Debt: The First 5,000 Years

Debt: The First 5,000 Years, by David Graeber, Melville House, 2011.

Another take on the rottenness that has come to inhabit the state of neoliberalism is David Graeber’s compendious history of debt. This was inspired by the specific question of debt forgiveness by the IMF for loans made to Madagascar: a country that was so saddled with debt that malaria, which had been wiped out, recurred because the country had to spend its meagre income on servicing debt rather than preventing malaria. A person commented to the author that for Madagascar to not pay its debt would be immoral: why, the author wondered, would that be?

From this springboard, the author traces the origins of debt, of money and of barter. The approach, however, is not an economist’s one, but an anthropologist’s, and this lends a certain charm and character to the account – and also a certain iconoclasm.

The conventional, economists’ account of debt goes something like this. In a village economy, if I had three chickens and wanted a goat, I would need to find someone who had a goat and wanted three chickens. This would be difficult to do – perhaps the goat owner didn’t want chickens or perhaps he wanted chickens but loved his goat more – so money was invented as a way by which I could sell my three chickens and buy a goat from someone who didn’t particularly want three chickens. This soon evolved into a situation whereby I could use my three chickens as surety, borrow some money to buy the goat, and hope that the goat produced enough milk to service the interest. Hence money and debt.

This state of nature story, Graeber points out, has one flaw: no village society in history has ever operated that way. Villagers exchange favours, every person has a rough idea of what favours he owes and is due, along with a vague notion of the relative value of these favours. Over time, the favours tend to cancel each other out, and there is rarely any need for settlement. Indeed, in the Middle Ages, English villages had a six-monthly reckoning at which everyone sat down and worked out what everyone owed to each other. For the most part, the debts cancelled each other out, and any left over were rolled over or settled for cash. Barter tended to be between communities (the cloth from our cotton fields for the arrows from your mine), and negotiations were often accompanied by elaborate social rituals to avoid war breaking out.

This is not to say that there were no units of account. Most records we have from 5,000 years ago are accounts, often from temples, of debts due and paid, but credit was often extended in the form of actual things: bushels of grain to help farmers whose crops had failed, and the labour – debt peonage – to pay the debt off. Because debts tended to aggregate over time, debt amnesties, which was the original meaning of the word “jubilee,” were declared, which wiped the slate clean (and the peons allowed to return home).

So debt has been around for a very long time. Although it’s difficult to say with any certainty, it’s almost certainly been around for longer than coinage. And coinage was originally just a way of keeping tally of debts: there were many places where, when two parties agreed that one owed the other several some-things, they would make marks on a stick and break the stick in two to keep track of those things. Those sticks became transferrable and, over time, what the original thing was became irrelevant. Hence, coinage.

Coinage, however, was hardly used in village economies. But it was intrinsic to war. The first problem with war is feeding the troops in their own country. The troops had nothing to offer in return for the huge amounts of food they consumed, and there was no practical means for villagers to hold them to account: first, troops were armed and second, they tended to come and go. However, war also produced plunder, and the loot was often in the form of precious metals. These were melted and coined, and those coins were used to pay the troops, who in turn used the coins to buy food (and prostitutes’ services). This, rather than intra-village brokering is where markets come from.

Money as coinage has come and gone – it largely disappeared from about 600 A.D. to 1400 A.D. – but debt and reckonings have remained a constant throughout recorded history. What’s happened in the modern era is the monetisation of everything. In Adam Smith’s day, most people everywhere either exchanged favours or ran tabs, and settled them sooner or later; now, we pay cash and have intermediaries (such as credit card companies) to run the tabs for us. For most of human history, steps were taken to protect debtors – mostly to stop them rebelling – now, our institutions increasingly protect creditors.

And thus Graeber’s history comes to an end, with the most recent three centuries packed into a chapter that is more of an afterthought than an analysis. Like many others writing in the immediate aftermath of the 2008 Global Financial crisis, the author on the one hand points out that those who made bad decisions to lend were let off the hook with huge public bailouts while those who made bad decisions to borrow were savagely punished, and on the other hand laments that no alternative to neoliberalism was on offer – so we’re stuck with that system.

Triteness aside, the trouble with this is that Graeber does himself a disfavour. He fails to recognise the fundamental change that happened to the nature of debt in the last century, and especially in the past fifty years.

Up to the start of the modern era, a moneylender had a room vault full of coins and, when he lent money, he gave a bunch of coins to the borrower. This meant, of course, that he could only lend as many coins as happened to be in his vault.

However, debt in our world dispenses with the coinage. A loan is a simple accounting entry – Chris has twenty bucks more and Banca del Exploitacion has twenty less. Because of this, creating money is no longer a question of mining gold, silver or seashells, but of creating a simple entry in a ledger.

The borrower does not for the most part get coins, but a promissory note and, as a result, the lender can lend as much as he likes; the only constraint is his ability to persuade people that his promissory note is good.

