David Graeber is a professor of anthropology at Goldsmith’s, London, and a left-wing political activist. His most recent book, Debt: The First 5,000 Years, has just been published in the UK. It looks at the history and evolution of debt as both a moral and an economic concept, drawing on anthropological evidence from a wide range of societies, both contemporary and historical.

I met up with David to discuss some of the arguments in the book. In the second of a two-part interview, he places the post-1971 shift towards a credit-based economic system in a much broader historical context, and looks at the role of the national debt in the light of currently dominant politics of austerity. The first part of the interview, which focused on development of debt as a moral language, can be readhere.

A key organising framework for the historical analysis you present in your book is the oscillation between economies based on credit and those based on bullion. You seem, here, to be picking up on the same patterns as Giovanni Arrighi, with his ‘systemic cycles of accumulation’, although you do different things with it.

Yes, it’s the same kind of thing. I’m trying to figure out these patterns. But it’s also very different in that he is essentially talking about different sorts of capitalist hegemony, whereas I’m saying that capitalism itself is one cycle of this very broad series of back-and-forth movements between credit systems that have certain relatively populist implications and bullion-based systems which tend to be associated with war, chattel slavery, standing armies, and so forth.

Could you outline your analysis of this cycle? One of the interesting things about your historical framework, for example, is that it shifts focus away from the ‘transition’ from feudalism to capitalism, which attracts so much attention and debate, by starting one period in 1450 and ending it in 1971.

Right. When looking for the shift from credit systems to bullion systems, the obvious place to start would be the discovery of the Americas and the massive flow of bullion from the Americas to Europe. But the problem is that the massive flow of bullion didn’t, for the most part, end up in Europe – it ended up in India and China. If you look carefully, the real transition seemed to happen around 1450, when China itself moved from the old paper money system to a silver bullion-based economy, which was one of those moments of free market populism when people shake off the old state-controlled system and the paper money and credit systems that are associated with it—which was closely tied to a tax system which assigned people to fixed slots as farmers, soldiers, artisans, etc. People started fleeing the villages to which they were assigned by the tax system, creating illegal silver mines and an informal economy that operated with uncoined silver. Eventually the Chinese government gave in, stopped even coining money, and said ‘fine, everyone just pay a uniform tax in silver.’ The problem was they quickly discovered that there actually isn’t very much silver in China. They cleaned out Japan in twenty years, but the insatiable demand for silver persisted. Some have estimated that the colonies established by the conquistadors wouldn’t have been economically viable for more than ten or twenty years were it not for this huge demand for bullion from the Far East. And that connection began the shift from the old credit systems that dominated during the Middle Ages to the bullion systems that dominated, really, until 1971.

You’ve described how the shift from credit to bullion, which occurred as a side-effect of war, created commercial markets. Was this the point at which the shift from what you call “human economies” to “commercial economies” occurred?

A ‘human economy’ is a term I coined to refer to an economy in which money is used primarily to rearrange social relations, rather than to buy material objects or possessions. I give a lot of examples in the book. Now, a credit system like the one in ancient Mesopotamia is sort of a half-way point: you could buy things, but it was largely on credit and you could not completely divorce the transaction from someone’s reputation (or their credit-worthiness). So it was kind of a hybrid – money was used both for rearranging social relations and for buying material objects. But when money is used for both, suddenly it creates all of these moral crises, which are further exacerbated when the system develops into one where people start routinely using cash for basic transactions. The examples I give in the book are the moral crises over slavery and prostitution.

Let’s focus here on prostitution. Obviously prostitution can’t really occur unless you have some kind of impersonal market system, but in a human economy, often, legitimate social relations are ones in which money has changed hands. That’s how you recognise when a new social relation has been created (for instance, when ‘bridewealth’ has been paid between families to recognise a new marriage). But when you’re using the same stuff to seal a marriage as you’re using to buy a duck or to pay a streetwalker for momentary sexual services, that creates a big problem, and that’s why you have this terrible moral panic which starts in Mesopotamia and becomes if anything even stronger in ancient Greece as the beginnings of a cash economy emerge.

And is the shift always from ‘human economies’ to ‘commercial economies’? Has the transition ever occurred in other direction?

Oh yes, people have certainly run away from commercial economies, and commercial economies have collapsed. Still, within the tradition of the great civilisations what happens is not a movement between human and commercial economies, but between credit-based systems and bullion-based systems, and that back-and-forth is one of the themes of the book. Credit-based systems are more like human economies, although they don’t go all the way.

Because credit is not completely impersonal in the way that cash transactions can be?

Yes, it relies on personal trust, but it’s also quantified and transferable, which makes it a debt rather than a simple moral obligation. This is where you get symptoms like those I have described – for example, in medieval Islam one’s honour is a form of capital; one’s reputation for being a decent person, for being trustworthy, becomes key. As Pierre Bourdieu said of contemporary Algeria, honour is superior to money because you can convert your honour into money, but you can’t convert your money into honour. I thought this was a brilliant discovery– that honour is a form of capital – until I discovered that in traditional Islamic law it is literally true: honour is legally recognised as a form of capital. That sort of system is similar to the kind of thing that prevailed in medieval Europe. In England, for example, you find expressions like “a worthy man” or “a man of no account”, which refer both to one’s personal reputation for decency and to one’s credit-worthiness. The two essentially could not be distinguished.

