Debt: The First 5,000 Years

by David Graeber

One reason is that monks appear to have been systematically melting down strings of coins, often hundreds of thousands at a time, to build colossal copper or even gilded copper statues of the Buddha—along with other objects such as bells and copper chimes, or even such extravagances as mirrored halls or gilded copper roof tiles. The result, according to official commissions of inquiry, was economically disastrous: the price of metals would soar, coinage disappear, and rural marketplaces cease to function, even as those rural people whose children had not become monks often fell deeper into debt to the monasteries.

Remember, melting gold and copper for which formed the basis of currency reduces the money supply, which in turn causes deflation (little money chasing lots of goods in demand => price of goods rapidly decrease). Deflation causes borrowing costs to rise, as the currency is now worth much more yet payments on debt remain fixed and must be paid with the currency. Depending on how responsive demand for debt is to increases in borrowing costs, assuming such demand was not as responsive as the resulting change in supply of debt (borrowing costs rise, debt supply increases), then the creditors would stand the most to gain.

Exchange implies interaction between equivalent beings. Your mother, on the other hand, is not an equivalent being. She created you out of her own flesh. This is exactly the point that I suggested the Vedic authors were subtly trying to make when they talked about “debts” to the gods: of course you cannot really “pay your debt to the universe”—that would imply that (1) you and (2) everything that exists (including you) are in some sense equivalent entities. This is clearly absurd. The closest you can come to repayment is to simply recognize that fact. Such recognition is the true meaning of sacrifice. Like Rospabé’s original money, a sacrificial offering is not a way to pay a debt, but a way to acknowledge the impossibility of the idea that there could ever be repayment:

I’ve also argued that any system of exchange is always necessarily founded on something else, something that, in its social manifestation at least, is ultimately communism. With all those things that we treat as eternal, that we assume will always be there—our mother’s love, true friendship, sociality, humanity, belonging, the existence of the cosmos—no calculation is necessary, or even ultimately possible; insofar as there is give and take, they follow completely different principles. What, then, happens to such absolute and unlimited phenomena when one tries to imagine the world as a set of transactions—as exchange? Generally, one of two things. We either ignore or deify them. (Mothers, and caregiving women in general, are a classic case in point.) Or we do both. What we treat as eternal in our actual relations with one another vanishes and reappears as an abstraction, an absolute.

Important note!

Yet at the same time—here I think Gernet is right—this communism became the basis, in turn, of something very much like capitalism. The reason was, above all, the need for constant expansion. Everything—even charity—was an opportunity to proselytize; the Dharma had to grow, ultimately, to encompass everyone and everything, in order to effect the salvation of all living beings.

all of them concerned with the dangers of carrying bullion over long distances, began to deposit their money with bankers in the capital and devised a system of promissory notes. They were called “Flying Cash,” also divided in half, like tallies, and redeemable for cash in their branches in the provinces. They quickly started passing from hand to hand and operated something like currency. The government first tried to forbid their use, then a year or two later—and this became a familiar pattern in China—when it realized that it could not suppress them, switched gears and established a bureau empowered to issue such notes themselves.

Important note!

The government, as usual, first tried to ban the practice, then control it (granting a monopoly to sixteen leading merchants), then, finally, set up a government monopoly—the Bureau of Exchange Medium, established in 1023—and before long, aided by the newly invented printing press, was operating factories in several cities employing thousands of workers and producing literally millions of notes.55

At first, this paper money was meant to circulate for a limited time (notes would expire after two, then three, then seven years) and was redeemable in bullion. Over time, especially as the Song came under increasing military pressure, the temptation to simply print money with little or no backup became overwhelming

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. If it was only China that developed paper money in the Middle Ages, this was largely because only in China was there a government large and powerful enough, but also, sufficiently suspicious of its mercantile classes, to feel it had to take charge of such operations itself.

Important note!

