Enmeshed in a Web of Debt

To tackle my project of showing the origins of money manager capitalism, I've decided to described the evolution of four institutions in American economic history; debt, managerialism, the welfare state, and cultural fundamentalism. In this thread and in subsequent ones, I discuss debt.

Debt is often seen in moralistic terms and having become a problem fairly recently. It depicted as the result of bad apples rather than systemic forces, of greedy, impatient individuals spending beyond their means, of corrupt politicians pandering to special interests, and of reckless gamblers blowing it all on an infinitesimally small chance of getting rich. The problems are perceived as fairly recent, a result of having lost our founding virtues of savings, thrift, and frugality, the purported virtues that made our nation great.

However, debt has been pervasive throughout American, and indeed, human history. In early colonial history southern plantation owners went deep into debt as they sought marketshare in global commodities such as tobacco, as well as to live like aristocrats, so much debt that they become terrified of becoming slaves themselves. Consumers, laborers, and farmers took on debt to buy British manufactured goods, and as the economy stuttered after the French-Indian War we see the emergence of a rhetoric of debt related to lost liberty. Much of the early political debates revolved around the issue of the national debt. A wave of financial innovations and foreign capital enabled the construction of the railroads; heavily indebted farmers formed movements such as populism; and the depressions that resulted from debt accumulation drove businesses to try to consolidate and end “ruinous competition,” to encourage stable levels of consumption through higher pay and easy credit. Massive international debt largely contributed to the Great Depression, debt paid for WWII, and afterwards helped fueled the post-bellum consumption boom. Thus we see at all stages of American history debt is almost always in the picture.

Historically, credit and debt has been central in human societies. What Anthropologists have discovered is that virtually all societies are based on complex arrangements of debt and credit. For example, most attested communities are based around gift-exchange, which goes something like this

Person 1 sees you have a nice pair of shoes. He says, “hey person 2, I really like your shoes.” Person 2 says, “you like them. You can have them.” Person 1 has a new pair of shoes, and in the eyes of the community he has “debt,” whereas person 2 has “credit.” Now suppose person 1 has caught some fish. Person 2 goes to him and says, “hey person 1, that's some tasty looking fish you got there!” Person 1 says, “you like the fish, have it!” Person 1 has now paid his “debt,” and person 2 has used his credit. This is how almost all premodern societies were arranged.

Now, if person 1 refused to honor his “debt,” he might be scorned or scolded by others in the community, and if he insists on taking without giving, he will eventually become a pariah.

If a person consistently gives more than he receives he can store up an excess of “credit,” which may lead to leadership roles or higher status. In contrast, a person who consistently takes more than he receives may eventually be exiled from his community.

There are of course many exceptions to this template in particular, but not in general. The Iroquis, for instance, would store goods in longhouses, to be redistributed by women's councils. But the basic principle remains the same; premodern human communities were based on gift-exchange, not market-exchange. Markets only existed when strangers or enemies traded with each other.

Thus, debt and credit, in early human community, represented mutual interdependence. Everyone in a community would be both a borrower and a lender.

By the time we get the first recorded civilizations in Mesopotamia and Egypt, complex and formalized systems of credit and debt are already in place. These systems revolved around the palace and temple complexes. Mesopotamia was rich in fertile soil, but not in other kinds of resources, such as stone, wood, metal, and silver, which had to be imported. Palace or temple bureacrats would “lend” commodities to merchants at a fixed interest, allowing them to trade for other resources, who would pay them back at interest. These temple complexes also result in the formalization of exchange rates, as it would be necessary to determine how many bushels of wheat was equivalent to, say, a pound of silver.

Merchants and temple bureacrats would also lend to farmers who might fall short of production due to droughts or floods. Over time a larger and larger percentage of the population would fall into debt; they would have to sell their farms, sheep, goats, and furniture, and eventually their own family members and even themselves into slavery. With so many poor falling into slavery many would choose to join roving bands of marauders, still others would riot, society would reach the edge of complete social disintegration.

