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during the ’70s oil crisis, OPEC countries ended up pouring so much of their newfound riches into Western banks that the banks couldn’t figure out where to invest the money; how Citibank and Chase therefore began sending agents around the world trying to convince Third World dictators and politicians to take out loans (at the time, this was called “go-go banking”); how they started out at extremely low rates of interest that almost immediately skyrocketed to 20 percent or so due to tight U.S. money policies in the early ’80s; how, during the ’80s and ’90s, this led to the Third World debt
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during the ’70s oil crisis, OPEC countries ended up pouring so much of their newfound riches into Western banks that the banks couldn’t figure out where to invest the money; how Citibank and Chase therefore began sending agents around the world trying to convince Third World dictators and politicians to take out loans (at the time, this was called “go-go banking”); how they started out at extremely low rates of interest that almost immediately skyrocketed to 20 percent or so due to tight U.S. money policies in the early ’80s; how, during the ’80s and ’90s, this led to the Third World debt
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that’s not how loans are actually supposed to work. Financial institutions are supposed to be ways of directing resources toward profitable investments. If a bank were guaranteed to get its money back, plus interest, no matter what it did, the whole system wouldn’t work.
‘You know, I just got a really great tip on the horses. Think you could lend me a couple million quid?’ Obviously they’d just laugh at me. But that’s just because they know if my horse didn’t come in, there’d be no way for them to get the money back. But, imagine there was some law that said they were guaranteed to get their money back no matter what happens, even if that meant, I don’t know, selling my daughter into slavery or harvesting my organs or something. Well, in that case, why not? Why bother waiting for someone to walk in who has a viable plan to set up a laundromat or some such?
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‘You know, I just got a really great tip on the horses. Think you could lend me a couple million quid?’ Obviously they’d just laugh at me. But that’s just because they know if my horse didn’t come in, there’d be no way for them to get the money back. But, imagine there was some law that said they were guaranteed to get their money back no matter what happens, even if that meant, I don’t know, selling my daughter into slavery or harvesting my organs or something. Well, in that case, why not? Why bother waiting for someone to walk in who has a viable plan to set up a laundromat or some such?
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“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.
“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.
Debt has come to be the central issue of international politics. But nobody seems to know exactly what it is, or how to think about it. The very fact that we don’t know what debt is, the very flexibility of the concept, is the basis of its power.
Debt has come to be the central issue of international politics. But nobody seems to know exactly what it is, or how to think about it. The very fact that we don’t know what debt is, the very flexibility of the concept, is the basis of its power.
Third World debtor nations are almost exclusively countries that have at one time been attacked and conquered by European countries—often, the very countries to whom they now owe money.
Third World debtor nations are almost exclusively countries that have at one time been attacked and conquered by European countries—often, the very countries to whom they now owe money.
Republic of Haiti—the first poor country to be placed in permanent debt peonage. Haiti was a nation founded by former plantation slaves who had the temerity not only to rise up in rebellion, amidst grand declarations of universal rights and freedoms, but to defeat Napoleon’s armies sent to return them to bondage. France immediately insisted that the new republic owed it 150 million francs in damages for the expropriated plantations, as well as the expenses of outfitting the failed military expeditions, and all other nations, including the United States, agreed to impose an embargo on the
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Republic of Haiti—the first poor country to be placed in permanent debt peonage. Haiti was a nation founded by former plantation slaves who had the temerity not only to rise up in rebellion, amidst grand declarations of universal rights and freedoms, but to defeat Napoleon’s armies sent to return them to bondage. France immediately insisted that the new republic owed it 150 million francs in damages for the expropriated plantations, as well as the expenses of outfitting the failed military expeditions, and all other nations, including the United States, agreed to impose an embargo on the
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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.
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.
