Debt is certainly a topic of deep interest and import these days, what with future prosperity seemingly threatened on all sides by a combination of personal, commercial, and national debt. A fact that has been brought home with particular poignancy in recent times by the role that debt played in the latest global financial crash of 2008, and the continuing threat of growing consumer debt and national debts in places such as Greece, Ireland, Portugal, and now Italy, and, of course, the US. According to Anthropologist David Graeber, author of the new book ‘Debt: The First 5000 Years’, debt takes on an even larger significance when we trace its history, since this exercise allows us to gain a new and more complete understanding of economics as a whole, and our modern capitalist system in particular (not to mention several other aspects of the human condition to boot). The story of debt takes us from the origins of money itself; through to the age of slavery and conquest; on to the origins of the major world religions (with their near universal prohibitions on usury); through to the middle ages, and the beginnings of capitalism and the modern banking system; and finally on to the modern age itself with its national currencies, central banks, and commitment to market capitalism.
While this story is interesting in its own right, Graeber’s main argument here is that tracing the history of debt unearths some uneasy truths and deep flaws in the nature of modern capitalism, and it is high time, he proposes, that we rekindle the conversation about how and with what we might replace it. According to Graeber, capitalism is faced with two fundamental flaws. To begin with, its assumptions about human nature are both false and immoral. Second, it is ultimately unsustainable. With regards to the first flaw, Graeber complains that capitalism is a completely impersonal system that treats people not as they truly are—that is, moral agents, and nodes in a nexus of interpersonal relationships—but as isolated, impersonal, self-interested entities; transaction machines, as it were, and ultimately reducible to mere matter and mathematical calculations (the traditional narrowly self-interested and materialist homo economicus of classical economics lore). According to Graeber, seeing people in this way flies in the face of our intuitive way of regarding ourselves and one another, and leads us into immoral behaviour that we would not otherwise stoop to or conceive of as conscionable (for example, holding others to their monetary debts [including developing countries], come hell or high water). With regards to capitalism’s second flaw, Graeber argues that capitalism is ultimately unsustainable since it depends on perpetual growth (quantifiable at a rate of 5% per annum), which simply cannot be maintained on a finite planet.
Graeber’s arguments that capitalism is essentially a corrupt and unsustainable economic system remain ultimately unconvincing. Nevertheless, it is clear that tracing the history of debt does add to our understanding of history, economics, modern capitalism, and indeed many other aspects of the human condition, and, as such, is a worthwhile project on this count alone.
In what follows, I will retrace (what I consider to be) the major steps in the history of debt as presented in ‘Debt: The First 5000 Years’. I will also outline David Graeber’s main arguments with regards to the faults of modern capitalism. Where I am unable to resist, I will provide a response to Graeber’s line of thinking.
Graeber begins by attacking the story, so ubiquitous in traditional economic theory, of how money originated. The story runs that people started off with a barter economy, where they traded goods back and forth. For instance, John may have apples, and Mary oranges. John and Mary exchange apples for oranges and both benefit in the process. There is a problem here, though: what if Mary wants apples, but John doesn’t want oranges: they cannot make a trade. If only there was something that everyone wanted that could be used to trade for anything and everything. Aha! Gold!! Hence people began trading their goods for coin, and money was born.
The problem with this story is two-fold, according to Graeber. To begin with, it simply isn’t true, and second, it carries with it assumptions about human nature that are equally false. By retracing the real story, we not only come to see that this one is false, but that the assumptions of human nature upon which it is based are also false.
In order to understand the real story, Graeber claims, we must go back to the very first instances of trade in human history (or, in this case, pre-history). This story begins with the nomadic hunting and gathering tribes that populated the earth exclusively up until the first agricultural (or Neolithic) revolution some 11 or 12 000 years ago. Most of these tribes consisted of no more than 50 to 100 people. Within each tribe a kind of communism existed, since the men would often hunt together, and divvy up the spoils. As such, trade did not really figure amongst the members of each given group. Where trade did exist was between groups. However, this trade, at least initially, did not take place in order to secure material advantage. Rather, the practice of trading was used to create ties of friendship between groups that were naturally very hostile towards one another, and would otherwise have been constantly warring. For these early people, the problem of barter does not arise, since the purpose of each tribe was not to secure a particular item, but simply anything of value upon which to base a trade, and hence a relationship.
