Debt: The First 5,000 Years

by David Graeber

It perhaps stands to reason that Chinese Buddhism, a religion of merchants that then took popular roots, should have developed in this direction: a genuine theology of debt, even perhaps a practice of absolute self-sacrifice, of abandoning everything, one’s fortune or even one’s life, that ultimately led to collectively managed finance capital. The reason that the result seems so weird, so full of paradoxes, is that it is again an attempt to apply the logic of exchange to questions of Eternity.

By 806 AD, for instance, right around the apogee of Chinese Buddhism, merchants moving tea over long distances from the far south of the country and officials transporting tax payments to the capital, 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.

Occasionally, the whole system would break down, but then people would resort to their own expedients: “privately issued tea checks, noodle checks, bamboo tallies, wine tallies, etc.”56 Still, the Mongols, who ruled China from 1271 to 1368 AD, chose to maintain the system, and it was only abandoned in the seventeenth century. This is important to note because the conventional account tends to represent China’s experiment with paper money as a failure, even, for Metallists, proof that “fiat money,” backed only by state power, will always eventually collapse.

The great urban civilizations of the Middle East had always been dominated by a de facto alliance between administrators and merchants, both of whom kept the rest of the population either in debt peonage or in constant peril of falling into it. In converting to Islam, the commercial classes, so long the arch-villains in the eyes of ordinary farmers and townsfolk, effectively agreed to change sides, abandon all their most hated practices, and become instead the leaders of a society that now defined itself against the state.

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.76 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. Over the course of the Middle Ages, the Indian Ocean effectively became a Muslim lake. Muslim traders appear to have played a key role in establishing the principle that kings and their armies should keep their quarrels on dry land; the seas were to be a zone of peaceful commerce.

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.

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

Still, 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

Much of our free-market doctrine, then, appears to have been originally borrowed piecemeal from a very different social and moral universe.93 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 The spread of Islam allowed the market to become a global phenomenon, operating largely independent of governments, according to its own internal laws. But the very fact that this was, in a certain way, a genuine free market, not one created by the government and backed by its police and prisons—a world of handshake deals and paper promises backed only by the integrity of the signer—meant that it could never really become the world imagined by those who later adopted many of the same ideas and arguments: one of purely self-interested individuals vying for material advantage by any means at hand.

At first, the Catholic attitudes toward usury were just as harsh as Muslim ones, and attitudes toward merchants, considerably harsher. In the first case, they had little choice, as many Biblical texts were quite explicit. Consider Exodus 22:25:

Jesus had said to give without expectation of return, but it seemed unrealistic to expect most Christians to do that. And even if they did, what sort of ongoing relationships would that create? 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.

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.110 This in turn made it harder to contain the practice, as witnessed in the common joke, current in twelfth-century ghettos to justify usury between Jews.

French poet Chretien de Troyes, author of the famous Arthurian romances—most famous, perhaps, for being the first to tell the story of Sir Percival and the Holy Grail. 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. 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.

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 fiscal demands on those unfortunate enough to live on them.

Our image of the Middle Ages as an “age of faith”—and hence, of blind obedience to authority—is a legacy of the French Enlightenment.

Aristotle had argued that gold and silver had no intrinsic value in themselves, and that money therefore was just a social convention, invented by human communities to facilitate exchange. Since it had “come about by agreement, therefore it is within our power to change it or render it useless” if we all decide that that’s what we want to do.146 This position gained little traction in the materialist intellectual environment of the Axial Age, but by the later Middle Ages, it had become standard wisdom. Ghazali was among the first to embrace it. In his own way, he took it even further, insisting that the fact that a gold coin has no intrinsic value is the basis of its value as money, since this very lack of intrinsic value is what allows it to “govern,” measure, and regulate the value of other things. But, at the same time, Ghazali denied that money was a social convention. It was given to us by God.

A tally does away with the need for witnesses; if the two surfaces agree, then everyone knows that the agreement between the contracting parties exists as well. This is why Aristotle saw it as a fit metaphor for words: word A corresponds to concept B because there is a tacit agreement that we shall act as if it does.

The era begins around 1450 with a turn away from virtual currencies and credit economies and back to gold and silver. The subsequent flow of bullion from the Americas sped the process immensely, sparking a “price revolution” in Western Europe that turned traditional society upside-down. What’s more, the return to bullion was accompanied by the return of a whole host of other conditions that, during the Middle Ages, had been largely suppressed or kept at bay: vast empires and professional armies, massive predatory warfare, untrammeled usury and debt peonage, but also materialist philosophies, a new burst of scientific and philosophical creativity—even the return of chattel slavery. It was in no way a simple repeat performance. All the Axial Age pieces reappeared, but they came together in an entirely different way.

