generalizedpurchasing

power, money emancipatesits users from numberlessrestrictions uponwhattheydoandwhat theyget. As asocietylearnsto usemoneyconfidently

it graduallyabandonsrestrictionsupon the placespeopleshall live, the oc-

cupations hey shall follow,thecirclestheyshallserve,thepricestheyshall

charge,and the goodsthey can buy. Its citizens have both a formal and a

genuinefreedom n theserespectswider thanis possibleunderan organiza-

6i

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62 WesleyC. Mitchell

tionin whichservicesandcommodities rebartered.AdamSmith's"obvious

and simple system of natural liberty"seems obvious and naturalonly to

denizensof a moneyeconomy.But economicfreedom, ike its sister,politicalfreedom,bringsresponsi-

bilities anddangersas well as opportunities.As personalrelationshipsbe-

tweenmasterandmanweretransformedntoa cash nexus, requent aments

wereheardover the hard ot of the manywho did notknowhow to profitby

theirlargeropportunities.Living by makingandspendinga moneyincome

requiresmental and moral abilities of a kind not inculcatedby a system of

personalmasteryanddependence, nd far harder o acquire hanmost mod-

ernsrealize.In graspingthe advantagesof a moneyeconomy,society wasunwittinglysubjecting itself to a harsh new disciplinewhich compelled

peopleto becomemorecalculating,moreself-reliant,and moreprovident,

that is, to acquirewhat the finishedproductsof this disciplinecameto call

''economicirtues."

Individualswho possessedsuperioraptitude for making money cameto

the forein all walks of life, graduallygiving society a newgroupof leaders

tocompeteandcombinewith thosewhoseeminencederived romhigh birth,skills in warorintrigue,or the qualitiesthat wonprefermentn the church

andsuccess n the arts. Theold aristocracy, s well as the oldpeasantry,had

its unadaptables o the neworder,and theysuffered romanticdecline.The

new leadersfound many chances to exploit others and took advantageof

them; but, broadlyspeaking,men who are tryingto makemoney are the

servantsof consumers-that is, of the whole society. For to makemoney, a

man has to sell goods,andnot very oftencan the sellerforce people to buy.

Usuallyhe must dependuponpersuasion-he must offergoodspeople wantat prices they areready to pay.In thissense,themoneyeconomygradually

put thetask of makinggoodsunder he directionof men whoprovidedmost

efficientlywhat solvent consumerswished to buy, and whose continued

leadershipdependedon maintaining heirefficiency.

The increasinguse of money acceleratedchanges n the methodsof pro-

ducingand distributinggoods,and changesin the characterof products.

Through the impersonalmechanismof the market,successful innovators

couldput pressureuponless enterprisingbusinessmen o adopt improved

methods.Forcedchange s an uncomfortable,ometimesa cruel, readjust-

ment,and a society unaccustomedo it puts obstaclesin its way. But the

moneyeconomyoffered uch incentives to the ingeniousandenergetic,and

the effects of their innovationswere often so pleasingto consumersthat

oppositionto changecould do no more than retard the reorganization f

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64 Wesley C. Mitchell

whatever hat shouldbe takento mean.Moneyeconomyfostersinequality

in the distributionof income,andwhereinequality is markedno one con-

tends that what pays best is what the community needs most. A subtlereffect, though less noticed, may be scarcelyless important n directing,or

misdirecting, urenergies.As denizensof a moneyeconomyweareproneto

payfarmoreattentionto therelatively ew factors hat influenceourmoney

incomes n a way we canreadilytrace than to the host of factorsthat influ-

ence our moneyexpenditures.This twist in perspectiveexplains, for ex-

ample, why protectionistpromisesof largermarkets, fuller employment,

andhigherwage rateswinourvotes, despitefree-tradedemonstrations hat

hightariffsreduce"real ncomes"by divertingenterprise rom thelines forwhicha nationis relatively best equipped. n general,the highly technical

character f money-making nablesus to be far morerational n carryingon

thatprocess han we canbe in spendingmoney to satisfy competingdesires,

whichwe cannotreduce o a commondenominator.

