Debt: The First 5,000 Years

by David Graeber

It seemed that most Americans were open to radical solutions. Surveys showed that an overwhelming majority of Americans felt that the banks should not be rescued, whatever the economic consequences, but that ordinary citizens stuck with bad mortgages should be bailed out. In the United States this is quite extraordinary. Since colonial days, Americans have been the population least sympathetic to debtors. In a way this is odd, since America was settled largely by absconding debtors, but it’s a country where the idea that morality is a matter of paying one’s debts runs deeper than almost any other.

The United States government effectively put a three-trillion-dollar Band-Aid over the problem and changed nothing. The bankers were rescued; small-scale debtors—with a paltry few exceptions—were not.14 To the contrary, in the middle of the greatest economic recession since the ’30s, we are already beginning to see a backlash against them—driven by financial corporations who have now turned to the same government that bailed them out to apply the full force of the law against ordinary citizens in financial trouble.

We have reached the point where even some of the central institutions have been forced to admit, however quietly, that this is indeed the case. In America, the Federal Reserve floated a plan for mass mortgage relief in the summer of 2012, only to discover the political class was simply unwilling to consider it.

For a while, even the IMF, under Dominique Strauss-Kahn, began trying to reposition itself as the conscience of global capitalism, issuing warnings that if the economy continues on the present course, some kind of crash is inevitable, and the next time, no bailout is likely to be forthcoming: the public simply will not stand for it, and as a result, everything really will come apart.

The moment one casts matters on a broad historical scale, though, the first thing one learns is that 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 in, say, the Middle Ages—or even ancient Mesopotamia.

But history does provide fascinating hints of what we might expect. For instance: in the past, ages of virtual credit money almost invariably involve the creation of institutions designed to prevent everything going haywire—to stop the lenders from teaming up with bureaucrat...

first chapter,

In that common-sense view, the State and the Market tower above all else as diametrically opposed principles. Historical reality reveals, however, that they were born together and have always been intertwined.

The one thing that all these misconceptions have in common, we will find, is that they tend to reduce all human relations to exchange, as if our ties to society, even to the cosmos itself, can be imagined in the same terms as a business deal.

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view of the moral basis of ec...

origins o...

Chapter Eight,

Probably the most notorious, and often catastrophic, way that this problem worked itself out in the High Middle Ages was in relations between Christians and Jews.

In the years since Nehemiah, Jewish attitudes toward lending had themselves changed. In the time of Augustus, Rabbi Hillel had effectively rendered the sabbatical year a dead letter by allowing two parties to place a rider on any particular loan contract agreeing that it would not apply. While both the Torah and the Talmud stand opposed to loans on interest, exceptions were made in dealing with Gentiles—particularly as, over the course of the eleventh and twelfth centuries, European Jews were excluded from almost any other line of work.

On the Christian side, in 1140 AD the “Exception of Saint Ambrose” found its way into Gratian’s Decretum, which came to be considered the definitive collection of canon law.

At the time, economic life fell very much under the jurisdiction of the Church. While that might appear to leave Jews safely outside the system, in reality, matters were more complicated. For one thing, while both Jews and Gentiles would occasionally attempt to make recourse to the Exception, the prevailing opinion was that it only really applied to Saracens or others with whom Christendom was literally at war.

In part, this was due to the habit of Christian princes of exploiting, for their own purposes, the fact that Jews did sit slightly outside the system. Many encouraged Jews to operate as moneylenders, under their protection, simply because they also knew that protection could be withdrawn at any time.

The kings of England were notorious in this regard. They insisted that Jews be excluded from merchant and craft guilds, but granted them the right to charge extravagant rates of interest, backing up the loans by the full force of law.113 Debtors in medieval England were regularly thrown in prisons until their families settled with the creditor.114 Yet the same thing regularly happened to the Jews themselves.

In 1210 AD, for example, King John ordered a tallage, or emergency levy, to pay for his wars in France and Ireland. According to one contemporary chronicler, “All the Jews throughout England, of both sexes, were seized, imprisoned, and tort...