The lender’s ability to persuade people that his notes are good is in turn based on the lenders’ assets – coinage, property and future cash flows from repayments and interest. Because of this, lenders lend several times what their assets are: the predominant way of doing this is fractional reserve banking, whereby banks must keep a fraction of their loans in reserves against a rainy day.[*] This is fine when it works, and sometimes it doesn’t, but it reflects a very fundamental change to the way that debt works, and Graeber doesn’t seem to get that point.

What is even more fundamental is that this system starts at the top. At Bretton Woods in 1944, when today’s modern financial system was hammered out, the US succeeded in making itself the world’s banker.[†] Other countries would hold dollars and, if a country needed gold, it had to exchange its dollars for gold – with the US. In 1971, Nixon reneged on the bit about the exchange for gold, instantly enriching the US and impoverishing every other country, but the architecture remained the same: to participate in the global financial system, a country must hold dollars. If it does not, it will be excluded.

This means, in effect, that every country in the world lends money to the US. They do this by buying US treasury bills (T-bills), which pay interest. However, although the bills to mature and are repaid when they mature, the vast majority are rolled over: as Graeber points out, the vast majority of these loans will never be repaid.

There is a good reason for this. Graeber makes the point while missing its significance that debt was traditionally between equals (if it isn’t, it’s called “theft”). This is true of the village economy: I go to the local moneylender or pawnshop, he lends me a shilling and I later pay back a shilling and a penny; if I don’t, there is social opprobrium and perhaps even confiscation. But in the vast majority of modern lending, there is a contract. That contract authorises force which, politeness aside, is backed up by violence. In the case of sovereign debt with the US, that violence is nukes: demand full repayment and your country is likely to become very radioactive, very soon.

So, the US itself is a fractional reserve lender. That means that, for every dollar out there sitting in other countries’ central banks, the US will lend several dollars to other countries. The T-bills pay interest, but the loans pay interest at a much higher rate, and for every T-bill that is paying 1%, there will be a dozen loans that pay 5%. You lend me $100 and I agree to pay you $1 interest and maybe the $100 in some distant future. On the back of that $100, I lend $1000, charge my borrowers 5%, and so earn $50 in interest. After paying you back, I have a profit of $49.

The actual numbers are hard to come by because the system is diffused through the World Bank, the International Monetary Fund and a whole bunch of other front-men, but the principle is simple. The US has access to basically all the world’s free money. Every central bank in the world is a debt peon to the US, every bank is debt peon to its central bank, and every customer – even those with no debt – is a debt peon to his bank. To say that this is an arrangement between equals is laughable.

But there’s another factor which Graeber misses, and that’s the nature of capitalism. In our inter-connected world, it’s easy to envisage a system in which all of our daily needs can be fulfilled by a global barter system – that I can jump on to Facebook and find someone somewhere who’s happy to swap my three chickens for his goat. But capitalism isn’t about that; it’s about capital: the capital needed to build multi-billion dollar things such as skyscrapers, oil refineries and microchip factories. Setting aside the fact that a barter system for these would be unimaginably complex – what exactly can I offer in exchange for building a Burj Al-Khalid? – no one anywhere would use their own money when they have access to debt.

It’s not just about using someone else’s money; it’s about sharing risk. If the capital project turns out to be a dud, the lender is stuck with it. I, as a borrower, lose whatever seed investment I made, but I walk away from the dud.

Now, put these together, and our modern conception of debt is not something that anyone who lived before about 1700 A.D. would recognise. Indeed, as Graeber points out, the main use of sovereign debt up to then was to fund wars and the main means of repayment was a distribution of the spoils of war. There were no capital projects to fund because the industrial revolution hadn’t started; cathedrals, castles and follies were paid for in cash. Moneylenders had vaults full of coins and, when the coins ran out, they could no longer lend money. What other credit instruments – letters of credit, bills of exchange and cheques – existed were promissory notes, which are not quite the same thing as debt.

The trouble is that, when it comes to fixing the system that gave us the Global Financial Crisis, two things need to be fixed: the first is to stop being debt peons of the US, and the second is to come up with an alternative that can fund massive capital projects. But the real problem is worse. We can invent as many currencies and technologies to transact them as we like, but the only one that matters is the one that a government will accept as payment of tax. And all but one government must pay its tribute (or extortion money) to the US in dollars. Until that changes, the system we have is here to stay.



[*] A fundamental flaw in the DNA of cryptocurrencies is the notion of the double-spending problem – that no coin should be spent twice. This is anathema to modern fractional reserve banking.

[†] Between that paragraph and this, by a weird coincidence, someone pointed me at a video of Simon Dixon’s commentary on the IMF’s recent decision to Do Something about the effect of covid-19 on the world economy. The commentary takes the position that the entire global financial system is a giant Ponzi scheme poised on the brink of collapse, creating ever more money out of thin air and dumping ever more toxic assets on an unwitting population – a position that reminded me what is missing from Debt, but which Jamie Crawley draws attention to in his The Birth of Now.