A debt is the obligation to pay a certain sum of money. As a result, a debt, unlike any other form of obligation, can be precisely quantified. This allows debts to become simple, cold, and impersonal—which, in turn, allows them to be transferable.
money’s capacity to turn morality into a matter of impersonal arithmetic—and by doing so, to justify things that would otherwise seem outrageous or obscene.
looked very much like an unusually elaborate version of what banks were doing when they lent money to dictators in Bolivia and Gabon in the late ’70s: making utterly irresponsible loans with the full knowledge that, once it became known they had done so, politicians and bureaucrats would scramble to ensure that they’d still be reimbursed anyway, no matter how many human lives had to be devastated and destroyed in order to do it. The difference, though, was that this time, the bankers were doing it on an inconceivable scale: the total amount of debt they had run up was larger than the combined
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wow, precedent for the 2008 financial crisis existed, just not the lessons or previous scale.
there’s nothing new about virtual money. Actually, this was the original form of money. Credit system, tabs, even expense accounts, all existed long before cash. These things are as old as civilization itself. True, we also find that history tends to move back and forth between periods dominated by bullion—where it’s assumed that gold and silver are money—and periods where money is assumed to be an abstraction, a virtual unit of account. But historically, credit money comes first, and what we are witnessing today is a return of assumptions that would have been considered obvious common sense
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The new age of credit money we are in seems to have started precisely backwards. It began with the creation of global institutions like the IMF designed to protect not debtors, but creditors.
The difference between a debt and an obligation is that a debt can be precisely quantified. This requires money.
possible: money and debt appear on the scene at exactly the same time.
When economists speak of the origins of money, for example, debt is always something of an afterthought. First comes barter, then money; credit only develops later. Even if one consults books on the history of money in, say, France, India, or China, what one generally gets is a history of coinage, with barely any discussion of credit arrangements at all.
Economists generally speak of three functions of money: medium of exchange, unit of account, and store of value. All economic textbooks treat the first as primary.
The story of money for economists always begins with a fantasy world of barter. The problem is where to locate this fantasy in time and space: Are we talking about cave men, Pacific Islanders, the American frontier?
never clear as to how.6 In the years after Columbus, as Spanish and Portuguese adventurers were scouring the world for new sources of gold and silver, these vague stories disappear. Certainly no one reported discovering a land of barter. Most sixteenth- and seventeenth-century travelers in the West Indies or Africa assumed that all societies would necessarily have their own forms of money, since all societies had governments and all governments issued money.7 Adam Smith, on the other hand, was determined to overturn the conventional wisdom of his day. Above all, he objected to the notion that
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Smith expanded on the argument, insisting that property, money, and markets not only existed before political institutions but were the very foundation of human society. It followed that insofar as government should play any role in monetary affairs, it should limit itself to guaranteeing the soundness of the currency. It was only by making such an argument that he could insist that economics is itself a field of human inquiry with its own principles and laws—that is, as distinct from, say ethics or politics.
this story played a crucial role not only in founding the discipline of economics, but in the very idea that there was something called “the economy,” which operated by its own rules, separate from moral or political life, that economists could take as their field of study. “The economy” is where we indulge in our natural propensity to truck and barter. We are still trucking and bartering. We always will be. Money is simply the most efficient means.
“Once upon a time, there was barter. It was difficult. So people invented money. Then came the development of banking and credit.” It all forms a perfectly simple, straightforward progression, a process of increasing sophistication and abstraction that has carried humanity, logically and inexorably, from the Stone Age exchange of mastodon tusks to stock markets, hedge funds, and securitized derivatives.14
The problem is there’s no evidence that it ever happened, and an enormous amount of evidence suggesting that it did not. For centuries now, explorers have been trying to find this fabled land of barter—
Stanley Jevons, for example, who in 1871 wrote what has come to be considered the classic book on the origins of money, took his examples straight from Smith, with Indians swapping venison for elk and beaver hides, and made no use of actual descriptions of Indian life that made it clear that Smith had simply made this up.
The definitive anthropological work on barter, by Caroline Humphrey, of Cambridge, could not be more definitive in its conclusions: “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing.”
the following story of barter between tribes is mind blowingly good
Barter, then, for all the festive elements, was carried out between people who might otherwise be enemies and hovered about an inch away from outright warfare—
This is why a direct one-on-one exchange is appropriate: each side makes their trade and walks away. It’s all made possible by laying down an initial mantle of sociability in the form of shared pleasures, music, and dance—the usual base of conviviality on which trade must always be built. Then comes the actual trading, where both sides make a great display of the latent hostility that necessarily exists in any exchange of material goods between strangers—where neither party has no particular reason not to take advantage of the other—by playful mock aggression,
in the century or two before Smith’s time, the English words “truck and barter,” like their equivalents in French, Spanish, German, Dutch, and Portuguese, literally meant “to trick, bamboozle, or rip off.”23 Swapping one thing directly for another while trying to get the best deal one can out of the transaction is, ordinarily, how one deals with people one doesn’t care about and doesn’t expect to see again.