Economically, most of Europe was until perhaps the High Middle Ages in exactly the same situation as most of Africa: plugged into the larger world economy, if at all, largely as an exporter of slaves, raw materials, and the occasional exotica (amber, elephant tusks …), and importer of manufactured goods (Chinese silks and porcelain, Indian calicoes, Arab steel).

Important note!

Confucians were suspicious of governance through strict codes of law, preferring to rely on the inherent sense of justice of the cultivated scholar—a scholar who was simply assumed to also be a government official. Medieval Islam, on the other hand, enthusiastically embraced law, which was seen as a religious institution derived from the Prophet, but tended to view government, more often than not, as an unfortunate necessity, an institution that the truly pious would do better to avoid.

“The best princes are those who visit religious teachers,” one proverb put it, “the worst religious teachers are the those who allow themselves to be visited by princes.”

This disjuncture had profound economic effects. It meant that the Caliphate, and later Muslim empires, could operate in many ways much like the old Axial Age empires—creating professional armies, waging wars of conquest, capturing slaves, melting down loot and distributing it in the form of coins to soldiers and officials, demanding that those coins be rendered back as taxes—but at the same time, without having nearly the same effects on ordinary people’s lives.

Important note!

Wars of expansion, and trade with Europe and Africa, did produce a fairly constant flow of slaves, but in dramatic contrast to the ancient world, very few of them ended up laboring in farms or workshops. Most ended up as decoration in the houses of the rich or, increasingly over time, as soldiers.

In most times and places, slaves are, for obvious reasons, the very last people to be allowed anywhere near weapons. Here it was systematic. But, in a strange way, it also made perfect sense: if slaves are, by definition, people who have been severed from society, this was the logical consequence of the wall created between society and the medieval Islamic state.

It was possible because, from the beginning, Islam had a positive view toward commerce. Mohammed himself had begun his adult life as a merchant, and no Islamic thinker ever treated the honest pursuit of profit as itself intrinsically immoral or inimical to faith. Neither in practice did the prohibitions against usury—which for the most part were scrupulously enforced, even in the case of commercial loans—in any sense mitigate against the growth of commerce, or even the development of complex credit instruments.69 To the contrary, the early centuries of the Caliphate saw an immediate efflorescence in both.

Promissory notes were called sakk, “checks,” or ruq’a, “notes.”

Checks could be countersigned and transferred, and letters of credit (suftaja) could travel across the Indian Ocean or the Sahara.72 If they did not turn into de facto paper money, it was because, since they operated completely independent of the state (they could not be used to pay taxes, for instance), their value was based almost entirely on trust and reputation.73 Appeal to the Islamic courts was generally voluntary or mediated by merchant guilds and civic associations. In such a context, having a famous poet compose verses making fun of you for bouncing a check was probably the ultimate disaster.

Important note!

When it came to finance, instead of interest-bearing investments, the preferred approach was partnerships, where (often) one party would supply the capital, the other carry out the enterprise. Instead of fixed return, the investor would receive a share of the profits. Even labor arrangements were often organized on a profit-sharing basis.

It sometimes happened that merchants would form partnerships with no capital at all, but only their good names. This was called “partnership of good reputation.”

The remarkable thing here is the tacit recognition that, in a credit economy that operates largely without state mechanisms of enforcement (without police to arrest those who commit fraud, or bailiffs to seize a debtor’s property), a significant part of the value of a promissory note is indeed the good name of the signatory. As Pierre Bourdieu was later to point out in describing a similar economy of trust in contemporary Algeria: it’s quite possible to turn honor into money, almost impossible to convert money into honor.

Important note! What a clever way to summarize Islamic credit systems into one sentence.

These networks of trust, in turn, were largely responsible for the spread of Islam over the caravan routes of Central Asia and the Sahara, and especially across the Indian Ocean, the main conduit of medieval world trade.

