Sujith Jay Nair Thinking Aloud

Debt : The First 5,000 Years

Chapter 1 - On the Experience of Moral Confusion

  • There is a moral quandary.
    • Paying back borrowed money is morally right.
    • The habit of lending money, i.e. usury, is sin.
  • All revolutions are of the form: ‘Cancel the debts and redistribute the land’.
  • Our contemporary moral and religious vocabulary is borne out of finance: redemption, reckoning, guilt, sin, freedom among others. Our vocabulary of right and wrong is shaped by it.
  • The central question of the book is: what, precisely, does it mean to say that our sense of morality and justice is reduced to the language of a business deal?
  • A debt is the obligation to pay a certain sum of money. Thus, debt is a fungible obligation.
  • There is a link between the quantifiability of debt and the presence of a threat of violence.

Chapter 2 - The Myth of Barter

  • Economists see three functions of money: medium of exchange, unit of account, and store of value.
  • Money as medium of exchange is treated as primary, and how it replaced barter is a founding myth of economics. In this myth, money replaced barter because it eliminates the problem of double coincidence of wants.
  • Lewis Henry Morgan, in his descriptions of the Six Nations of the Iriquois, says that the main economic institution of the Iriquois were longhouses where most goods were stockpiled and then allocated by women’s councils.
  • Caroline Humphrey: ‘No example of barter system, pure and simple, has ever been described, let alone the emergence of money from it.’
  • Barter has been observed in small, non-industrialised societies. Nambikwara of Brazil have barter as a ritualized exchange that bordered on outright warfare. Gunwinggu of Western Arnhem Land, Australia have rituals of ceremonial barter called dzamalag, which are cordial festive games of sexual intrigue, potential hostility, music and dance. Pakhtun in Northern Pakistan indulge in adal-badal, wherein men exchange items with non-relatives.
  • Double coincidence of wants is a non-issue in small communities where everyone keeps track of who owes what to whom. Quantification of favor can be accomplished via ‘spheres of exchange’.
  • Barter seems to crop up as a phenomenon only among groups who are aware of the concept of money, and were improvising credit systems because coinage was in short supply.
  • Sumerian accounting system in 3500 BC: A silver shekel was equal to a gur of barley. A shekel had 60 minas. Temple bureaucrats used this system to calculate debts, rents, fees, loans in silver. However, the circulation of silver was minimal; most debts were settled in barley, but also in goats or furniture or lapis lazuli. Transactions were almost always done with credit.
  • Virtual money and credit came first, then coinage. Barter has always been a rarity.
  • History of money is not the history of coinage; it precedes the latter by a lot.

Chapter 3 - Primordial Debts

  • The myth of barter is necessary to state the natural existence of markets; to state that our pursuit of self-interest would, in an unfettered market, be guided ‘as if by an invisible hand’ to promote general welfare.
  • Although economics sees money as a veil over vast barter economic systems (a collection of individuals and nations whose main business is exchanging things), the existence of economic systems needs money and in addition, government policy.

    State and Credit Theories of Money

  • According to Credit Theory of Money (of which Mitchell-Iness was an exponent), money is a measurement (accounting tool) for debt. A bank note is not a promise to pay a certain amount of ‘real money’, it is the promise to pay something of the same value as that amount of ‘real money’. Money existed not as a medium of exchange but as a standard of deferred payment.
  • State Theory of Money (Chartalism) expounds that money is a creation of the state. It is borne of the states’ attempts to direct economic activity rather than as a spontaneous solution to the problems with barter or as a means with which to tokenize debt. Currency is anything the state will accept in payment of taxes.
  • The creation of the modern central bank in England was seeded when a consortium of bankers made a loan of £ 1,200,000 to the king. In return they received a royal monopoly on issuance of banknotes. This meant they had the right to advance IOUs for a portion of the money the king owed them to any inhabitant of the kingdom willing to borrow from them, or deposit their own money in the bank - in effect, monetise or circulate the royal debt.
  • The Chartalist thought helps answer why did the kingdoms make subjects pay taxes. Instead of taking control of gold and silver mines and thus cornering all wealth, why did kingdom coin money, circulate it and then demand tax? Financing armies via levy, instead of cornering entire wealth and then paying for the armies themselves, was a way to engage the entire national economy to provisioning the army, instead of the state official requisitioning everything. Taxes subsequently lead to the creation of a market.
  • Keynes endorsed that all civilized money to-day is chartalist. State need not create money. Money is credit, it can brought into existence by private contractual agreements (loans, for instance). State merely enforces agreements and dictates legal terms. Thus, Keynes asserted that banks create money and there is no intrinsic limit to the ability to do so.

    Primordial Debt Theory

  • The weak link in state-credit theory is the element of taxes. Early states demanded taxes to create markets, but by what right?
  • Modern day rationale for taxes is that we pay taxes so the government can provide us with services. Early states provided the service of military protection. This explanation (taxes as a form of ‘social contract’) does not hold if the assumption that markets came before government is not true.
  • Vedas and Brahmanas say that human existence itself is a form of debt to the gods. Sacrifices were a form of partial reimbursement for this debt.
  • Primordial debt theorists argue this Vedic line of thought was prevalent across every human society.
  • Bruno Theret, in “The Socio-Cultural Dimensions of the Currency: Implications for the Transition to the Euro”, folds back the primordial debt into the state theory of money. Debt to the gods eventually was replaced by a debt to the society and to the state.
  • The primordial debt is that owed by the living to the continuity and durability of the society that secures their individual existence.
  • There is indirect proof for the primordial theory, such as etymological evidence (synonymous words for debt, guilt & sin in Indo-European languages) and the widespread use of cattle as money.