David Graeber’s history of debt
How commerce is implemented, based on whether money is a unit of trust or scarcity, has severe implications on the degree to which people and markets are actually free.
I came across Debt: The First 5,000 years, written by David Graeber via Alex Danco’s synthesis on his blog.
Just before stumbling on Danco’s blog, I ‘d recently read Adam Tooze’s Crashed, and found it exhilarating, and to be honest mystifying. Subsequent to Tooze’s portrait of 2008, making sense of how the Fed could keep printing so much money, seemingly without consequence produced a question I couldn’t shake: does the music ever have to stop?
I explored that question by reading reading Ray Dalio and trying to make sense of entropy (which I learned is very complicated, and which I still don't understand well enough), and tried to synthesize my learning in this blog post. Most of the next few paragraphs I credit to Danco, whose synthesis of Graeber's points was extremely helpful.
Origins of Money
Graeber opens with the premise that our understanding of the origins of money is wrong, and then builds into his primary thesis around the duality of money.
For Graeber, conventional wisdom states that before money, humans engaged in trade through bartering. But there was a fundamental problem with bartering, which economists call the “coincidence of wants.” A coincidence of wants occurs when economies are simple. For example, when it’s just you and a friend, bartering is easier, because coincidentally, you have something your friend wants, and she has something you want. She wants your cow, and you want her sheep. Problem solved, deal done.
But in more complex economies, the bartering process quickly becomes intolerably difficult. Imagine walking into a crowded marketplace and trying to buy a purse and a watermelon and a jacket and a croissant and having to barter with each merchant about what they might want of yours in exchange for their goods. Bartering quickly becomes really, really hard.
As the conventional narrative goes, to make bartering easier, we invented money, because it was easier to give coins to all the different merchants at the marketplace. Danco points out that “in this view, money is an abstract representation of scarcity that we invented in order to suit our commercial needs.” Lots of societies developed currencies made out of shells, and eventually hard, precious metals (e.g. gold, silver, etc). It was the gold and silver coins that mattered the most, and as the conventional story goes, metallic currencies were the catalysts of banking and credit.
For Graeber, this is totally backward, and the origin of money unfolded the other way around.
If you were to go back in time to the pre-money days, and ask a woman how she engaged in trade with her neighbor, when her neighbor didn’t want anything she had (e.g. the coincidence of wants problem), she’d say, “simple, I just owe her one next time she needs something.”
What Graeber’s driving at is that the coincidence of wants problem in pre-money societies wasn’t real, because trade took place through IOUs. This idea changes the meaning of money. Rather than representing a unit of scarcity, money represents a unit of obligation, of trust. And this means that credit didn’t come last, it came first.
This is where things get really interesting, and where we arrive at Graeber’s thesis: that throughout history the duality of money (as a unit of trust vs. a unit of scarcity) has determined the degree to which people and markets are actually free.
For Graeber, money as a unit of trust facilities a "cycle of merchant power, trust, and localism,” whereas money as a unit of scarcity facilities a cycle of “military power, debt peonage, and empire."
Danco's illustrated diagram of the duality of money
As Danco points out, this thesis is anti-Adam Smith. For Smith, people are "free to choose how they want to work, with currency as a universal intermediary” to incentivize their efforts.
Graeber’s point is that when money is a unit of scarcity, rather than a unit of trust, genuinely free trade is impossible. The moment the hard precious metal currencies have shown up, the market is no longer free, because commerce is a representation of state power, which is perpetuated and preserved by military force.
Money as a representation of military empire?
The jump from money as unit of trust that facilitates local commerce to money as a unit of scarcity that facilitates empire isn't immediately obvious, but as Danco explains, IOUs were really effective at facilitating local commerce, but ineffective at a couple of really important human activities, which require money, but which are not implicitly commercial: 1) paying tribute (e.g. payments to the church for eternal debts); and 2) conducting wars across continents (e.g. you can't pay soldiers with IOUs).
Why did hard currency take over commerce from IOUs? Graeber argues that metal coinage comes from violence and calls it the "military-coinage-slave-complex." When a country marches on another country and conquers it, it will demand reparations payments from the conquered country to be paid in its own currency. When the conquered nation can't pay in the conquering nation's currency, the conquered nation has to pay with labor (e.g. debt peonage).
For Graeber, this means that precious metal currencies represent a critical tool used by states to enslave people to debt cycles that facilitate empire building. Or put more starkly, metallic currencies are the root causes of fundamentally unfree markets.
What this implies is that individual freedom is intimately related to the mechanisms of debt repayment. When money is a unit of trust, the mechanism of debt repayment is usually the threat of diminishing one’s reputation in a local community and losing the trust of your neighbors. When money is a unit of scarcity, the mechanism of debt repayment is state-backed violence.
In summary, how commerce is implemented, based on whether money is a unit of trust or scarcity, has severe implications on the degree to which people and markets are actually free.