I thinkmoneyeconomy s responsible lso forbusinesscycles. So far as I

have been ableto tracethem, theserecurrent lternationsof expansionand

contraction n economicactivity occuronly in communitieswherethepro-ductionand distributionof goodsare carriedon mainlyby business enter-

prisesmanaged orprofit,andwheremostpeople get their livingsby mak-

ingandspendingmoney ncomes.Communities therwiseorganizedundergo

fluctuations n fortune,and may notenjoy sohigh astandardof living as the

mostfortunatemoneyeconomies;but theyseem to be exemptfromcyclical

contractionsn employment.

II

Moneyeconomyhasalso a profound ffecton man'seffortsto know him-

self. By givingeconomicactivity an immediateobjectiveaim,andby pro-

viding a commondenominatorn termsof whichall costs andall gains can

be adequatelyexpressed orbusinesspurposes, he use of money provideda

technicallyrationalscheme for guiding economic effort. It thereby paved

the way for economictheory; for technicallyrational conductcan be rea-

sonedout,andin thatsenseexplained.But moneyeconomydoes this jobof

rationalizingconductonly in a superficial ense, andunwaryobserversof

humanbehavior ell into the trap t had set. Thoroughlydisciplinedcitizens

of the moneyeconomyreadilyassumedthat all economicbehavioris ra-

tional,andwhentheytriedto penetratebeneath hemoneysurfaceof things

they found no absurdity n supposing hat men do psychicbookkeepingn

painsandpleasuresas theydopecuniarybookkeepingn outgoand income.

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The Role of Money in EconomicHistory 65

Onthisbasisthey couldgo to thelengthofdeclaring, sMill did,thatmoney

merelyenablesmen to do moreeasily what they would do without it. Fol-

lowing themoney-making attern,economic heorybecame,not anaccountof actualbehavior uchas historiansattempt to provide,but ananalysisof

what it is to the interestof men to do undera varietyof imagined onditions.

Fascinatingsystems of thought have been excogitated n this fashion.

They are not wholly lacking in verisimilitude n a nation where money

economy s highlydeveloped,andpecuniaryaccounting s theguideof many

actions.But, after all, moneyeconomyhas not made humannatureoverin

its ownimage.We cannotexplainoureconomicbehaviorn termsof a calcu-

latingpursuitof self-interest f forno otherreason hanbecausemuchof ourbehavior s not guidedby calculations.Sopatenthas this fact become that

economic heorynowvirtually rejectsthe theoryof value,whichused to be

considered he cornerstoneof the entire structure.Today's fashion is to

assumedemand chedulesorcurves of indifference,withoutinquiringwhat

men's preferencesreally are, how they are arrived at, or how they are

changed.But knowledgeof economicbehaviorremainsexceedinglysche-

matic, superficial,and technicalwhen it rests on confessedignoranceof

what men are striving to get and what they are strivingto avoid.To say

merelythat menhavescales of preferenceays a foundation orspeculations

thatapplylogically to EsquimauxandLondonbankers, o men of the tenth

and menof the twentiethcenturies, o peoplesat war andpeoples at peace.

The very generalityof the conclusions hat can be deducedfromsuch as-

sumptionsprevents hem from ittingthefactsof any placeandtime.Pretty

much all that economichistorians try to learn is barredfrom economic

theoryof the currentabstracttype.Not only did the moneyeconomymakeit plausible to explaineconomic

behavioras a calculatingpursuit of self-interest, t also long kept a more

scientifictreatmentverydifficult.Evenin the first decadeof the nineteenth

century,a realist ikeMalthuscouldfinddata fortestingspeculationsabout

thegrowthof populations.But Ricardocouldnot have foundadequatedata

fortestinghis "laws"of distribution,howeverhardhe tried.The humdrum

processesof producing ndexchanging oods,of payingandreceivingmoney

wererecordedn privateaccountbooks,butstudentshad noaccess to these

basicsources,andvirtuallyno summariesof them werecompiled.As Mr.