To resolve this problem, kings would declare debt amnesties or “clean slates.” In the Bible, this is called a Jubilee, described in Leviticus, where every man was released from bondage and returned to his land and family.
In 1761 Hammurabi abolished debts in Babylon so “that the strong might not oppress the weak.” Other Babylonian rulers oversaw the ritual of “breaking the tablets,” that is the debt records. Persons held in debt bondage were released to their families, and other debtors were restored cultivation rights to their customary lands.

In 720-715 BC Pharaoh Bakenranef issued a decree abolishing debt bondage and annulling all outstanding liability, since “he felt it would be absurd for a soldier, perhaps at the moment when he was setting for to fight for his fatherland, to be hauled off to prison by his creditor for an unpaid loan...”

Other civilizations dealt with debt in other ways. In the Mediterranean there was a “military-coinage-slavery” complex. The fiscal policies of most Greek City states amounted to not much more than the distribution of loot. Gold and silver were acquired in war or mined by slaves, which was distributed among the populace through fees for attending assemblies or juries or outright distributions, such as the Athenians did when they discovered a new vein of silver in the mines of Laurium in 483 BC, which employed 10-20,000 slaves. Citizens were not required to pay taxes, disproving Benjamin Franklin's assertion that the only things that are certain are death and taxes. Instead, powerful city states such as Athens met their fiscal needs through tribute. Indeed, as Ian Morris shows, tribute sustained a fairly percentage of the Athenian population, and slaves enabled the existence of the “public life” that Athens was famous for.

The Roman Empire could be described as a vast machine for the extraction of previous metals. Debt was kept at bay through military expansion, bringing in new slaves and money that could be distributed through “bread and circuses.” As David Graeber notes

However, in cities that could not rely on tribute, debt crises and social disintegration flared up every century or so. After the first century CE, when Roman expansion ceases, and with it the flow of precious metals and slaves, an ever growing percentage of the Roman population became what amounted to debt peons, sinking to the level of serfs and clients.

India also developed its own version of the military-coinage-slavery complex. The various Republics and kingdoms were founded on the institution of the professional army, which was open to young men of a wide variety of backgrounds, supported with generous salaries. Government systematically set up granaries, workshops, trading houses, warehouses, and jails. Instead of war captives going to private households, they were relocated to government villages on newly reclaimed land. Asoka, often considered one of the more humane and enlightened rulers in Indian history, began his reign in conquest, destroying the Kalingas, one of the last remaining Indian Republics, in a war in which hundreds of thousands of human beings were either killed or carried off into slavery. He eventually ended aggressive conquest, and it perhaps is not a coincidence that shortly after his reign his Empire splintered into a succession of every weaker and smaller states.

In China, debt is such a factor that legends of coinage ascribe its invention to ancient emperors trying to relieve the debt accumulated after a series of natural disasters. As one Han text reports

The Guanzi notes that “there were people who lacked even gruel to eat, and who were forced to sell their children. To rescue these people, Tang coined money.”

In 9 AD a Confucian official named Wang Mang seized the throne to deal with a nationwide debt crisis. According to proclamations made at the time, the practice of usury had caused the effective tax rate to increase from 3% to 50%. In response, Wang Mang reformed the currency, nationalized large estates, promoted state-run industries--such as granaries—and banned private holding of slaves. He set up a state loan agency that offered interest free funeral loans for up to 90 days and long-term loans of 3% monthly or 10% annual income rates for commercial or agricultural investments. Reforms by subsequent emperors would include cheap grain loans, famine relief, regional debt relief, and laws against the selling of children.