One of the perverse effects of the bubonic plague, which killed off about one-third of the European workforce in the years after it first struck in 1347, was that wages increased dramatically. It didn’t happen immediately, but this was largely because the first reaction of the authorities was to enact legislation freezing wages, or even attempting to tie free peasants back to the land again.

The fifteenth century is, in fact, considered the heyday of medieval festive life, with its floats and dragons, maypoles and church ales, its Abbots of Unreason and Lords of Misrule.1 Over the next centuries, all this was to be destroyed. In England, the festive life was systematically attacked by Puritan reformers, then eventually by reformers everywhere, Catholic and Protestant alike. At the same time its economic basis in popular prosperity dissolved. Why this happened has been a matter of intense historical debate for centuries. This much we know: it began with a massive inflation. Between 1500 and 1650, for instance, prices in England increased 500 percent, but wages rose much more slowly, so that in five generations, real wages fell to perhaps 40 percent of what they had been.

The favorite explanation, ever since a French lawyer named Jean Bodin first proposed it in 1568, was the vast influx of gold and silver that came pouring into Europe after the conquest of the New World. As the value of precious metals collapsed, the argument went, the price of everything else skyrocketed, and wages simply couldn’t keep up.

The problem with the conventional story is that very little of that gold and silver lingered very long in Europe. Most of the gold ended up in temples in India, and the overwhelming majority of the silver bullion was ultimately shipped off to China. The latter is crucial. If we really want to understand the origins of the modern world economy, the place to start is not in Europe at all. The real story is of how China abandoned the use of paper money. It’s a story worth telling briefly, because very few people know it.

government attempted to shut down illegal mines in the 1430s and 1440s, their efforts sparked local insurrections in which miners would make common cause with displaced peasants, seize nearby cities, and sometimes threaten entire provinces.5 In the end, the government gave up even trying to suppress the informal economy. Instead, they swung the other way entirely: they stopped issuing paper money, legalized the mines, allowed silver bullion to become the recognized currency for large transactions, and even gave private mints the authority to produce strings of cash.6 This, in turn, allowed the government to gradually abandon the system of labor exactions and substitute a uniform tax system payable in silver.

new silver mines were discovered in Japan, but these were exhausted in a decade or two as well. Before long, China had to turn to Europe and the New World. Now, since Roman times, Europe had been exporting gold and silver to the East: the problem was that Europe had never produced much of anything that Asians wanted to buy, so it was forced to pay in specie for silks, spices, steel, and other imports.

The conquest of Mexico and Peru led to the discovery of enormous new sources of precious metal, and these were exploited ruthlessly and systematically, even to the point of largely exterminating the surrounding populations to extract as much precious metal as quickly as possible. As Kenneth Pomeranz has recently pointed out, none of this would have been possible were it not for the practically unlimited Asian demand for precious metals.

Royal agents regularly attempted to forbid such practices, arguing that the Indians were now Christian and that this violated their rights as loyal subjects of the Spanish crown. But as with almost all such royal efforts to act as protector of the Indians, the result was the same. Financial exigencies ended up taking precedence. Charles V himself was deeply in debt to banking firms in Florence, Genoa, and Naples, and gold and silver from the Americas made up perhaps one-fifth of his total revenue. In the end, despite a lot of initial noise and the (usually quite sincere) moral outrage on the part of the king’s emissaries, such decrees were either ignored or, at best, enforced for a year or two before being allowed to slip into abeyance.

All of this helps explain why the Church had been so uncompromising in its attitude toward usury. It was not just a philosophical question; it was a matter of moral rivalry. Money always has the potential to become a moral imperative unto itself. Allow it to expand and it can quickly become a morality so imperative that all others seem frivolous in comparison. For the debtor, the world is reduced to a collection of potential dangers, potential tools, and potential merchandise.23 Even human relations become a matter of cost-benefit calculation. Clearly, this is the way the conquistadors viewed the worlds that they set out to conquer.

If one looks at how all this was justified, two things jump out. First, Protestant thinkers all continued to make the old medieval argument about interesse: that “interest” is really compensation for the money that the lender would have made had he been able to place his money in some more profitable investment. Originally, this logic had only been applied to commercial loans. Increasingly, it was now applied to all loans. Far from being unnatural, then, the growth of money was now treated as completely expected. All money was assumed to be capital.