The level of trust thereby created between merchants in the great Malay entrepôt Malacca, gateway to the spice islands of Indonesia, was legendary. The city had Swahili, Arab, Egyptian, Ethiopian, and Armenian quarters, as well as quarters for merchants from different regions of India, China, and Southeast Asia. Yet it was said that its merchants shunned enforceable contracts, preferring to seal transactions “with a handshake and a glance at heaven.”78

Once freed from its ancient scourges of debt and slavery, the local bazaar had become, for most, not a place of moral danger, but the very opposite: the highest expression of the human freedom and communal solidarity, and thus to be protected assiduously from state intrusion.

There was a particular hostility to anything that smacked of price-fixing. One much-repeated story held that the Prophet himself had refused to force merchants to lower prices during a shortage in the city of Medina, on the grounds that doing so would be sacrilegious, since, in a free-market situation, “prices depend on the will of God.”82 Most legal scholars interpreted Mohammed’s decision to mean that any government interference in market mechanisms should be considered similarly sacrilegious, since markets were designed by God to regulate themselves.83

Important note! The similarities with the "invisible hand" are clear.

Even more dramatically, Smith’s most famous example of division of labor, the pin factory, where it takes eighteen separate operations to produce one pin, already appears in Ghazali’s Ihya, in which he describes a needle factory, where it takes twenty-five different operations to produce a needle.85

The differences, however, are just as significant as the similarities. One telling example: like Smith, Tusi begins his treatise on economics with a discussion of the division of labor; but where for Smith, the division of labor is actually an outgrowth of our “natural propensity to truck and barter” in pursuit of individual advantage, for Tusi, it was an extension of mutual aid:

As a result, he argues, divine providence has arranged us to have different abilities, desires, and inclinations. The market is simply one manifestation of this more general principle of mutual aid, of the matching of abilities (supply) and needs (demand)—or, to translate it into my own earlier terms, it is not only founded on, but is itself an extension of the kind of baseline communism on which any society must ultimately rest.

Important note! This is where the Islamic concept of the market deviates significantly from the "invisible hand".

once you start from the initial premise that markets are primarily about cooperation rather than competition—and while Muslim economic thinkers did recognize and accept the need for market competition, they never saw competition as its essence87—the moral implications are very different.

It seems while the prescribed tools for market intervention are similar in Western and Islamic law, Western law views markets more as the common good being achieved through the actions of purely rational utility-maximizing indivuals interacting, while Islamic law views markets as the natural extension of principles of mutual aid.

How do you compare two things with no common qualities? His conclusion: it can only be done by comparing both to a third thing with no qualities at all. For this reason, he explains, God created dinars and dirhams, coins made out of gold and silver, two metals that are otherwise no good for anything:

Important note! Al-Ghazali's interpretation of why metals-backed currencies were desired is not because the metals themselves had some intrinsic value, but that their value was actually from their lack of intrinsic value - instead, based on the underlying value of the goods, services and debt (credit) being transacted with them.

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. Money is thus a unit of measure that provides a means of assessing the value of goods, but also one that operates as such only if it stays in constant motion.

Important note!

The mercantile classes of the medieval Near West had pulled off an extraordinary feat. By abandoning the usurious practices that had made them so obnoxious to their neighbors for untold centuries before, they were able to become—alongside religious teachers—the effective leaders of their communities: communities that are still seen as organized, to a large extent, around the twin poles of mosque and bazaar.94

Usury was seen above all as an assault on Christian charity, on Jesus’s injunction to treat the poor as they would treat the Christ himself, giving without expectation of return and allowing the borrower to decide on recompense (Luke 6:34–35).