Societies that organize their economies not for material advantage but as an expression of the social relationships therein, Graeber calls ‘human economies’. The fact that human economies existed as the original economic system demonstrates that people initially thought of themselves not as isolated, self-interested individuals, but as people who exist within a web of interpersonal relationships. In contrast to this, by taking a barter economy as your starting point you are saying just the opposite, for the assumption here is that each individual bares no personal relationship to the other, and the purpose and goal of each individual is nothing other than to increase their material advantage: each person is a transaction machine designed to reap the greatest advantage, and treats all others in the same impersonal way. When we are reminded of how human communities actually started out, we come to see that this view of human nature is not necessarily accurate.
As a rejoinder to Graeber, we might argue here that the fact that people begin as nodes in interpersonal relationships does not preclude their also being self-interested agents. Indeed, the very the fact that inter-group animosity and conflict is a pervasive feature of our past, existing alongside an original in-group communism, does seem to point up our dual nature. Additionally, even within groups, while a material communism may have existed, differences in immaterial currency nonetheless arose, such as a greater amount of honor and reputation being heaped upon the best hunter or warrior, or the most skilled healer, or the wisest advisor. It’s as if the inability to reward more productive people with more material goods (due to practical difficulties) is understood as needing to be corrected by rewarding them with another form of currency; And indeed this immaterial currency (in the form of honor and reputation) often translated into concrete material advantages (at least in the biological sense), such as access to more (and/or more highly coveted) sexual partners. Again, I am not arguing that our moral sense and other-interest are not important features of our human nature (as indeed I am convinced they are), but it must be granted that there is also an important element of self-interest and love of gain in our nature as well.
Now, Graeber does seem to acknowledge that self-interest is an aspect of our humanity. However, for him, this does not mean that we need to base our society on this aspect of ourselves, as, he claims, we currently do: “of course we have a propensity to calculate. We have all sorts of propensities. In any real-life situation, we have propensities that drive us in several different contradictory directions simultaneously. No one is more real than any other. The question is which we take as the foundation of our humanity, and therefore, make the basis of our civilization” (p. 130) However, it does not seem to me that we have the luxury to simply pick and choose which aspect of our humanity we want to make the basis of our civilization, since if we try to set up a system that does not adequately accommodate all of the aspects of our humanity, we are bound to create a system that simply doesn’t work. Indeed, this has long been the main criticism against trying to set up communism at the level of the state: it simply fails to accommodate our self-interested side, and therefore, is bound to fail (as 20th century experiments attest to).
At any rate, Graeber continues by way of telling the story of how money actually originated. The true story once again reveals how important human relations are at this early stage. For this story we must go back in time to just after the beginning of the Neolithic revolution 11 to 12000 years ago. As agriculture begins to take hold, village life and an increasing division of labor are natural outcrops. At this initial stage, villages are still small enough that everyone knows everyone else. In addition, the economy is based on a practice of generating food that takes months at a time. As a result, the transactions that take place between the villagers are mostly ones of credit. For instance, if farmer Frank goes to bartender Betsy, and orders a bevy, he pays not in wheat (which he does not even have yet), but with an IOU. The next day, Betsy realizes she needs a new pair of shoes, and so goes to cobbler Chris, and gives him Frank’s IOU in exchange for some nice new kicks (Chris accepts the IOU because he knows Frank, and he knows he’s good for it). Chris closes up shop and is feeling a bit snacky, so he goes to shopkeeper Sue and orders up some bangers and mash, and a side order of garlic toast, and pays for it, again, with Frank’s IOU. Eventually, after the harvest, Frank comes back to Shopkeeper Sue and gives her a bushel of wheat and collects his IOU. The process has come full circle. But here’s the kicker: the process doesn’t even need to come full circle, and the IOU never really needs to be redeemed, in order to have value. As long as all parties agree that it could be redeemed, in principle, it can stay in circulation forever, acting as money (in fact, it is only when the original IOU is payed off and torn up that it ceases to be money). Money originates, then, out of a promise to pay up at a later time, and a trust that the promiser is good for it. In other words, money originates as debt.
Hence paper money (in the form of an IOU) actually predates metal money such as gold and silver (actually, in its earliest days, paper money is not really paper money at all, but some other object that acted as a tally, such as a reed or a piece of clay). It is the existence of trust, based on relationship, which is the basis of money that Graeber is concerned with here. Once again, the argument is, we see how human relationships are at the essence of what people truly are.
