Debt: The First 5,000 Years

by David Graeber

This courtly ideal of the gallant knight, the quest, the joust, romance and adventure, remains central to our image of the Middle Ages.136

The curious thing is that it bears almost no relation to reality. Nothing remotely like a real “knight-errant” ever existed. “Knights” had originally been a term for freelance warriors, drawn from the younger or, often, bastard sons of the minor nobility. Unable to inherit, they were often forced to band together to seek their fortunes. Many of these bands became little more than roving gangs of thu...

Culminating in the twelfth century, there was a concerted effort to bring this dangerous population under the control of the civil authorities: not only the code of chivalry, but the tournament, the joust—all these were more than anything else ways of keeping them out of trouble, as it were, in part by setting knights again...

The ideal of the lone wandering knight, in search of some gallant adventure, on the other hand, seems...

So, it was not only that the merchants supplied the materials that made the fairs possible; since vanquished knights technically owed their lives to the victors, merchants ended up, in their capacity as moneylenders, making good business out of liquidating their assets.

Alternately, a knight might borrow vast sums to outfit himself in magnificence, hoping to impress some fair lady (with handsome dowry) with his victories; others, to take part in the continual whoring and gambling that always surrounded such events.

Losers would end up having to sell their armor and horses, and this created the danger that they would go back to being highwaymen, foment pogroms (if their creditors were Jews) or, if they had lands, make new fi...

Others turned to war, which itself tended to drive the creation of new markets.140 In one of the most dramatic of such incidents, in November 1199, a large number of knights at a tournament at the castle of Écry in Champagne, sponsored by Henry’s son, Theobald, were seized by a great religious pa...

The crusader army then proceeded to commission the Venetian fleet for transport in exchange for a promise of a 50-percent share in all resulting profits. In the end, rather than proceeding to the Holy Land, they ended up sacking the (much wealthier, Orthodox) Christian city of Constantinople after a prolonged and bloody siege. A Flemish count named Baldwin was installed as “Latin Emperor of Constantinople,” but attempting to govern a city that had been largely de...

All this does not really answer the question: Whence, then, this image of the solitary knight-errant, wandering the forests of a mythic Albion, challenging rivals, confronting ogres, fairies, wizards, and mysterious beasts? The answer should be clear by now. Really, this is just a sublimated, romanticized image of the traveling merchants themselves: men who did, after all, set off on lonely ventures through wilds and forests, whose outcome was anything but certain.142

And what of the Grail, that mysterious object that all the knights-errant were ultimately seeking? Oddly enough, Richard Wagner, composer of the opera Parzifal, first suggested that the Grail was a symbol inspired by the new forms of finance.143 Where earlier epic heroes sought after, and fought over, piles of real, concrete gold and silver—the Nibelung’s hoard—these new ones, born of the new commercial economy, pursued purely abstract forms of value. No one, after all, knew precisely what the Grail was. Even the epics disagree: sometimes it’s a plate, sometimes a cup, sometimes a stone. (Wolfram von Eschenbach imagined it to be a jewel knocked from Lucifer’s helmet in a battle at the dawn of time.) In a way, it doesn’t matter. The point is that it’s invisible, intangible, but at the same time of infinite, inexhaustible value, containing everything, capable of making the wasteland flower, feeding the world, providing spiritual sustenance, and healing wounded bodies.

Whatever Nixon’s reasons, though, once the global system of credit money was entirely unpegged from gold, the world entered a new phase of financial history—one that nobody completely understands.

In part, these systems work because no one knows how they really work.

The United States has always been dominated by a certain market populism, and the ability of banks to “create money out of nothing”—and even more, to prevent anyone else from doing so—has always been the bugaboo of market populists, since it directly contradicts the idea that markets are a simple expression of democratic equality.

Under the free-market orthodoxy that followed, we have all been asked, effectively, to accept that “the market” is a self-regulating system, with the rising and falling of prices akin to a force of nature, and simultaneously to ignore the fact that, in the business pages, it is simply assumed that markets rise and fall mainly in anticipation of, or reaction to, decisions by Alan Greenspan, or Ben Bernanke, or whoever is currently the chairman of the Federal Reserve.5

One element, however, tends to go flagrantly missing in even the most vivid conspiracy theories about the banking system, let alone in official accounts: that is, the role of war and military power. There’s a reason why the wizard has such a strange capacity to create money out of nothing. Behind him, there’s a man with a gun.