Casimir was the son of Margrave Friedrich the Elder of Brandenburg, who has come to be known as one of the “mad princes” of the German Renaissance. Sources differ on just how mad he actually was. One contemporary chronicle describes him as “somewhat deranged in his head from too much racing and jousting.” Most agree that he was given to fits of inexplicable rage, as well as to the sponsorship of wild, extravagant festivals, said often to have degenerated into bacchanalian orgies.

Since everyone was involved in selling something, however, just about everyone was both creditor and debtor; most family income took the form of promises from other families; everyone knew and kept count of what their neighbors owed one another; and every six months or year or so, communities would hold a general public “reckoning,” canceling debts out against each other in a great circle, with only those differences then remaining when all was done being settled by use of coin or goods.

When people used the word “credit,” they referred above all to a reputation for honesty and integrity; and a man or woman’s honor, virtue, and respectability, but also, reputation for generosity, decency, and good-natured sociability, were at least as important considerations when deciding whether to make a loan as were assessments of net income.46 As a result, financial terms became indistinguishable from moral ones. One could speak of others as “worthies,” as “a woman of high estimation” or “a man of no account,” and equally of “giving credit” to someone’s words when one believes what they say (“credit” is from the same root as “creed” or “credibility”), or of “extending credit” to them, when you take them at their word that they will pay you back.

As a result, all moral relations came to be conceived as debts. “Forgive us our debts”—this was the period, the very end of the Middle Ages, that this translation of the Lord’s Prayer gained such universal popularity. Sins are debts to God: unavoidable, but perhaps manageable, since at the end of time our moral debts and credits will be all canceled out against each other in God’s final Reckoning.

Thomas Hobbes, whose Leviathan, published in 1651, was in many ways an extended attack on the very idea that society is built on any sort of prior ties of communal solidarity.

I want to draw particular attention to the underlying notion of “self-interest.”56 It is in a real sense the key to the new philosophy. The term first appears in English right around Hobbes’ time, and it is, indeed, directly borrowed from interesse, the Roman law term for interest payments. When it was first introduced, most English authors seemed to view the idea that all human life can be explained as the pursuit of self-interest as a cynical, foreign, Machiavellian idea, one that sat uncomfortably with traditional English mores. By the eighteenth century, most in educated society accepted it as simple common sense. But why “interest”? Why make a general theory of human motivation out of a word that originally meant “penalty for late payment on a loan”?

discover that, despite all this, most really important decisions are based on the rational calculation of material advantage—which means that they are fairly predictable as well. “Just as the physical world is ruled by the laws of movement,” wrote Helvétius, in a passage reminiscent of Lord Shang, “no less is the moral universe ruled by laws of interest.”57 And, of course, it was on this assumption that all the quadratic equations of economic theory could ultimately be built.

Augustine already anticipated, infinite desires in a finite world means endless competition, which in turn is why, as Hobbes insisted, our only hope of social peace lies in contractual arrangements and strict enforcement by the apparatus of the state.

The history of modern financial instruments, and the ultimate origins of paper money, really begin with the issuing of municipal bonds—a practice begun by the Venetian government in the twelfth century when, needing a quick infusion of income for military purposes, it levied a compulsory loan on its taxpaying citizens, for which it promised each of them five percent annual interest, and allowed the “bonds” or contracts to become negotiable, thus creating a market in government debt.

It was only with the creation of the Bank of England in 1694 that one can speak of genuine paper money, since its banknotes were in no sense bonds. They were rooted, like all the others, in the king’s war debts. This can’t be emphasized enough. The fact that money was no longer a debt owed to the king, but a debt owed by the king, made it very different than what it had been before. In many ways, it had become a mirror image of older forms of money.

The man who won the argument, however, was John Locke, the Liberal philosopher, at that time acting as advisor to Sir Isaac Newton, then Warden of the Mint. Locke insisted that one can no more make a small piece of silver worth more by relabeling it a “shilling” than one can make a short man taller by declaring there are now fifteen inches in a foot. Gold and silver had a value recognized by everyone on earth; the government stamp simply attested to the weight and purity of a coin, and—as he added in words veritably shivering with indignation—for governments to tamper with this for their own advantage was just as criminal as the coin-clippers themselves: The use and end of the public stamp is only to be a guard and voucher of the quality of silver which men contract for; and the injury done to the public faith, in this point, is that which in clipping and false coining heightens the robbery into treason.82 Therefore, he argued, the only recourse was to recall the currency and restrike it at exactly the same value that it had before. This was done, and the results were disastrous.