So how is it that people, who originally saw themselves as moral agents in a nexus of interpersonal relationships, came to see each other as material transaction machines? According to Graeber, this shift most likely begins when civilizations become large and powerful enough to conquer and enslave neighboring peoples (which, in the history of civilization, begins quite early, since slavery is seen to be practiced in virtually all of the earliest civilizations from Mesopotamia, to India to China): “…there is every reason to believe that slavery, with its unique ability to rip human beings from their contexts, to turn them into abstractions, played a key role in the rise of markets” (p. 165). Owning people as property is, of course, the very epitome of treating them as material commodities, and therefore, it is easy to see how this practice would have started the ball rolling toward seeing all people as ultimately reducible to mere material.
It is not long after this, Graeber explains, that we begin seeing the first instances of lending out at interest. The precise point at which this occurs is difficult to pin down, given the fact that it predates writing. Nevertheless, the evidence we do have indicates that it is most likely to have started with the lending out of material goods from temples (where surplus commodities were held in early civilizations), to merchants who would then transport them for trade. Rather than demand a percentage of the profit derived from the trading enterprise (which the temple administrators would not be able to accurately verify anyway), they demanded instead a certain fixed rate: interest. This practice was soon adopted by the merchants themselves, who would offer loans to farmers in return for a fixed interest rate.
In order to hold the first debtors to their debt, the creditor would, of course, need collateral against the debt. This existed in the form of the debtor’s property, but if the debtor fell on such hard times that all of their property would still not be able to pay off the interest (let alone the principal), the only option left would be to offer themselves (or their family) up as property in the form of debt peons (debt slaves, more or less). The shift here is subtle but important: a move is made from treating war captives as slaves to treating anyone as a potential slave. In other words, all people are now reducible to mere matter.
It is important to note, here, according to Graeber, that both war slavery and debt peonage are ultimately based on violence, for neither are possible without it. This is important, according to Graeber, because it demonstrates the crucial role that violence plays in ripping people out of their natural contexts (that of their interpersonal relationships), and goes to show that it is violence that is at the heart of treating people as mere matter, as the market continues to do today.
As a response to Graeber, however, we may question whether slavery is truly the cause of seeing people as commodities, or the effect. In fact, it would seem necessary that the latter is the case, since unless you already see people as potential commodities, the practice of enslaving them would never even enter your mind to begin with. If this is true, it demonstrates once again that while morality and other-interest may be an important part of our human nature, there is also an aspect of self-interest and love of gain that is there from the very beginning, and which sometimes motivates us to do immoral things. Whether or not this aspect of ourselves only comes fully to the fore when societies grow large and complex enough is irrelevant, for societies seem naturally to run in this direction, and the new behavioural phenomenon would seem to be an inevitable result of the fact that societies necessarily grow more impersonal as they evolve in this direction (since the larger a civilization grows, the smaller the percentage of the population that each individual knows personally). These are considerations that must then be accounted for in one’s political theory (which, I fear, Graeber does not).
Returning to our story, then, as lending at interest gains momentum in the ancient world, so, of course, does debt peonage, and, ultimately, debt slavery. And this phenomenon (as unfortunate as it is) has some interesting effects. To begin with, it is no secret that debt slaves are not exactly enamored with their situation. Since they have lost everything already, it starts to look like a pretty enticing option to just pick up and flee their masters. What this ultimately meant was fleeing civilization outright, since the state was there to see to it that debtors upheld their end of the bargain (with brutal violence if necessary). And so it happened, in several early civilizations, that many debt slaves tried (and succeeded) in fleeing the agrarian lowlands to the hinterlands to join the nomadic pastoralist tribes that roamed there (it doesn’t take much imagination to understand what happened to those who weren’t as fortunate with their escape plans). Once these nomadic tribes became large enough and powerful enough, they would inevitably swoop down into the lowlands and conquer the existing rulers. At this point, the process would start all over again: the wealthy would lend to the poor, who inevitably fell into debt slavery, run to the hills, and return when they became powerful enough to overtake the rulers.