True, in one sense, he’s been there from the start. I have already pointed out that modern money is based on government debt, and that governments borrow money in order to finance wars. This is just as true today as it was in the age of King Phillip II. The creation of central banks represented a permanent institutionalization of that marriage between the interests of warriors and financiers that had already begun to emerge in Renaissance Italy and that eventually became the foundation of financial capitalism.6

Nixon floated the dollar in order to pay for the cost of a war in which, during the period of 1970–1972 alone, he ordered more than four million tons of explosives and incendiaries dropped on cities and villages across Indochina—causing one senator to dub him “the greatest bomber of all time.”7 The debt crisis was a direct result of the need to pay for ...

This was what was causing such an enormous strain on the U.S. gold reserves. Many hold that by floating the dollar, Nixon converted the U.S. currency into pure “fiat money”—mere pieces of paper, intrinsically worthless, that were treated as money only because the United States government insisted that they should be. In that case, one could well argue that U.S. military power was now the only thing backing up the currency. In a certain sense this is true, but the notion of “fiat ...

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...

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 bon...

The difference is that while the Bank of England originally loaned the king gold, the Fed simply whisks the money into existence by saying that it’s there. Thus, it’s the Fed that has the power to print money.10 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 r...

For instance, while technically, the Fed cannot lend money directly to the government by buying Treasury Bonds, everyone knows that doing so indirectly is one of its primary reasons for being. And insofar as the government issues T-bonds, it actually is, in one sense, printing money: circulating debt tokens that—as one apparently paradoxical effect of Nixon’s floating the dollar—have now themselves come to replace gold as the world’s reserve currency:

Meanwhile, the U.S. debt remains, as it has been since 1790, a war debt: the United States continues to spend more on its military than do all other nations on earth put together, and military expenditures are not only the basis of the government’s industrial policy; they also take up such a huge proportion of the budget that by many estimations, were it not for them, the United States would not run a deficit at all.

The U.S. military, unlike any other, maintains a doctrine of global power projection: that it should have the ability, through roughly 800 overseas military bases, to intervene with deadly force absolutely anywhere on the planet. In a way, though, land forces are secondary; at least since World War II, the key to U.S. military doctrine has always been a reliance on air power. The United States has fought no war in which it did not control the skies, and it has relied on aerial bombardment far more systematically than any other military—in its recent occupation of Iraq, for instance, even going so far as to bomb residential neighborhoods of cities ostensibly under its own control.

The essence of U.S. military predominance in the world is, ultimately, the fact that it can, at will, with only a few hours’ notice, drop bombs at absolutely any point on the surface of the planet.13 No other government has ever had anything remotely like this sort of capability. In fact, a case could well be made that it is this very cosmic power that holds the entire world monetary system, organized around the dollar, together.

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.

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:

To the extent that these Treasury IOUs are being built into the world’s monetary base they will not have to be repaid, but are to be rolled over indefinitely. This feature is the essence of America’s free financial ride, a tax imposed at the entire globe’s expense.

What’s more, Hudson notes, over time, the combined effect of low interest payments and the inflation is that these bonds actually depreciate in value—adding to the tax effect, or, as I preferred to put it in the first chapter, “tribute.” Economists prefer to call it “seigniorage.”

The effect, though, is that American imperial power is based on a debt that will never—can never—be repaid. Its national debt has become a promise, not just to its own people, but to the nations of the entire world, that everyone knows will not be kept.

As I’ve already observed, since Nixon’s time, the most significant overseas buyers of U.S. treasury bonds have tended to be banks in countries that were effectively under U.S. military occupation.

In Europe, Nixon’s most enthusiastic ally in this respect was West Germany, which then hosted more than three hundred thousand U.S. troops. In more recent decades the focus has shifted to Asia, particularly the central banks of countries like Japan, Taiwan, and South Korea—again, all U.S. military protectorates.