scenarios, the problem of “double coincidence of wants,” so endlessly invoked in the economics textbooks, simply disappears. Henry might not have something Joshua wants right now. But if the two are neighbors, it’s obviously only a matter of time before he will.24 This in turn means that the need to stockpile commonly acceptable items in the way that Smith suggested disappears as well. With it goes the need to develop currency. As with so many actual small communities, everyone simply keeps track of who
there is good reason to believe that barter is not a particularly ancient phenomenon at all, but has only really become widespread in modern times. Certainly in most of the cases we know about, it takes place between people who are familiar with the use of money but, for one reason or another, don’t have a lot of it around. Elaborate barter systems often crop up in the wake of the collapse of national economies: most recently in Russia in the ’90s and in Argentina around 2002, when rubles in the first case, and dollars in the second, effectively disappeared.26 Occasionally one can even find
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The most remarkable thing is that even in Adam Smith’s examples of fish and nails and tobacco being used as money, the same sort of thing was happening. In the years following the appearance of The Wealth of Nations, scholars checked into most of those examples and discovered that in just about every case, the people involved were quite familiar with the use of money and, in fact, were using money—as a unit of account.30
Employers in Smith’s day often lacked coin to pay their workers; wages could be delayed by a year or more; in the meantime, it was considered acceptable for employees to carry off either some of their own products or leftover work materials, lumber, fabric, cord, and so on. The nails were de facto interest on what their employers owed them. So they went to the pub, ran up a tab, and when occasion permitted, brought in a bag of nails to charge off against the debt. The law making tobacco legal tender in Virginia seems to have been an attempt by planters to oblige local merchants to accept their
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The primary examples, then, were ones in which people were improvising credit systems because actual money—gold and silver coinage—was in short supply.
Mesopotamian civilization around 3500 BC, temple administrators already appear to have developed a single, uniform system of accountancy—
The basic monetary unit was the silver shekel. One shekel’s weight in silver was established as the equivalent of one gur, or bushel of barley. A shekel was subdivided into 60 minas, corresponding to one portion of barley—on the principle that there were 30 days in a month, and Temple workers received two rations of barley every day. It’s easy to see that “money” in this sense is in no way the product of commercial transactions. It was actually created by bureaucrats in order to keep track of resources and move things back and forth between departments.
while debts were calculated in silver, they did not have to be paid in silver—in fact, they could be paid in more or less anything one had around. Peasants who owed money to the Temple or Palace, or to some Temple or Palace official, seem to have settled their debts mostly in barley, which is why fixing the ratio of silver to barley was so important. But it was perfectly acceptable to show up with goats, or furniture, or lapis lazuli.
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
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Recall here what Smith was trying to do when he wrote The Wealth of Nations. Above all, the book was an attempt to establish the newfound discipline of economics as a science. This meant that not only did economics have its own peculiar domain of study—what we now call “the economy,” though the idea that there even was something called an “economy” was very new in Smith’s day—but that this economy operated according to laws of much the same sort as Sir Isaac Newton had so recently identified as governing the physical world. Newton had represented God as a cosmic watchmaker who had created the
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Call this the final apotheosis of economics as common sense. Money is unimportant. Economies—“real economies”—are really vast barter systems. The problem is that history shows that without money, such vast barter systems do not occur.
The century before The Wealth of Nations had seen at least two attempts to create state-supported central banks, in France and Sweden, that had proven to be spectacular failures. In each case, the would-be central bank issued notes based largely on speculation that collapsed the moment investors lost faith. Smith supported the use of paper money, but like Locke before him, he also believed that the relative success of the Bank of England and Bank of Scotland had been due to their policy of pegging paper money firmly to precious metals. This became the mainstream economic view, so much so that
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Credit Theorists insisted that money is not a commodity but an accounting tool. In other words, it is not a “thing” at all. For a Credit Theorist can no more touch a dollar or a deutschmark than you can touch an hour or a cubic centimeter. Units of currency are merely abstract units of measurement, and as the credit theorists correctly noted, historically, such abstract systems of accounting emerged long before the use of any particular token of exchange.
The obvious next question is: If money is a just a yardstick, what then does it measure? The answer was simple: debt.
