While there is a burgeoning literature on business cycles – periodic episodes of booms and bust, work on debt cycles has largely remained in oblivion. In his magnum opus, Debt: The first 5000 years, David Graeber introduces the concept of debt cycles, which he also claims to be his greatest discovery. Contrary to the popular belief that barter was the first stage in the evolution of money, Graeber claims that there are no historical records to corroborate that ancient societies indeed operated on barter. The theory of debt cycles propounded by Graeber suggests that societies alternate through periods of virtual money(debt) and metal money(bullion). This theory postulates that bullion dominates debt during times of war while virtual money tends to dominate during periods of relative social peace. During periods of war, soldiers have access to loot and plunder, which is largely consisted of precious metals and hence they find it convenient to trade those metals for commodities of daily use. Graeber proposes the following breakdown of Eurasian history to illustrate the alternation between virtual and metal money:
1) The Age of first Agrarian Empires(3500 – 800 BC) – period of virtual credit money
2) Axial Age (800 BC – 600 AD) – rise of coinage and shift to metal bullion
3) The Middle Ages (600 – 1450 AD) – return to virtual credit money
4) The Age of Capitalist Empires (1450 – 1970) – shift to bullion ; Gold Standard scrapped by Richard Nixon in 1971
Graeber recounts that Mesopotamia, the earliest urban civilization operated on credit money. He writes, “in the great temple and palace complexes, money served largely as an accounting measure rather than physically changing hands, merchants and tradespeople developed credit arrangements of their own, which took the physical form of clay tablets, inscribed with some obligation of future payment”. Interest bearing loans were also offered to merchants by temples and palaces. The practice of debt peonage emerged during this period. Those who were unable to pay their debt had to work for their creditors and sometimes had to sell their family members to pay the debt. Hence, in order to keep the social order intact and to avoid severe debt crises, the ritual of ‘breaking of clay tablets‘ was observed from time to time where the temple would cancel all the outstanding debt and the debt peons would return to their families.
The Axial age is perhaps the most interesting since this was the period when “Pythagoras,the Buddha and Confucius were all alive at exactly the same time” and ” the three parts of the world where coins were first invented were also the very parts of the world where those sages lived : the Kingdoms around the Yellow river in China, the Ganges Valley in Northern India and the shore of the Aegean Sea.” It is interesting to note how Graeber links the invention of coinage to war. Silver, gold and other precious metals which would only be found in the treasuries of temples in the agrarian age were now being used as coins for daily transactions. Graeber suggests that it was possible because the precious metals were stolen. In Axial age, China, India and The Aegean saw the rise of an army of trained professionals. The armies were controlled by the state and as a way to provide for the armies the state converted precious metals (which were stolen) into coins which would be accepted for day-to-day transactions. Slavery, which was an outcome of this system, also helped in reinforcing the system. War captives worked as slaves in the gold and silver mines and produced more gold and silver which was used to produce coins. Graeber calls this – “military-coinage-slavery” complex. This was the period when war was glorified and empire states were commonplace.
In the middle ages, the empire states, which were built on the bedrock of war, began to fall and religion took over the logic of war. People were beginning to ask questions about the existence of human life and religious debates were to be seen everywhere. The religious authorities started controlling the economic sphere and once again the concept of debt resurfaced. The temple treasuries again became the storehouses of precious metal and credit systems similar to those in the agrarian age became popular.
Around 1450, there was again a shift from virtual credit to gold and silver. The discovery of the New World(owing to the voyages of Christopher Columbus) and the colonization of the American continents led to a massive influx of bullion into Europe from the Americas. This return to bullion was accompanied by “vast empires and professional armies, massive predatory warfare, untrammeled usury and debt peonage, a new burst of scientific and philosophical creativity”. This was the time when a series of plagues and Black Death decimated large cities in Europe, commercial regions were destroyed and whole cities went bankrupt. Real wages fell as the inflation(price revolution) spurred by the inflow of bullion continued to erode the purchasing power and the region was trapped in endemic warfare. This set the stage for the emergence of capitalism. This phase also saw the emergence of the banking system. “The Bank of England was created in 1694 when a consortium of London and Edinburgh merchants offered the King William III a loan to help finance his war against France and in return asked for a monopoly over issuance of banknotes – notes for the money that the king owed them.” In 1690’s there was a severe shortage of silver coins and the wages and prices collapsed. It led to a series of debates on whether the coins should be debased or bullion should be abandoned in favor of pure credit money. The final outcome was that various forms of credit money emerged alongside bullion but bullion was never abandoned and in 1717, Britain adopted gold standard.
Gold standard was vulnerable to fluctuations in the quantity of gold and countries kept suspending and adopting gold standard from time to time. For instance, Britain abandoned gold standard after the first world war and returned to it in 1925. It finally came to an end when in 1971, US President Richard Nixon announced that dollar was no longer convertible to gold. Since then, there have been a slew of innovations in the financial sector and various forms of credit money have emerged, marking the return to the phase of virtual credit money.
Graeber claims that modern money is based on government debt and governments borrow money to finance wars. He says that Nixon floated the dollar to pay for the Vietnam war and the debt crisis was a direct result of the massive military expenditure. In this light, Graeber says, US currency is fiat money backed by its military power. He concludes by presenting a paradox : If history holds true then a return to virtual money should mean a movement away from war, empire buildings and slavery but since 1971 what we have seen is the opposite. US debt has primarily been war debt and the credit arrangements are not mediated by interpersonal relations of trust(as was the case when credit systems dominated in history) but by profit seeking corporations. By eliminating all legal restrictions on the interest that these credit companies could charge, this system is actually making usury legal – which is the opposite of what one would expect in a society based on credit arrangements. US debt is monetized by the Fed which prints money to buy treasury bonds and then lends them to other commercial banks. The international organisations like IMF, World Bank, WTO work on the principle that “(unless one is the United States Treasury)one has to pay one’s debt “. Graeber claims that this “debt – imperialism” is not sustainable and the recent financial crisis was a manifestation of the strains that the system is experiencing.
Graeber’s book has garnered much praise in the intellectual sphere and has sparked off discussions on debt and the role of money as a social convention. Some commentators have critiqued Graeber’s hypothesis including Noah Smith(here) and Brad DeLong(here). I feel that the book provides a fresh perspective on debt, war, slavery, politics and religion and debunks various myths surrounding money. Looking at the evolution of money through an anthropological lens, it touches upon concepts like gift economies, human economies, communism, hierarchy and exchange . While providing a background for the recent financial crisis, it raises many questions on the sustainability on the current system for which we still don’t have any concrete answers.