Religion as well is seeped in the language of debt. Jesus is referred to as “the Redeemer,” redemption a word taken directly from the language of finance meaning “to buy something back, or to recover something that had been given up in security for a loan; to acquire something by paying off a debt.” The Hebrew words Padah and goal, both translated as “redemption,” could be used for buying back anything one had sold to someone else, particularly the recovery of ancestral land. “Forgiveness” is also a term from finance meaning to give up all claim on a debt. Early prophets contain allusions to debt crises, such as in the book of Nehemiah

In the Parable of the Unforgiving Servant, Jesus describes the Kingdom of heaven in terms of debt and forgivenenss

Not the way debt is formulated; 10,000 bags of gold, or in the original 10,000 talents, which in modern terms would be like saying you owe someone 100 billion dollars. In other words, it is a debt that can never be repaid.
This concept of unpayable debt is prevalent in other religious traditions as well. Hymns in the Vedas concludes that human existence is itself a form of debt. One Vedic Hymn states that
“A Man, being born, is a debt; by his own self he is born to Death, and only when he sacrifices does he redeem himself from debt.”
Two other passages from the Brahmanas assert that we are born as a debt to the gods, to be repaid in sacrifice, to the Sages who created the Vedic learning, to be repaid through study, to our ancestors, who we must repay by having children, and to humanity, to be repaid through hospitality to strangers.

Another way to frame this is that according to the Vedas, human beings owe everything they have to the world around them. Humans are not responsible for their own existence, which they owe to nature and the universe that provides the materials for their life and to their ancestors which made their existence possible. Humans owe their beliefs, their worldview, and their knowledge to the sages and poets who have created knowledge and culture. They owe their continuing existence to society, which provides them with their basic needs. Finally, they owe their government, which provides peace and stability. These debts are repaid through prayers and sacrifice, respect for elders and becoming an ancestor, study and reverence, and kindness to your fellow man. However, it is impossible to ever pay off these debts, so that you are always enmeshed in these webs of debt.

Buddhism was one of the few world religions to not condemn usury. But in China, the notion of karmic debt took on a powerful life of its own. According to this strand of Buddhism, any attempt to pay off temporal debts resulted in the creation of spiritual debts, since every means of acquiring wealth would necessarily involve exploiting, damaging, and causing suffering to other human beings. As one text put it
However, there is a way out of this seemingly intractable debt
Chinese buddhists, unlike their Confucian counterparts, where concerned with the suffering of mothers, and tried to quantify what they called the “milk debt.” As one Buddhist author wrote

“If you stacked up jewels from the ground up to the twenty-eighth heaven it would not compare” with the value of your parents nurturance. Another wrote that if you were to “cut your own flesh to offer her three times a day for four billion years it would not pay back even a single day” of what your mother did for you.

The solution for these “milk debts” as with all other debts, was to donate to the inexhaustible treasuries, money that would be loaned out at interest with the interest earmarked for special purposes such as aid for the poor and for the furtherance of Buddhist education. Thus, these “inexhaustible treasuries” were precursors to modern corporations, eternal institutions of vast wealth operating on profits.

Debt is also at the heart of all monetary systems. In Great Britain, the first modern central bank was established in 1694 when a consortium of English bankers loaned 1.2 million pounds to the king, a sum that has never been paid off. In return they received a royal monopoly on the issuance of bank notes, essentially, they could advance any IOU for a portion of the money the king owed to any inhabitant willing to borrow from them or deposit their own money.

To go back to my original illustration of how premodern economies worked, suppose that when person 1 gives shoes to person 2, instead of an informal acknowledgment of debt person 2 gave person 1 an IOU. Person 1 can use that IOU as a form of currency, exchanging it for other goods, as long as person 2 is someone of good repute. In modern economies, the “person” backing those IOU's is the sovereign. This is how our own economy works.
over 90% of our transactions involve no real money at all. Let's just use one example. You go to the bank to get a mortgage, which the bank approves. The bank marks up your account by $100,000, gives you a certificate signifying a debt of $100,000. You use that 100k to buy a house, the bank marks your account down by 100k and marks up the real estate companies account by 100k, which they use to pay their real estate agents and constructions, in which case the banks marks the real estate companies accounts down and the workers accounts up, who use that “money” to pay their own debts and buy goods, and so on. At no point is “money” involved in this process; it is all just book keeping entries within the banking system, the swapping of digital IOUs. If at any time the depositors tried to withdraw all the money the bank would not be good for it.