John’s successor, Henry III (1216–1272 AD), was in the habit of turning over Jewish victims to his brother the Earl of Cornwall, so that, as another chronicler put it, “those whom one brother had flayed, the other might embowel.”116 Such stories about the extraction of Jewish teeth, skin, and intestines are, I think, important to bear in mind when thinking about Shakespeare’s imaginary Merchant of Venice demanding his “pound of flesh.”

The terror inflicted by kings carried in it a peculiar element of identification: the persecutions and appropriations were an extension of the logic whereby kings effectively treated debts owed to Jews as ultimately owed to themselves, even setting up a branch of the Treasury (“the Exchequer of the Jews”) to manage them.

But it also gave the kings the opportunity to periodically play the populist card, dramatically snubbing or humiliating their Jewish financiers, turning a blind eye or even encouraging pogroms by townsfolk who chose to take the Exception of Saint Ambrose literally and treat moneylenders as enemies of Christ who could be murdered in cold blood. Particularly gruesome massacres occurred in Norwich in 1144 AD, and in Blois, France, in 1171. Before long, as Norman Cohn put it, “What had once been a flourishing Jewish culture had turned into a terrorized society locked in perpetual warfare with the greater society around it.”119

One mustn’t exaggerate the Jewish role in lending. Most Jews had nothing to do with the business, and those who did were typically bit players, making minor loans of grain or cloth for a return in kind. Others weren’t even really Jews. Already in the 1190s, preachers were complaining about lords who would work hand in glove with Christian moneylenders claiming they were “our Jews”—and thus under their special protection.

120 By the 1100s, most Jewish moneylenders had long since been displaced by Lombards (from Northern Italy) and Cahorsins (from the French town of Cahors)—who established themselves across...

The rise of rural usury was itself a sign of a growing free peasantry (there had been no point in making loans to serfs, since they had nothing to repossess). It accompanied the rise of commercial farming, urban craft guilds, and the “commercial revolution” of the High Middle Ages, all of which finally brought Western Europe to a level of economic activity comparable to that long since considered normal in other parts of the world.

Existing loopholes in the usury laws were systematically closed, particularly the use of mortgages. These latter began as an expedient: as in medieval Islam, those determined to dodge the law could simply present the money, claim to be buying the debtor’s house or field, and then “rent” the same house or field back to the debtor until the principal was repaid.

In the case of a mortgage, the house was in theory not even purchased but pledged as security, but any income from it accrued to the lender. In the eleventh century, this became a favorite trick of monasteries. In 1148, it was made illegal: henceforth, all income was to be subtracted from the principal. Similarly, in 1187, merchants were forbidden to charge higher prices when selling on credit—the Church thereby going much further than any school of Islamic law ever had.

In 1179, usury was made a mortal sin, and usurers were excommunicated and d...

All this was echoed by a heady intellectual debate in the newly founded universities, not so much as to whether usury was sinful and illegal, but precisely why. Some argued that it was theft of another’s material possessions; others that it constituted a theft of time, charging others for something that belonged only to God. Some held that it embodied the sin of Sloth, since like the Confucians, Catholic thinkers usually held that a merchant’s profit could only be justified as payment for his labor (i.e., in transporting goods to wherever they were needed), whereas interest accrued even if the lender did nothing at all.

Soon the rediscovery of Aristotle, who returned in Arabic translation, and the influence of Muslim sources like Ghazali and Ibn Sina, added new arguments: that treating money as an end in itself defied its true purpose, that charging interest was unnatural, in that it treated mere metal as if it were a living thing that could breed or bear fruit.

But as the Church authorities soon discovered, when one opens up such debates, it’s very hard to keep a lid on them. Soon, new popular religious movements were appearing everywhere, and many took up the same direction so many had in late Antiquity, not only challenging commerce but questioning the very legitimacy of private property.

At the same time, the revival of Roman law—which, as we’ve seen, began from the assumption of absolute private property—put new intellectual weapons in the hands of those who wished to argue that, at least in the case of commercial loans, usury laws should be relaxed.