The borrower, coming home with his newfound money, at first rejoices. But quickly, “the money slips away,” interest accumulates, and his possessions are sold off. Basil grows poetic in describing the debtor’s plight. It’s as if time itself has become his enemy. Every day and night conspires against him, as they are the parents of interest. His life becomes a “sleepless daze of anxious uncertainty,” as he is humiliated in public; while at home, he is constantly hiding under the couch at every unexpected knock on the door and can barely sleep, startled awake by nightmare visions of his creditor standing over his pillow.101

If by extracting interest one is, as he puts it, fighting without a sword, then it is only legitimate to do so from those “whom it would not be a crime to kill.”103

St. Basil took the radical position. God had given us all things in common, and he had specifically instructed the rich to give their possessions to the poor. The communism of the Apostles—who pooled all their wealth and took freely what they needed—was thus the only proper model for a truly Christian society.105 Few of the other Christian Fathers were willing to take things this far. True, they admitted, communism was the ideal, but in this fallen and temporary world, it was simply unrealistic. The Church must accept existing property arrangements, but also come up with spiritual arguments to encourage the rich to nonetheless act with Christian charity. Many of these employed distinctly commercial metaphors.

human beings live in time, noted St. Thomas Aquinas, so it makes sense to say that sin is a debt of punishment we owe to God. But God lives outside of time. By definition, he cannot owe anything to anyone. His grace can therefore only be a gift given with no obligation.107

Where Mohammed declared that an honest merchant deserved a place by the seat of God in heaven, men like Ambrose wondered if an “honest merchant” was not a contradiction in terms. Many held that one simply could not be both a merchant and a Christian.109 In the early Middle Ages, this was not a pressing issue—especially since so much commerce was conducted by foreigners. The conceptual problems, however, were never resolved. What did it mean that one could only lend to “strangers”? Was it just usury, or was even commerce tantamount to war?

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.”117 It all seems to have been a bit of a guilty projection of terrors that Jews had never really visited on Christians, but that had been directed the other way around.

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.

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

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.126

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 form of fraud only truly legitimate when directed against one’s mortal enemies. 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.

“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 thugs, in an endless pursuit of plunder—precisely the sort of people who made merchants’ lives so dangerous. Culminating in the twelfth century, there was a concerted effort to bring this dangerous population under the control of the civil authorities:

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 passion, abandoned their games, and swore a vow to instead retake the Holy Land. 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 destroyed and stripped of everything of value ensured that he and his barons soon ended up in great financial difficulties. In a gigantic version of what was happening on the small scale in so many tournaments, they were ultimately reduced to stripping the metal off the church roofs and auctioning holy relics to pay back their Venetian creditors. By 1259, Baldwin had sunk to the point of taking out a mortgage on his own son, who was taken back to Venice as security for a loan.141

Important note!

The independent university—perhaps the quintessential medieval institution—is another case in point. Nalanda was founded in 427 AD, and there were independent institutions of higher learning all over China and the Near West (from Cairo to Constantinople) centuries before the creation of similar institutions in Oxford, Paris, and Bologna.

Instead, once-subversive popular religious movements were catapulted into the status of dominant institutions. Slavery declined or disappeared, as did the overall level of violence. As trade picked up, so did the pace of technological innovation; greater peace brought greater possibilities not only for the movement of silks and spices, but also of people and ideas. The fact that monks in medieval China could devote themselves to translating ancient treatises in Sanskrit, and that students in madrasas in medieval Indonesia could debate legal terms in Arabic, is testimony to the profound cosmopolitanism of the age.

If there is an essence to medieval thought, it lies not in blind obedience to authority, but rather in a dogged insistence that the values that govern our ordinary daily affairs—particularly those of the court and marketplace—are confused, mistaken, illusory, or perverse. True value lay elsewhere, in a domain that cannot be directly perceived, but only approached through study or contemplation.

Almost all the great intellectual debates of the age turned on this question in one way or another. Is the world created by our minds, or our minds by the world?

Intriguingly, Dionysius warns us that we cannot begin to understand how symbols work until we rid ourselves of the notion that divine things are likely to be beautiful. Images of luminous angels and celestial chariots are only likely to confuse us, since we will be tempted to imagine that that’s what heaven is actually like, and in fact we cannot possibly conceive of what heaven is like. Instead, effective symbols are, like the original symbolon, homely objects selected apparently at random; often, ugly, ridiculous things, whose very incongruity reminds us that they are not God, of the fact that God “transcends all materiality,” even as, in another sense, they are God.157