It didn’t take the rulers long to see that there was a problem with this whole cycle of events. It is at this point that we first see the practice of debt relief schemes. In order to break the vicious cycle, kings would periodically wipe the slate clean of all debts, return all property to its original owners, and send all debt peons back to their families. The first evidence of such a scheme is in Mesopotamia circa 2400 bc, but the practice itself came to be fairly common in the ancient world. Babylonian kings went so far as to make it part of the annual new year’s festival (p. 216). The kings were careful to couch this practice in terms of justice, citing the rationale, as Hammurabi did, that they were ensuring “that the strong may not oppress the weak” (p. 216). Nevertheless, it is clear that the kings understood what the alternative was: “the world plunged into chaos, with the farmers defecting to swell the ranks of nomadic pastoralists, and ultimately, if the breakdown continued, returning to overrun the cities and destroy the existing economic order entirely” (p. 217).
The same debt crises soon threatened the mediterranean civilizations of Greece and Rome, but here a different approach was devised. Rather than allowing debt slavery to get out of hand, the solution was to limit debt peonage, keep the peasants free and employ them (or their children) as soldiers in conquering neighboring lands, use the war captives as slaves in metal mines, and use the proceeds of the mines to keep paying the soldiers. A system that Graeber calls the ‘military-coinage-slavery’ complex (p. 229).
In fact, it was the ‘military-coinage-slavery’ complex that seems to have originally brought about the first metal coinage (at around 600-400 bc): the rulers began breaking up the large gold and silver ingots that had traditionally been used only for international trade, and offered it up to their soldiers who could use it on campaign to purchase whatever they needed and wanted. At the same time, the rulers demanded that their subjects pay their taxes in the same metal coins that they themselves had issued to their soldiers. This ensured that their subjects would be clamouring over themselves to produce something that was of value to the soldiers. It was in this way, Graeber explains, that certain competitive markets first came into being. Once these competitive markets were established, he claims, we see the final stage in people coming to view themselves as transaction machines, out to achieve the greatest advantage.
The fact that it is the state that brings about markets through their activities is of particular importance for Graeber, for it puts the lie, he argues, to the line of thinking that states are necessary in order to regulate pre-existing markets. For Graeber, markets themselves would not exist but for states.
Of course, as soon as the conquest machine begins to slow down, or comes to a halt, the ‘military-coinage-slavery’ complex begins to break down, and the practice of domestic debt peonage inevitably returns, and so the solution itself is a precarious one at best. When the system does break down, it is only a matter of time before debt slave revolts and attacks from surrounding nomadic tribes returns, as the late Roman Empire discovered in the Barbarian Invasions.
While the solutions to the perils of debt slavery outlined above often proved to be practically effective in many instances (at least for certain periods of time), many were still left with an uneasy feeling about the results. After all, in the near east, the time between debt amnesties saw widespread debt peonage, and in Europe there was a continuous state of war. The result, argues Graeber, was a proliferation of intellectual movements that seriously questioned the whole premise of materialism and the entire deplorable state of affairs that seemed to fall out of it, including the violence of conquest, and the excesses of the market (not least of which was the practice of usury). These intellectual movements represent the beginnings of the major philosophical and religious systems that continue to carry influence in society today.
At first, most states regarded these movements with bemused contempt. Later, as the movements became more popular, as political nuisances, and still later, as the limits of conquest began to challenge the sustainability of the ‘military-slavery-coinage’ complex, as real alternatives to the political problem. The most famous case of a ruler adopting such a movement was Constantine’s adoption of Christianity in Rome. But this solution also took place in India, where the ruler Asoka tried to refound his kingdom on Budhism, and in China, where the Han emperor Wu-Ti (157-87 bc) adopted Confuscianism as the philosophy of state.
Not that that this solution was necessarily effective in staving off collapse. Indeed, eventually these empires did collapse, leading the world into the middle ages. In the middle ages, though the empires collapsed, the religious institutions did not, and it is they who ultimately ended up controlling the metallic wealth (once accumulated by the now fallen empires) in the form of powerful monasteries (including the Holy See—the Vatican, essentially). This arrangement, Graeber reminds us, did not only develop in Europe, in what was formerly the Roman Empire, but in China and India as well. As political states crumbled and metalic wealth was once again being hoarded up (this time by religious institutions and monasteries), the people reverted once again to credit money in the villages.