The great discovery in this case was the notion of interesse, which is where our word “interest” originally comes from: a compensation for loss suffered because of late payment.124 The argument soon became that if a merchant made a commercial loan even for some minimal period (say, a month), it was not usurious for him to charge a percentage for each month afterward, since this was a penalty, not rental for the money, and it was justified as compensation for the profit he would have made, had he placed it in some profitable investment, as any merchant would ordinarily be expected to do.125

The reader may be wondering how it could have been possible for usury laws to move in two opposite directions simultaneously. The answer would seem to be that politically, the situation in Western Europe was remarkably chaotic. Most kings were weak, their holdings fractured and uncertain; the Continent was a checkerboard of baronies, principalities, urban communes, manors, and church estates. Jurisdictions were constantly being renegotiated—usually by war.

Merchant capitalism of the sort long familiar in the Muslim Near West only really managed to establish itself—quite late, compared with the situation in the rest of the medieval world—when merchant capitalists managed to secure a political foothold in the independent city-states of northern Italy—most famously, Venice, Florence, Genoa, and Milan—followed by the German cities of the Hanseatic League.

Italian bankers ultimately managed to free themselves from the threat of expropriation by themselves taking over governments and by doing so, acquiring their own court systems (capable of enforcing con...

What jumps out, in comparison with the Muslim world, are these links of finance, trade, and violence. Whereas Persian and Arab thinkers assumed that the market emerged as an extension of mutual aid, Christians never completely overcame the suspicion that commerce was really an extension of usury, a ...

Debt was, indeed, sin—on the part of both parties to the transaction. Competition was essential to the nature of the market, but competition was (usually) nonviolent warfare. There was a reason why, as I’ve already observed, the words for “truck and barter” in almost all European languages were derived from terms meaning “swindle,” “bamboozle,” or “deceive.” Some disdained ...

It is often held that the first pioneers of modern banking were the Military Order of the Knights of the Temple of Solomon, commonly known as the Knights Templar. A fighting order of monks, they played a key role in financing the Crusades.

Through the Templars, a lord in southern France might take out a mortgage on one of his tenements and receive a “draft” (a bill of exchange, modeled on the Muslim suftaja, but written in a secret code) redeemable for cash from the Temple in Jerusalem. In other words, Christians appear to have first adopted Islamic financial techniques to finance attacks against Islam.

The Templars lasted from 1118 to 1307, but they finally went the way of so many medieval trading minorities: King Phillip IV, deep in debt to the order, turned on them, accusing them of unspeakable crimes; their leaders were tortured and ultimately killed, and their wealth was expropriated.128 Much of the problem was that they lacked a powerfu...

In banking history, the Italians are most famous for their complex joint-stock organization and for spearheading the use ...

Most of the capital for these banking enterprises derived from the Mediterranean trade in Indian Ocean spices and Eastern luxuries. Yet, unlike the Indian Ocean, the Mediterranean was a constant war zone. Venetian galleys doubled as both merchant vessels and warships, replete with cannon and marines, and the differences between trade, crusade, and piracy often depended on the balance of forces at any given moment.

The Venetians were only the most famous in this regard. They created a veritable mercantile empire over the course of the eleventh century, seizing islands like Crete and Cyprus and establishing sugar plantations that eventually—anticipating a pattern eventually to become all too familiar in the New World—came to be staffed largely by African slaves.

Genoa soon followed suit; one of their most lucrative businesses was raiding and trading along the Black Sea to acquire slaves to sell to the Mamluks in Egypt or to work mines leased from the Turks.134 The Genoese republic was also the inventor of a unique mode of military financing, which might be known as war by subscription, whereby those planning expeditions sold shares to investors in exchange for the rights to an equivalent percentage of the spoils.

It would be instructive, I think, to pause a moment to think about this term, “merchant adventurer.” Originally, it just meant a merchant who operated outside of his own country.

French poet Chretien de Troyes,

The romances were a new sort of literature featuring a new sort of hero, the “knight-errant,” a warrior who roamed the world in search of, precisely, “adventure”—in the contemporary sense of the word: perilous challenges, love, treasure, and renown. Stories of knightly adventure quickly became enormously popular, Chretein was followed by innumerable imitators, and the central characters in the stories—Arthur and Guinevere, Lancelot, Gawain, Percival, and the rest—became known to everyone, as they are still.