In addition, the global status of the dollar is reinforced by the fact that it is, again since 1971, the only currency used to buy and sell petroleum, with any attempt by OPEC countries to begin trading in any currency stubbornly resisted by OPEC...

When Saddam Hussein made the bold move of singlehandedly switching from the dollar to the euro in 2000, followed by Iran in 2001, this was quickly followed b...

and one of the earliest and greatest political victories of the U.S. credit-card industry was the elimination of all legal restrictions on what they could charge as interest.

If history holds true, an age of virtual money should mean a movement away from war, empire-building, slavery, and debt peonage (waged or otherwise), and toward the creation of some sort of overarching institutions, global in scale, to protect debtors. What we have seen so far is the opposite.

Insofar as overarching grand cosmic institutions have been created that might be considered in any way parallel to the divine kings of the ancient Middle East or the religious authorities of the Middle Ages, they have not been created to protect debtors, but to enforce the rights of creditors.

All true. But again, we are speaking of a mere forty years here, in what is likely to be a 400- or 500-year epoch. Nixon’s gambit, what Hudson calls “debt imperialism,” has already come under considerable strain.

By 2000, East Asian countries had begun a systematic boycott of the IMF. In 2002, Argentina committed the ultimate sin: they defaulted—and got away with it. Subsequent U.S. military adventures were clearly meant to reestablish the nation’s symbolic, cosmological power—that is, to terrify and overawe (it didn’t really matter whom)—but in that respect do not appear to have been very successful: partly because they demonstrated that the U.S. military was unable to totally overcome far weaker rivals; partly, too, because, to finance them, the United States had to turn not just to its military clients, but increasingly to China, its chief remaining military rival.

Seemingly everywhere he went on a recent tour of China, Dallas Fed President Richard Fisher was asked to deliver a message to Federal Reserve Chairman Ben Bernanke: “stop creating credit out of thin air to purchase U.S. Treasuries.”

Bearing all this in mind, the current picture begins to fall easily back into place. When the United States was far and away the predominant world economic power, it could afford to maintain Chinese-style tributaries. Thus these very states, alone amongst U.S. military protectorates, were allowed to catapult themselves out of poverty and into first-world status.

After 1971, as U.S. economic strength relative to the rest of the world began to decline, they were gradually transformed back into a more old-fashioned sort of tributary. Yet China’s getting in on the game introduced an entirely new element. There is every reason to believe that, from China’s point of view, this is the first stage of a very long process of reducing the United States to something like a traditional Chinese client state.

And, of course, Chinese rulers are not, any more than the rulers of any other empire, motivated primarily by benevolence. There is always a political cost, and what that headline marked was the fir...

This was certainly true throughout earlier stages of U.S. history, incidentally—as the endless nineteenth-century battles between goldbugs, greenbackers, free bankers, bi-metallists, and silverites so vividly attest—or, for that matter, the fact that American voters were so suspicious of the very idea of central banks that the Federal Reserve system was only created on the eve of World War I, three centuries after the Bank of England.

Even the monetization of the national debt is, as I’ve already noted, double-edged. It can be seen—as Jefferson saw it—as the ultimate pernicious alliance of warriors and financiers; but it also opened the way to seeing government itself as a moral debtor, and freedom as something literally owed to the nation.

By the end of World War II, the specter of an imminent working-class uprising that had so haunted the ruling classes of Europe and North America for the previous century had largely disappeared.

This was because class war was suspended by a tacit settlement. To put it crudely: the white working class of the North Atlantic countries, from the United States to West Germany, were offered a deal. If they agreed to set aside any fantasies of fundamentally changing the nature of the system, then they would be allowed to keep their unions, enjoy a wide variety of social benefits (pensions, vacations, health care …), and, perhaps most important, through generously funded and ever-expanding public educational institutions, know that their children had a reasonable chance of leaving the working class entirely.

One key element in all this was a tacit guarantee that increases in workers’ productivity would be met by increases in wages: a guarantee that held good until the late 1970s. Largely as a result, the period saw both rapidly rising productivity and rapidly...

Economists call this the “Keynesian era,” since it was a time in which John Maynard Keynes’ economic theories, which already formed the basis of Roosevelt’s New Deal in the United States, were adopted by industrial democracies pretty much everyw...