The Function of Money

Money probably developed not for its function in mediated exchange, but as a sign for performance imbalances, to begin with, probably in household economies. Public debt was already the primary tool for money creation in the eighteenth century, and “bank” notes were initially designed as (transferable) promissory notes. (Luhmann. Theory of Society, vol 1, p. 208)

So money was (probably) originally like a transferable IOU, a transferable debt that can be redeemed for some tangible good. Say, you do some work for me, for which I had agreed to pay you five bags of rice, and you do a little extra work but I only have the five bags of rice; so I give you a slip of paper that says I will give you another bag of rice when I have one. You can then take that slip of paper and give it to a somebody else in exchange for a cup of coffee. The person who provided the coffee can then come back to me (the originally debtor) and ask for the bag of rice.

But this gets complicated because

one increasingly had to know who the debtor was, and whether his solvency was to be trusted. Only in very recent times has this restriction been abandoned. The debtor, if we can use this term at all, is the economy itself, which owes itself the money it as circulating. (208)

Exchangeable money could not have been a precondition for a money economy.

The function of . . . money is so improbable that it could never have served as an enabling factor in evolution, but become manifest only in an already functioning money economy. (208)

Society must first accept the concept of property–the rule that I can own those five bags of rice even when other people might go hungry.  Property is a communication medium in a barter economy, and it was transformed into money to facilitate complex exchanges.

The medium of money then ensures acceptance of others’ acquiring what they wish with their money, or simply making money with money without knowing why. (208)

Property (including money) motivates acceptance of others’ selections. You can buy what you want with your own money.

In contrast to the usual economics perspective, we accordingly do not see the social function of property in the immediacy of access to material goods or services, or the social function of money in the mediation of transactions. There is no disputing this as factual and historical genetic motive. But the function of the corresponding generalized symbolic medium lies elsewhere, as always in overcoming an improbability threshold. Everyone must be motivated to accept the experience of extremely specific selections by someone or other–from furnishing the living room and buying a certain screw to an international company being taken over by another. Otherwise, the economy would not have been able to function in the past and would certainly be unable to satisfy today’s demands. (208-09)

However, the legal system has established limits on what type of transactions can be accepted. Transactions seen as harmful to society tend to made illegal. This is where the law rubs up against the economy.



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