Where modern religions held sway (which was virtually everywhere at the time), lending at interest was deeply regulated—in fact prohibited in most cases. Nevertheless, interested parties often found ingenious loop holes around these regulations and prohibitions (loop holes still used in the Islamic world today, where lending at interest continues to be prohibited). One famous trick was that, instead of borrowing at interest, a borrower would sell their property (a farm, say) to a ‘lender’ for the sum of the loan (eg. $1000). The farmer would continue to work the property and offer up a percentage of what he produced to the lender (er, owner of the farm), as a renters fee. In the meantime, the farmer would have spent the $1000 on whatever he needed, and hopefully eventually earned it back somewhere in order to pay off the loan (all the while paying a renters fee to the owner of the farm). When the farmer did raise the $1000 to pay off the loan, he would buy his farm back and all would go their separate ways. As we can see, what looks like a renters fee by the farmer to the new owner of the farm, is really an interest fee on a loan to a lender.
A much more sinister way to get around the loop hole on usury was to allow those to do it whom you didn’t really care if they went to hell. In Christian Europe this meant Jews (the Jews themselves were permitted under their religion to lend at interest to ‘gentiles’, meaning anyone who did not share their faith, and therefore, members of the two religions came to develop a close, albeit uncomfortable, relationship). In this way, many Jews achieved great wealth, but drew almost as much resentment (traditions which have remained, to some degree, unbroken to this day).
In any event, the regulations and prohibitions on usury throughout the world during the middle ages did function to curb the practice significantly. Despite this however, and despite the absence of states to enforce contracts, vast trade networks did begin to build up again. This occurred first in the Islamic world, in the Middle-East, India and North Africa.
Interestingly, this vast trade network was built not on the physical enforcement of contracts (which was no longer possible without a state willing and able to do the enforcing) but on the basis of trust (itself built on a common commitment to the religion of Islam—contracting parties would seal a deal ‘with a handshake and a glance towards heaven’). This trade network only reached into Europe when Italian merchants managed to take over political rule in certain northern principalities, such as Venice and Genoa, thus allowing them to return openly to the instruments of credit which had so long been prohibited by the Church.
Modern money as we know it today (in the form of national currencies) is neither quite the system of credit devised at the beginning of village life (and reverted to in the middle ages), nor the metal coins conjured up by imperial states in the axial age (though it does partake of both of these to a degree, as we shall see). Once again, however, a kind of debt forms the basis of this money, and therefore, Graeber is interested in telling the story of its origin.
Understanding the nature of modern money in the form of national currencies begins with understanding modern banking, and so we will begin here. We may understand modern banks as beginning as safety deposits for metal currency known as specie (silver and gold, essentially). The bankers were protecting the metal from possible theft, and, therefore, offering a service to the depositors (mostly merchants), and so charged them a fee for the service. To record the transaction, the depositors were issued a receipt that indicated just how much specie they had deposited in the bank. The same receipt could be used to withdraw funds from the bank when needed. It did not take the depositors long to realize that these receipts could be transferred to others in payment for goods: the depositor passed on the receipt to the shop keeper, who now had the right to withdraw the funds from the bank. Of course, the shopkeeper need never actually exchange the receipt for the metal in order for it to have value, since the receipt itself could be passed on to yet someone else in exchange for other goods, and so was valuable in itself (this should remind us of the beginning of money as credit systems). In fact, it was more in the interest of the holder of the receipt to just keep the receipt, rather than exchange it for the metallic equivalent, since it was always safer to keep the metal under lock and key. The banknotes, then, came to be a kind of currency in and of itself, with purchasing power much the same as gold had had.
The bankers themselves soon caught on to the fact that the metal tended to remain in their vaults most of the time, and realized that they could just as well make use of it while it was there. They did so by way of lending it out at interest. In other words, they borrowed out the front door, and lent out the back. Again, the loans that the banks issued did not entail the banks actually handing over metal to the borrowers, but a receipt saying how much metal the borrower (or whoever carried the receipt) could, in principle, withdraw from the bank. This revenue-generating practice became so profitable for the bankers that competition arose among them for people’s deposits, and banks began offering interest to those who deposited their money with them, rather than charging them fees.
Now, there is one sense in which we may see the banker’s practice of lending out his depositor’s money at interest as entirely legitimate. After all, since the metal does tend to stay in the bankers vaults, there seems to be no reason why it should not be made use of while it is there. But we may also experience a nagging feeling that something is not quite right here, for by issuing banknotes to the original depositors to represent the specie that they have dropped off at the bank, and also issuing banknotes on the same metal to the borrowers, the banker is issuing more banknotes that represent the gold in his vaults, than actual gold in his vaults. Given that this is the case, it starts to look a lot like the banker is double-dipping and making money out of thin air. The practice itself is called fractional reserve banking (since the reserves that the bank keeps on hand represent just a fraction of the actual money put into circulation).