Currency and markets are created when sovereigns impose taxes. Suppose a sovereign wants an efficient way to feed and clothe his army. He might coin or print currency and pay his soldiers with it. Then he will declare that all taxes must be paid in that currency. Merchants, workers, and landowners will then produce goods and services for that army to obtain the currency to pay their taxes. In most colonial economies the colonialists used this method to force production for the metropole, as the French did in Madagascar and the British did in India.

Our own economy works along similar lines. One of the reasons we can't just exchange goods is because in any large exchange taxes must be paid, and those taxes can only be paid in dollars. Even leaving exchanges aside, property taxes can only be paid in dollars. Thus, to obtain the dollars to pay for these taxes, one must either invest or produce for the market.
Debt has been pervasive in other ways. The trading companies, such as the East India Company and the Dutch East Indies funded their conquest of Southeast Asia largely through debt. Sovereigns continually expanded their debts in the early modern period to fund their navies and mercenary armies in their quest for global dominance.

Many of the Conquistadores where heavily indebted individuals. While living in the colony of Hispaniola in the Early Sixteenth Century, Hernan got deep into debt, and like a reckless gambler, decided to double down and go for broke. He got the governor to sponsor his expedition to Mexico, where, after toppling the Aztec empire, gained access to enormous sums of gold. Yet within ten years of his conquest of Mexico he was deep in debt again, with creditors repossessing his holdings. Cortez wrote to Emperor Charles V that

At the time he did own his own personal palace. A few years later, after pawning his wife's jewelry to finance an expedition to California, he was was so besieged by creditors that he had to return to Spain to petition the emperor in person.

Heavy government debts spurred the British to raise taxes, contributing to the American Revolution, and in France the Old Regime, unable to finance its debt, had to convoke an Estates General in 1789, precipitating the French Revolution.

But beyond the level of kings and queens, emperors and conquerors, the ordinary peasant lived in a world of debt and credit obligations. Money always being scarce, most economic transactions in peasant communities (and rural communities in the United States) were done on tab, a tab that all participants implicitly understood would never be paid off. Thus, contrary to Adam Smith's parable that the butcher produces meat purely out of self-interest, the opposite seems to have been the case; the butcher, as did most other people in these towns, produced because they were apart of a web of interdependency, rarely receiving tangible compensation in return. It would not be until the mid-nineteenth century that most American and Europeans would regularly use money in their market transactions.

Thus, we see that debt has been integral to societies, governments, and religion throughout history. On the one hand, debt can represent the web of interdependence we are all caught in, but it can also be a predatory instrument in which usurers extract ever greater amounts of rent from the economy.

Debt is both a cultural institution and a reflection of cultural institutions. Much of our modern terminology is steeped in the language of debt. An ex-con is said to have "paid his debt" to society after he serves his sentence. We give "credit" to those who have done a good job, and we are said to act in our own "self-interest" when in fact we should act in the "interest" of society. The nature of our debt represents our relation to society, to the economy, and to the community. It is framed in moralistic terms, it fuels aspirations, provides the capital to rise up in society, and is a constant source of despair and anguish.

Most of the information in the post was taken from Debt: The First 5000 Years by David Graeber.
To read more on debt and the invention of money, here are two excellent articles by Graeber

David Graeber: On the Invention of Money

What is Debt?

On Ancient Greece, here is a paper from Ian Morris. In it he argues that urban growth in Ancient Athens was inseparable from Imperialism and Administration.

The Growth of Greek Cities in the First Millennium BC