Hamiltonpoints out, until Jevons publishedhis index numbers n i863,

economistsdid not even know whether the trend of wholesaleprices of

commoditieswasrisingorfalling.No methodof inquiry ntomosteconomic

problemsotherthan speculativereasoning romassumptionsof uncertain

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66 Wesley C.Mitchell

factualvalidity was feasible so long as observationsof whatoccurredwere

scanty and the methodsof usingsuch observationsas could be had were

crude.But in thecourseof theirexpansion, hemoneyeconomiesreachedastagewherebusinessmen,nvestors,andofficialsneededeconomic nforma-

tion moreextensivethan their predecessorshad. How operatingrequire-

ments led to the collectionand publicationof an ever-expanding rrayof

data is a developmenthateconomichistorians houldnot neglect.One con-

sequencewas that it becamepossible to test a widerrangeof explanatory

hypotheses.And that possibility encouraged conomiststo formulate heir

hypotheseswithan eye to empirical esting.Nowadayswe canbeginlaying

the foundation or a type of economics hat will have a demonstrable ela-tion to theactualconditionswith whichmenhaveto deal, because t canbe

baseduponan analytic study of actual behavior.This empiricalscience,

whose birthpangswe arewitnessing,will be as definitelya by-productof a

later phase of money economy as mercantilismand the speculationsof

Ricardowereby-productsof earlierphases.

III

To thebest of my knowledgeandbelief, I havesaid nothingnew.WhatI

have tried to do is to suggesthow diverse are the cumulativechanges to

which the adoptionof monetaryinstitutions has led. For that purpose,

familiar tems are the mosttellingillustrations. have onemoreremark o

make,and that is as familiaras its predecessors.All the developmentsI

havementioned,andmanyothersyoumight addto my short list, areinter-

related.That is, theirhistoricalevolution cannotbe adequatelyaccounted

forpiecemeal.Monographswe need,more thanwe nowhave. They are in-dispensable.But howevermanywe may accumulate,monographswill not

give us understanding f the organizationwe received romourforefathers

and shall pass on with modifications o our grandsons.Economictheory

makes a valuablecontributionto the understanding f this institutional

complex;but it will not give us insightinto the way ourorganizationhas

changed hrough he centuriesandis changing oday.Andsuchinsightinto

the way social organization volves is imperativenow that we arestriving

moreconsciouslyanddaringly han everto readjustoureconomicorganiza-

tion to thelargeropportunities penedbeforeusbytheapplicationofscienceto the workof theworld.

While servingsociety by focusingattentionupon this theme, economic

historianswould at thesame time be meetingone of theirownprofessional

needs.They arepainfullyawarehowhard t is to organize hevast arrayof

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TheRole of Money in EconomicHistory 67

materials that have to be crammed nto their general treatises.To cite

examples:readersof Cunningham's nd Clapham's reatbookscanhardly

see the forest for the trees. What I have been sayingleads to a suggestionfor overcoming his difficulty.The nationswith which economichistorians

are chiefly concernedorganizetheireconomicactivitiesunderthe form of

making and spendingmoney. This practice suppliesthe basic framework

foreconomic heory.Cannoteconomichistory be organizedmosteffectively

around the evolution of pecuniary nstitutions? If the activities studied

have a definiteschemeof organization, hould not a history of them follow

that scheme?

If this suggestionmeritsseriousconsideration, he firststep toward ryingit out in practicewouldbe to framethe best accountnow feasibleof the way

men came to organize heir dealingswith one anotheron the basis of money

payments, he way thisschemespread romone sphere o another, he mate-

rialand culturalconsequences o which it led, the rationalizations nd con-

demnations t evoked,and the furtherchanges t seems to be undergoingn

ourday. Not only wouldsuch a sketch contribute owardeffective dealing

with the large problemsof social organization hat are impingingupon us,

it wouldcontributealsotoward he planningof research n economichistory

and the effectivepresentationof its findings.

TheNational Bureauof EconomicResearch WESLEY C. MITCHELL