The feeling that something is not quite right with fractional reserve banking grows stronger when we consider what would happen if everyone that the banker has promised gold to (by way of issuing banknotes) were to come back and demand their gold all at once: the banker would be unable to pay out. It is precisely this thought that motivates depositors in a bank run (where depositors are literally running to the bank to get their funds out before others do, and there is nothing left). Such bank runs were not uncommon in the early days of banking, and indeed, the financial crisis of 2008 reminds us that they are not entirely behind us. In other words, this theoretical glitch is not without practical ramifications.
Not only this, but the practice of fractional reserve banking creates an additional problem: inflation (meaning the price of goods grows higher (inflates), and the value of money grows lower [these are two heads of the same coin]). Indeed, by increasing the money supply through the issuance of banknotes, the result is that people have more money in their pockets to pay for goods, meaning they are willing and able to shell out more for said goods, and so bid up their prices. Since more money is needed to buy the same goods we may say that the purchasing power of money has decreased. While a certain small amount of inflation may not be problematic, a higher amount can become an issue.
Inflation becomes more and more problematic as it increases because it deters people from saving. Just think: if you know that your dollar will be able to purchase less tomorrow than it does today, you will not put your money in the bank, but spend it as fast as you can, while it has more value. With everyone trying to spend their money as quickly as possible, its value drops even further, and you run into a situation of hyperinflation. Eventually, the value of money is dropping so quickly that people refuse to deal in it, and they resort to barter instead, which greatly hurts the efficiency of the system.
So, if the practice of fractional reserve banking looks so suspect, and carries with it so many dangers, why is it allowed to be practiced at all? Well, to begin with, it is clear that the option of being able to borrow money benefits many people—including the bankers, of course—and therefore, if its dangers could be mitigated, we might well agree that it should be allowed. As it turns out, the dangers of fractional reserve banking can be mitigated. Part of the solution is simply to increase the amount of reserves that banks keep on hand in order to back their banknotes. This increases consumer confidence that the banks will be able to meet their obligations (and so reduces the likelihood of bank runs), and in the process limits the amount of banknotes the bank can issue (thereby mitigating inflation).
Though banks may not have the resolve to stick to this practice themselves (there is a lot of money to be made risking the opposite, of course), governments can force them to. Today, governments do do this, and mostly through the mechanisms of their central bank. Indeed, this role of the central bank is one of the main arguments in favour of the necessity of this institution (I will return to this topic below).
Though central banks perform this role today, this was not the necessarily the main impetus behind creating them to begin with. On the contrary, the main impetus behind the rise of most central banks, and with it national currencies, was normally a government’s need to raise capital to pay for its operations, which historically most often meant waging a war.
An interesting case in point is the Bank of England, which is the second oldest central bank (behind only the Bank of Sweden). The Bank of England was born in 1694 when a group of London bankers came together and offered king William III a loan of £1.2 million (in funds that they generated through soliciting private investors). The king himself was eager to take the loan because he was running out of funds, and was in the middle of waging an expensive war against the French. The loan was offered to the king in return for an 8% interest rate, as well as several banking privileges, including the right to issue banknotes on the debt that would be considered legal tender by the state (that is, capable of being used to pay taxes, conduct transactions, and pay off personal and commercial debt).
In effect, the Bank of England became the government’s own bank, and the banknotes that they issued on the government’s debt was the beginning of the national currency. This is a point that Graeber hammers home repeatedly: modern money, in the form of national currencies, is essentially borne out of government debt, and government debt that is invariably generated out of a need to fight foreign wars. What’s more, Graeber continues, these national currencies only retain their value based on the decree, backed up by the arm of the state, that they be considered legal tender. All of this goes to show how violence is at the base of our modern system, which, for Graeber, proves how scandalous our modern system truly is.
As for the Bank of England, it soon came to be not only the government’s bank, but the bankers’ bank as well, where other commercial banks would go to lend, borrow and cancel out their debts amongst each other (transactions that were beneficial in facilitating interactions between individuals and companies of different private banks). For an informative look at how this occurs today, watch the video at http://www.youtube.com/watch?v=b5kyMwceCek.
