Debt - Updated and Expanded: The First 5,000 Years

This was not a bad book — in fact, i thoroughly enjoyed many parts of it. However, the reason for the (relatively) low rating is because it’s so immensely long that the best points are few and sparse relative the sheer volume.

This book permanently changed my views on money, credit, war and concomitantly debt. It will change your view too (assuming you too have the patience to go through all 560 pages of it).

Most notably, it opened my eyes to the correlation between war and the rise of money vs. credit (in order to fund said war).

Notably, it becomes clear after reading the book, the wisdom of the ban on usury (interest bearing loans) in Islam. This excerpt by Ghazali is apt in explaining it:

A thing can only be exactly linked to other things if it has no particular special form or feature of its own—for example, a mirror that has no color can reflect all colors. The same is the case with money—it has no purpose of its own, but it serves as medium for the purpose of exchanging goods.91 From this it also follows that lending money at interest must be illegitimate, since it means using money as an end in itself: “Money is not created to earn money.” In fact, he says, “in relation to other goods, dirhams and dinars are like prepositions in a sentence,” words that, as the grammarians inform us, are used to give meaning to other words, but can only do so because they have no meaning in themselves.

However, at the same time:

True, much of what has since come to pass for Islamic economics nowadays has proved decidedly unimpressive.

For a transition to no-interest to work, it would have to be total (without having interest and non-interest options available).

Note to self: The next book I read better be short! These reviews are becoming increasingly taxing on my schedule, often leading to procrastination. I want to relive the satisfaction of completing several books a week.

Notable notes

“Surely one has to pay one’s debts.” The reason it’s so powerful is that it’s not actually an economic statement: it’s a moral statement.

China finds that the fact it holds so many U.S. treasury bonds makes it to some degree beholden to U.S. interests, rather than the other way around.

(when you owe someone an eye-watering amount of money, you gain power over that person/entity)

What is the difference between a gangster pulling out a gun and demanding you give him a thousand dollars of “protection money,” and that same gangster pulling out a gun and demanding you provide him with a thousand-dollar “loan”? In most ways, obviously, there is no difference. But in certain ways there is As in the case of the U.S. debt to Korea or Japan, were the balance of power at any point to shift, were America to lose its military supremacy, were the gangster to lose his henchmen, that “loan” might start being treated very differently. It might become a genuine liability. But the crucial element would still seem to be the gun.

the majority of human beings hold simultaneously that (1) paying back money one has borrowed is a simple matter of morality, and (2) anyone in the habit of lending money is evil.

The difference between a debt and an obligation is that a debt can be precisely quantified. This requires money.

to this day, no one has been able to locate a part of the world where the ordinary mode of economic transaction between neighbors takes the form of “I’ll give you twenty chickens for that cow.”

Note: Early on, and for a long part of the book, the author goes through a blow-by-blow attack of the previously held assumption that money was an inevitability — precisely because the exchange/barter of items was not possible. Turns out, this assumption is a false one. People used credit instead of barter in almost every occasion.

In fact, our standard account of monetary history is precisely backwards. We did not begin with barter, discover money, and then eventually develop credit systems. It happened precisely the other way around. What we now call virtual money came first. Coins came much later, and their use spread only unevenly, never completely replacing credit systems. Barter, in turn, appears to be largely a kind of accidental byproduct of the use of coinage or paper money: historically, it has mainly been what people who are used to cash transactions do when for one reason or another they have no access to currency.

Whatever its earliest origins, for the last four thousand years money has been effectively a creature of the state. Individuals, he observed, make contracts with one another. They take out debts, and they promise payment.

the value of a unit of currency is not the measure of the value of an object, but the measure of one’s trust in other human beings.

This is profound, and pivotal. This is why the debasement of the US dollar (and later, other currencies) from the gold standard is not surprising. Money was never meant to have intrinsic value — it was simply meant to replace the bits of paper that people previously used to track credit.

whatever the state was willing to accept, for that reason, became currency.

one popular theory of the origins of the state, which goes back at least to the fourteenth-century North African historian Ibn Khaldun, runs precisely along these lines: nomadic raiders eventually systematize their relations with sedentary villagers; pillage turns into tribute, rape turns into the “right of the first night” or the carrying off of likely candidates as recruits for the royal harem. Conquest, untrammeled force, becomes systematized, and thus framed not as a predatory relation but as a moral one, with the lords providing protection, and the villagers, their sustenance. But even if all parties assume they are operating by a shared moral code, that even kings cannot do whatever they want but must operate within limits,

Government was essentially a contract, a kind of business arrangement, whereby citizens had voluntarily given up some of their natural liberties to the sovereign.

True to his word, and starting from a “first principles” approach, he begins by questioning the authority of government over its people … and where it derived the right to collect taxes and the like from its constituents.

once relations are seen as based on “custom,” the only way to demonstrate that one has a duty or obligation to do something is to show that one has done it before.