The reforms proceeded top-down, and very slowly, but they did proceed, and they gradually came to create the world where even ordinary, everyday transactions with butchers and bakers were carried out in polite, impersonal terms, with small change, and therefore it became possible to imagine everyday life itself as a matter of self-interested calculation.

But consider the following lines, often attributed to Lord Josiah Charles Stamp, director of the Bank of England: The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in iniquity and born in sin. Bankers own the earth; take it away from them, but leave them with the power to create credit, and with the stroke of a pen they will create enough money to buy it back again … If you wish to remain slaves of Bankers, and pay the cost of your own slavery, let them continue to create deposits.87

However apocryphal, it clearly strikes a chord, and apparently for the same reason: bankers are creating something out of nothing. They are not only frauds and magicians. They are evil, because they’re playing God.

Having made incessant war on all remaining forms of the communism of the poor, even to the point of criminalizing credit, the masters of the new market system discovered that they had no obvious justification left to maintain even the communism of the rich—that level of cooperation and solidarity required to keep the economic system running. True, for all its endless strains and periodic breakdowns, the system has held out so far. But as 2008 dramatically testified, it has never been resolved.

The same is true of nations. Just as five percent per annum was widely accepted, at the dawn of capitalism, as the legitimate commercial rate of interest—that is, the amount that any investor could normally expect her money to be growing by the principle of interesse—so is five percent now the annual rate at which any nation’s GDP really ought to grow. What was once an impersonal mechanism that compelled people to look at everything around them as a potential source of profit has come to be considered the only objective measure of the health of the human community itself.

Paper money was debt money, and debt money was war money, and this has always remained the case. Those who financed Europe’s endless military conflicts also employed the government’s police and prisons to extract ever-increasing productivity from the rest of the population.

If one is to believe MacKay, the entire population of London conceived the simultaneous delusion, not that money could really be manufactured out of nothing, but that other people were foolish enough to believe that it could—and that, for that very reason, they actually could make money out of nothing after all.

This is a scandal not just because the system occasionally goes haywire, as it did in the Putumayo, but because it plays havoc with our most cherished assumptions about what capitalism really is—particularly that, in its basic nature, capitalism has something to do with freedom. For the capitalists, this means the freedom of the marketplace. For most workers, it means free labor. Marxists have questioned whether wage labor is ultimately free in any sense (since someone with nothing to sell but his or her body cannot in any sense be considered a genuinely free agent), but they still tend to assume that free wage labor is the basis of capitalism.

In eighteenth-century London, the Royal Admiralty was regularly over a year behind in paying the wages of those who labored at the Deptford docks—one reason that they were willing to tolerate the appropriation of chips, not to mention hemp, canvas, steel bolts, and cordage. In fact, as Linebaugh has shown, the situation only really began to take recognizable form around 1800, when the government stabilized its finances, began paying cash wages on schedule, and therefore tried to abolish the practice of what was now relabeled “workplace pilfering”—which, meeting outraged resistance on the part of the dockworkers, was made punishable by whipping and imprisonment. Samuel Bentham, the engineer put in charge of reforming the dockyards, had to turn them into a regular police state in order to be able to institute a regime of pure wage labor—to which purpose he ultimately conceived the notion of building a giant tower in the middle to guarantee constant surveillance, an idea that was later borrowed by his brother Jeremy for the famous Panopticon.

Karl Marx, who knew quite a bit about the human tendency to fall down and worship our own creations, wrote Das Capital in an attempt to demonstrate that, even if we do start from the economists’ utopian vision, so long as we also allow some people to control productive capital and, again, leave others with nothing to sell but their brains and bodies, the results will be in many ways barely distinguishable from slavery, and the whole system will eventually destroy itself. What everyone seems to forget is the “as if” nature of his analysis.106 Marx was well aware that there were far more bootblacks, prostitutes, butlers, soldiers, pedlars, chimneysweeps, flower girls, street musicians, convicts, nannies, and cab drivers in the London of his day than there were factory workers. He was never suggesting that that’s what the world was actually like.

It’s not surprising that so many of the economists’ assumptions—most of those for which I have been taking them to task over the course of this book—have been embraced by the leaders of the historic workers’ movements, so much so that they have come to shape our visions of what alternatives to capitalism might be like. The problem is not just—as I demonstrated in Chapter Seven—that it is rooted in a deeply flawed, even perverse, conception of human freedom.