While the origins of the American central bank, the Federal Reserve, are somewhat different from that of the Bank of England, the elements of debt and war once again take central stage. The Federal Reserve, which was instituted only in 1913, was predated by two earlier efforts to produce a central bank in America. The need for a central bank was originally conceived, as it had been in England, to fill the desire of the federal government to have a secure institution from whence it could borrow funds, and also (as an offshoot) a national currency that would facilitate trade. The idea, though, met with considerable political opposition, since many Americans, fresh off the War of Independence, were still very wary of centralized power, and hence centralized institutions. Nevertheless, the idea generated enough support (mostly from the North) that a central bank was eventually instituted. America’s first central bank was called the First Bank of the United States, and was established in 1791. The bank received a 20 year charter to act as the government’s bank, but this charter was not renewed upon its expiry. Once again, it was political opposition that stood in its way.
Nevertheless, three factors kept the prospect of reinstituting a central bank on the table. The first two we have already seen above, while the third consisted of the need to end the threat of bank runs and inflation caused by an unregulated banking sector. However, the overriding factor that made a central bank irresistible, it seems, was the need of the government to raise capital to fight its wars. America’s second central bank, the Second Bank of the United States, was chartered in 1816, primarily as a means to raise capital to continue the ongoing War of 1812. By the end of the Bank’s 20 year charter in 1836, the war was well over, and the threat being gone, the bank’s charter was once again allowed to slip.
The period between 1836 and 1863, known as the free banking era in the US (due to the disappearance of bank regulation provided by the central bank), saw a massive increase in inflation, financial bubbles, panics and bank runs, as well as numerous recessions. Only in 1863, however, with the need to raise capital to fight the American Civil War, was something like a national system of banking once again instituted, this time as the National Bank Act of 1863. The National Bank Act stopped short of creating a central bank, however, and remained weak in terms of bank regulation. The result was that the financial system continued to be unstable, and panics and recessions continued to occur. Finally, a particularly nasty bank panic in 1907 once again had politicians talking about the prospect of a central bank.
By the time a central bank was again introduced in 1913 (now the Federal Reserve), the global political situation had become a tinderbox, and WWI was clearly on the horizon. As such, we may well wonder whether the true impetus for the Federal Reserve was actually financial stability, or, as Graeber would have us believe, the need to raise capital to fight a war (as it had ever been in the past).
While Graeber seems convinced that the fact that central banks and national currencies are borne of war and backed by violence makes them illegitimate institutions, the conclusion seems dubious at best. Indeed, with war a constant feature of our human heritage (extending all the way back to our ape ancestors, the chimpanzee), there is little in human society that is not in some way shaped by violence or the threat thereof (does this, then, make it all illegitimate, or simply an unfortunate reality?). What’s more, regardless of the origins of central banks and national currencies, we need only cite the benefits that these institutions continue to provide today in order to justify preserving them (even though they do not always work perfectly, as the financial crash of 2008 illustrates).
On that note, this point simply must be made here: many critics of today’s banking system point to the fact that most major central banks are private institutions, and beyond the direct control of the government, and blame this for the world’s financial difficulties. However, there is a very good reason why it is not a good idea to allow governments to directly control banking. The fact is, and experience shows, that governments are inclined to pump liquidity into the system running up to an election in order to reduce unemployment and create a boom (which tends to increase their chances of being re-elected), which is then invariably undone (after the election) with the resulting inflation. The inflation, of course, makes things worse than before, so the system ultimately suffers. It is the same desire to please citizens in the short term, at the expense of the long term good, that has got so many governments in debt trouble in recent memory. For rather than upsetting citizens either with tax increases or service cuts (which no one likes), governments choose to bump up their funds by borrowing instead, thereby putting off the pain of financing their expenses until tomorrow, all the while building up the debt (and the interest payments), until, as so many countries are now discovering (the US included), something has to give.
In any event, returning to the book, Graeber spends the rest of this section deploring the injustices that he identifies as being perpetrated by the modern system, which, according to him, begins with the central banks and their national currencies, and includes the markets that they invariably create.
To recap, then, Graeber characterizes the modern capitalist system as being built on illegitimate government debt (which neither can, nor ever was, intended to be paid off), endlessly perpetuating injustice (including holding developing countries to their debts), and being held up by nothing but brute force and violence.