Having established a precedent, things tend to coast (and are accepted as true) henceforth.

If a friend is unusually generous once, we will likely wish to reciprocate. If she acts this way repeatedly, we conclude she is a generous person, and are hence less likely to reciprocate … We can describe a simple formula here: a certain action, repeated, becomes customary; as a result, it comes to define the actor’s essential nature. Alternately, a person’s nature may be defined by how others have acted toward him in the past.

Prostitutes and slaves (and prostitutes are now considered to include unmarried temple servants as well as simple harlots) are not allowed to wear veils.

Interesting side-note on how veils were used to distinguish the honorable women from the others (what a huge departure from today!).

in harsh years, many poor farmers fell into debt; as a result they ended up as sharecroppers on their own property, dependents. Some were even sold abroad as slaves. This led to unrest and agitation, and also to demands for clean slates, for the freeing of those held in bondage, and for the redistribution of agricultural land. In a few cases, it led to outright revolution. In Megara, we are told, a radical faction that seized power not only made interest-bearing loans illegal, but did so retroactively, forcing creditors to make restitution of all interest they had collected in the past.

Interest-bearing loans appear to be at the heart of the matter — driving otherwise productive members of society in slavery.

The same tensions can be observed between neighbors, who in farming communities tend to give, lend, and borrow things amongst themselves—anything from sieves and sickles to charcoal and cooking oil, to seed corn or oxen for plowing. On the one hand, such giving and lending were considered essential parts of the basic fabric of human sociability in farm communities, on the other, overly demanding neighbors were a notorious irritant—one that could only have grown worse when all parties are aware of precisely how much it would have cost to buy or rent the same items that were being given away.

As a result, while credit systems tend to dominate in periods of relative social peace, or across networks of trust (whether created by states or, in most periods, transnational institutions like merchant guilds or communities of faith), in periods characterized by widespread war and plunder, they tend to be replaced by precious metal.

Essentially, trust between individuals has been replaced with trust between individuals and some central entity (the state that issues the money). This allows people to transact amongst each other without the baseline trust that’s typically required. It does however carry an implicit trust in the states ability to deliver on the IOU that is presented.

Most money literally was trust, since most credit arrangements were handshake deals. When people used the word “credit,” they referred above all to a reputation for honesty and integrity

By tying this with the issue of war & peace, we can understand this motive at a deeper level. Soldiers traveling across the country during times of war would require a way of transacting with local merchants they don’t know — hence the convenience of using money. Also, by requiring that taxes be paid in “money”, the governments essentially force merchants to replace at least a portion of their gold/silver reserves with currency. This allows the state to collect these gold/silver reserves and use them for further funding the war. As new lands are conquered, so their reserves in turn are pillaged, feeding the war machine.

the entire Roman empire, at its height, could be understood as a vast machine for the extraction of precious metals and their coining and distribution to the military—combined with taxation policies designed to encourage conquered populations to adopt coins in their everyday transactions.

We are so used to the idea of “having” rights—that rights are something one can possess—that we rarely think about what this might actually mean. In fact (as Medieval jurists were well aware), one man’s right is simply another’s obligation. My right to free speech is others’ obligation not to punish me for speaking;

Shang (ruler of China) believed that widespread prosperity would ultimately harm the ruler’s ability to mobilize his people for war, and therefore that terror was the most efficient instrument of governance, but even he insisted that this regime be clothed as a regime of law and justice.

Almost all of the new forms of paper money that emerged were not originally created by governments at all; they were simply ways of recognizing and expanding the use of credit instruments that emerged from everyday economic transactions.

As we have seen in the case of medieval Islam, under genuine free-market conditions—in which the state is not involved in regulating the market in any significant way, even in enforcing commercial contracts—purely competitive markets will not develop, and loans at interest will become effectively impossible to collect. It was only the Islamic prohibition against usury, really, that made it possible for them to create an economic system that stood so far apart from the state.

It would appear that having interest would discourage people from putting their money to work, opting instead for guaranteed growth where it’s possible. By prohibiting interest entirely, the state can maintain it’s separation from the banking sector while ensuring that they are properly incentivized to invest.

It was only with the creation of the Bank of England in 1694 that one can speak of genuine paper money, since its banknotes were in no sense bonds. They were rooted, like all the others, in the king’s war debts. This can’t be emphasized enough. The fact that money was no longer a debt owed to the king, but a debt owed by the king, made it very different than what it had been before. In many ways, it had become a mirror image of older forms of money.

the reliance on gold and silver seemed to provide the only check on the dangers involved with the new forms of credit-money, which multiplied very quickly—especially once ordinary banks were allowed to create money too

It can be hard to imagine a past where the switch from credit arrangements to money happened directly, without going through a precious-metal-coin-phase. This is specifically because it requires the sort of blind trust of government (and banks) that one can only attain gradually.

