Debt: The First 5,000 Years

by David Graeber

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.

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 l...

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...

(Henry Ford once remarked that if ordinary Americans ever found out how the banking system really worked, there would be a revolution tomorrow.)

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: 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.

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. 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 members Saudi Arabia and Kuwait—also U.S. military protectorates.16 When Saddam Hussein made the bold move of singlehandedly switching from the dollar to the euro...

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. The new global currency is rooted in military power even more firmly than the old was. Debt peonage continues to be the main principle of recruiting labor globally: either in the literal sense, in much of East Asia or Latin America, or in the subjective sense, whereby most of those working for wages or even salaries feel that they are doing so primarily to pay off interest-bearing loans.

All that I have said so far merely serves to underline a reality that has come up constantly over the course of this book: that money has no essence. It’s not “really” anything; therefore, its nature has always been and presumably always will be a matter of political contention.

Within another decade, the entire project—even in South Asia, where it began—began to appear suspiciously similar to the U.S. subprime mortgage crisis: all sorts of unscrupulous lenders piled in, all sorts of deceptive financial appraisals were passed off to investors, interest accumulated, borrowers tried to collectively refuse payment, lenders began sending in goons to seize what little wealth they had (corrugated tin roofs, for example), and the end result has been an epidemic of suicides by poor farmers caught in traps from which their families could never possibly escape.

It’s only now, at the very moment when it’s becoming increasingly clear that current arrangements are not viable, that we suddenly have hit the wall in terms of our collective imagination. There is very good reason to believe that, in a generation or so, capitalism itself will no longer exist—most obviously, as ecologists keep reminding us, because it’s impossible to maintain an engine of perpetual growth forever on a finite planet, and the current form of capitalism doesn’t seem to be capable of generating the kind of vast technological breakthroughs and mobilizations that would be required for us to start finding and colonizing any other planets.

As I pointed out in the very beginning: the difference between owing someone a favor and owing someone a debt is that the amount of a debt can be precisely calculated.

Who was the first man to look at a house full of objects and immediately assess them only in terms of what he could get for them in the market? Surely, he can only have been a thief. Burglars, marauding soldiers, then perhaps debt collectors, were the first to see the world this way. It was only in the hands of soldiers, fresh from looting towns and cities, that chunks of gold or silver—melted down, in most cases, from some heirloom treasure, that like the Kashmiri gods, or Aztec breastplates, or Babylonian women’s ankle bracelets, was both a work of art and a little compendium of history—could become simple, uniform bits of currency, with no history, valuable precisely for their lack of history, because they could be accepted anywhere, no questions asked. And it continues to be true. Any system that reduces the world to numbers can only be held in place by weapons, whether these are swords and clubs, or, nowadays, “smart bombs” from unmanned drones.

The remarkable thing is that, nowadays, defenders of the financial system are often prepared to use both arguments, appealing to one or the other according to the rhetorical convenience of the moment. On the one hand, we have “pundits” like Thomas Friedman, celebrating the fact that “everyone” now owns a piece of Exxon or Mexico and that rich debtors are therefore answerable to the poor.

On the other, Niall Ferguson, author of The Ascent of Money, published in 2009, can still announce as one of his major discoveries that: Poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions, with the absence of banks, not their presence. Only when borrowers have access to efficient credit networks can they escape from the clutches of loan sharks, and only when savers can deposit their money in reliable banks can it be channeled from the idle rich to the industrious poor.44