I will return to this argument of Graeber’s in a moment. However, let me first outline and address Graeber’s second argument against capitalism. As mentioned in the introduction, Graeber’s complaint against capitalism does not end with his objection to the violence out of which it grew, which it continues to perpetrate, and which alone props up it up, but the fact that the system itself is unsustainable. This is clear, he claims, when we consider the fact that modern capitalism depends on perpetual growth: “Just as five percent per annum was widely accepted, at the dawn of capitalism, as the legitimate commercial rate of interest—that is, the amount than any investor could normally expect her money to be growing by the principle of interesse—so is five percent now the annual rate at which any nation’s GDP really ought to grow” (p. 345). Now, for Graeber, this expectation of perpetual growth is clearly unsustainable, since it ultimately depends on the resources that the earth provides, which are themselves finite: “There is very good reason to believe that, in a generation or so, capitalism itself will no longer exist—most obviously, as ecologists keep reminding us, because it’s impossible to maintain an engine of perpetual growth forever on a finite planet…” (p. 381).
Now, as much as it seems to be self-evident that ever-continuing growth cannot be maintained on a finite planet, the fact is that the issue is still very much a matter of intense debate amongst experts. The optimists will point out, first of all, that demographers are predicting a levelling out of the world’s population sometime around mid-century. If this does occur, we will be relieved of the necessity of having to continuously increase the amount of resources that we need to support the world’s population. Of course, this is only a start, for we are still faced with the problem of continuing growth even with a stable global population. To this dilemma the optimists will point out that humankind’s ability to increase its efficiency (not to mention recycle the earth’s resources) continues to surge ahead at an ever-increasing pace, and no one can tell what progress may be made in these areas tomorrow. All of this goes to show that it may simply be premature to presume that growth cannot, at some level, be continued indefinitely (as counter-intuitive as this may sound).
Returning now to Graeber’s original argument against modern capitalism (that it is an illegitimate and corrupt system). Let us agree that our current system has its flaws, and is not perfect. First off, granting that this is so does not mean that a better alternative necessarily exists. Indeed, given the imperfect nature of human beings, we may well expect that even the best system that we can come up with will have its flaws. Nevertheless, simply because we cannot expect any system to be perfect does not mean that there is not some better alternative to the one we currently have, so let us be open to suggestions. For someone who is so critical of the present system, we would certainly expect Graeber to have such suggestions. Especially since decrying the present system (and essentially advocating that it be dismantled) without a viable alternative would seem to be an especially irresponsible position. Sadly (and this is the greatest flaw in the book), Graeber does not have any suggestions. Indeed, Graeber ventures only that the flaws in the current system point to the necessity to start thinking about alternatives.
And what is to blame for the fact that no viable alternatives have yet been thought up? Graeber argues that our lack of imagination here is a direct result of the fact that we have been living under the corrupting influence of the modern system for so long, that we have all simply come to take it for granted. What’s more, he argues, the system itself is designed to make us think that there is no other alternative: “We cling to what exists because we can no longer imagine an alternative that wouldn’t be even worse… it could well be said that the last thirty years have seen the construction of a vast bureaucratic apparatus for the creation and maintenance of hopelessness, a giant machine designed, first and foremost, to destroy any sense of possible alternative futures” (p. 382). However, it must be said that this is a very cheap out. And an outrageously arrogant swipe at those who have thought deeply about the issues, and do not necessarily assume that our current system is the best or only one.
While understanding the history of debt does add greatly to our understanding of history, economics, modern capitalism, and many other aspects of the human situation, it does not make it clear, as Graeber claims, that our present system neither should nor can be preserved. While capitalism may have its flaws, and may one day reach its limit, it is neither clear that its flaws render it completely insupportable, nor that its demise is inevitable. And this remains the case even in light of the mounting debt crises that are plaguing the international community; for though rising debt may certainly mean that changes will have to be made, it is difficult to believe that debt alone will force a revolution.
*Thank you for taking the time to read this article. If you have enjoyed this summary of ‘Debt: The First 5000 Years’ by David Graeber, or just have a thought, please free to leave a comment below. Also, if you feel others may benefit from this article, please feel free to click on the g+1 symbol below, or share it on one of the umpteen social networking sites hidden beneath the ‘share’ button.
Cheers,
Aaron,
The Book Reporter