The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in iniquity and born in sin. Bankers own the earth; take it away from them, but leave them with the power to create credit, and with the stroke of a pen they will create enough money to buy it back again … If you wish to remain slaves of Bankers, and pay the cost of your own slavery, let them continue to create deposits.

The most absurd and preposterous of all, and which shewed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled “A company for the carrying on of an undertaking of great advantage, but nobody to know what it is.”

It is the secret scandal of capitalism that at no point has it been organized primarily around free labor.

The United States was in possession of a large proportion of the world’s gold reserves in its vaults in Fort Knox (though increasingly less in the late 1960s, as other governments, most famously Charles de Gaulle’s France, began demanding gold for their dollars); most poorer countries, in contrast, kept their reserves in dollars. The immediate effect of Nixon’s unpegging the dollar was to cause the price of gold to skyrocket; it hit a peak of $600 an ounce in 1980. This of course had the effect of causing U.S. gold reserves to increase dramatically in value. The value of the dollar, as denominated in gold, plummeted. The result was a massive net transfer of wealth from poor countries, which lacked gold reserves, to rich ones, like the United States and Great Britain, that maintained them.

Whoa .. no comment.

Contrary to popular belief, the U.S. government can’t “just print money,” because American money is not issued by the Federal government at all, but by private banks, under the aegis of the Federal Reserve System. The Federal Reserve, in turn, is a peculiar sort of public-private hybrid, a consortium of privately owned banks whose Governing Board is appointed by the U.S. president, with Congressional approval, but which otherwise operates autonomously. All dollar bills in circulation in America are “Federal Reserve Notes”—the Fed issues them as promissory notes and commissions the U.S. mint to do the actual printing, paying it four cents for each bill.8 The arrangement is just a variation of the scheme originally pioneered by the Bank of England, whereby the Fed “loans” money to the United States government by purchasing treasury bonds, and then monetizes the U.S. debt by lending the money thus owed by the government to other banks … Thus, it’s the Fed that has the power to print money. The banks that receive loans from the Fed are no longer permitted to print money themselves, but they are allowed to create virtual money by making loans ostensibly, at a fractional reserve rate established by the Fed

Because of United States trade deficits, huge numbers of dollars circulate outside the country; and one effect of Nixon’s floating of the dollar was that foreign central banks have little they can do with these dollars except to use them to buy U.S. treasury bonds.14 This is what is meant by the dollar becoming the world’s “reserve currency.” These bonds are, like all bonds, supposed to be loans that will eventually mature and be repaid, but as economist Michael Hudson, who first began observing the phenomenon in the early ’70s, noted, they never really do

This makes a lot of sense now. Since the dollar is being used by foreign (weaker) countries, the US can essentially print its way out of any debt situation … even then, it doesn’t bother doing so (ostensibly because of it’s military superiority; other countries just can’t collect on the promised interest on the treasury bonds).

Oh yeah, there’s more:

At the same time, U.S. policy was to insist that those countries relying on U.S. treasury bonds as their reserve currency behaved in exactly the opposite way: observing tight money policies and scrupulously repaying their debts.

[The IMF] created largely under U.S. patronage. All of them operate on the principle that (unless one is the United States Treasury, or perhaps American Insurance Group), “one has to pay one’s debts”

One can see the great crash of 2008 in the same light—as the outcome of years of political tussles between creditors and debtors, rich and poor. True, on a certain level, it was exactly what it seemed to be: a scam, an incredibly sophisticated Ponzi scheme designed to collapse in the full knowledge that the perpetrators would be able to force the victims to bail them out.

The reader will recall that Keynes fully accepted that banks do, indeed, create money “out of thin air,” and that for this reason, there was no intrinsic reason that government policy should not encourage this during economic downturns as a way of stimulating demand—a position that had long been dear to the heart of debtors and anathema to creditors.

Indeed, why doesn’t the US just print more money in times of great need? Here’s why:

Capitalism doesn’t work that way. It is ultimately a system of power and exclusion, and when it reaches the breaking point, the symptoms recur, just as they had in the 1970s: food riots, oil shock, financial crisis, the sudden startled realization that the current course was ecologically unsustainable, and attendant apocalyptic scenarios of every sort. In the wake of the subprime collapse, the U.S. government was forced to decide who really gets to make money out of nothing: The financiers, or ordinary citizens. The results were predictable. Financiers were “bailed out with taxpayer money”—which basically means that their imaginary money was treated as if it were real. Mortgage holders were, overwhelmingly, left to the tender mercies of the courts, under a bankruptcy law that Congress had a year before (rather suspiciously presciently, one might add) made far more exacting against debtors

What is a debt, anyway? A debt is just the perversion of a promise. It is a promise corrupted by both math and violence.

And in conclusion:

never allowing anyone to question the sacred principle that we must all pay our debts. At this point, however, the principle has been exposed as a flagrant lie. As it turns out, we don’t “all” have to pay our debts. Only some of us do. Nothing would be more important than to wipe the slate clean for everyone, mark a break with our accustomed morality, and start again.

Further Reading