The interesting thing this brings out, I think, is that while markets emerge as a side-effect of military operations, in certain times and places in history they become something different. They become something which is neither dependent upon nor a side-effect of state actions, but instead become opposed to the state. The first time I’m aware of this happening is in medieval Islam, but you also see it in Ming China and there are traces of it in renaissance England. It is a kind of market populism that tends to occur when controls are instituted to ensure that credit systems don’t go crazy. So in medieval Islam, for example, there was a ban on usury. But that ban was not enforced by the state— people appealed to religious law to settle commercial disputes and contracts, but the state couldn’t haul someone off to jail for violating them. Abusive practices like usury and debt peonage had been typical of the Middle East for thousands of years, and were essentially made illegal under Islam. That’s one of the reasons why many people were so willing to convert – it was really through the judicial system that it all happened.

The way I put it is that the mercantile classes basically switched sides. Throughout most of Middle Eastern history they were allied with the government – they were the money-lenders, they were the people that others fell into debt traps with and became debt peons because of interest bearing loans. And essentially they said, ‘OK, OK, we’ll become the good guys. We will stop charging interest, we will outlaw slavery and debt peonage, and the government are the bad guys now, we won’t even talk to them, we’ll just work this stuff out among ourselves.’

Now, you can’t have this sort of system if you’re extracting interest and getting people ensnared in debt traps where they become enslaved. For that kind of system you need physical enforcement. So essentially they created this idea of a market existing outside the state. But it was a different type of market. While the market and the state were considered completely separate it was also assumed that competition, while it plays a role, is not the essence of what the market is. The market, ultimately, was seen as a form of mutual trust and mutual aid.

One of the more surprising things is the degree to which free market rhetoric was spearheaded in medieval Islam within that context of Sharia. To take one example, Adam Smith’s idea of the ‘invisible hand’ – that divine providence sets prices under free market conditions – was originally a sentiment attributed to Muhammad, who was initially, of course, a merchant. Some of Adam Smith’s best lines – you never saw two dogs exchanging a bone, his example of the pin factory – go back to free market theorists in medieval Persia. He seems to have taken a lot of his lines directly from them.

But there is a difference, because the Sharia notion of the market as based fundamentally on mutual aid and trust did not transfer straightforwardly to the European context. To illustrate, contrast the Indian Ocean and the Mediterranean. The Indian Ocean became a Muslim lake in the Middle Ages, and there was an understanding that, while on land you could kill each other, on the ocean everyone had to be friends. The ocean is the domain of merchants who will go to the religious courts to enforce contracts, and with contracts, everything’s a handshake deal. On the Mediterranean, by contrast, whether Venetian galleys were traders, pirates or crusaders really depended on the balance of forces of the moment. Every ship was equipped both for trade and for war, and one was considered an extension of the other. So in Europe you had this much more aggressive idea of trade as an extension of competitive relations with people who you would just as soon kill, were it not disadvantageous to try to do so at a particular moment. Well in that context the idea of the ‘free market’ becomes completely different. And in that context you create an idea of a market that should exist outside of the state, but actually couldn’t.

I’ll come back to credit vs. bullion cycles in a bit. But you mentioned prostitution above, and one of the interesting arguments in your book concerns the origins of patriarchy in the context of moral crises surrounding debt and the introduction of commerce. Could you elaborate?

Yes. I should make clear that I’m not talking about male dominance per se, for which we would have to cast a wider net, but rather about the specific phenomenon of Middle Eastern patriarchy in which women are locked away, or veiled, or otherwise sequestered from public life. That is not something which goes back to the earliest times. In fact the evidence is that in thevery earliest times, it was least like that. If you look at the early Sumerian records, the situation looks kind of like now – it’s not equal, but you know, a third of doctors are women, or a third of administrators, or even among heads of state, you’ve got a few. Within 1000-1500 years, somehow or another, women are systematically excluded from public life, and suddenly you’ve got this intense concern about premarital virginity (it’s not even clear that they had a concept of that in early Sumerian times). How did all this happen?

The traditional line suggests that maybe the Sumerians were ‘mellow’ while the Semitic people were these pastoral nomadic types with severe patriarchal traditions, and gradually these nomads seeped in from the steppes and overwhelmed the cities with wave after wave of conquest. And it is true that the language spoken along the Tigris and Euphrates successively shifted from Sumerian to Semitic, Akkadian, Amorite, Aramaic, then finally, Arabic, which you could say was the last Semitic language to take over the region. But there is a problem with this explanation. In most other respects, the evidence suggests that these conquering Semitic peoples adopted the mores of the people they found living in the cities. So why not in this case? The picture doesn’t really make sense – it’s almost a substitute for a real explanation.

What I found more plausible is that it had to do with debt crises. You had this situation where women, especially poor women, became commoditised. Some of that has to do with the history of prostitution. It is much contested whether there really was a thing called ‘sacred prostitution’ in the ancient world – some people say the whole thing is a myth, but there seems to be some fairly clear evidence that ritual sexual behaviour which involved exchange of something did take place. In any case, the details aren’t so important. Whether or not there were sacred prostitutes in temples, it quickly became the case that temples were surrounded by red light districts with actual bordellos in the modern sense of the term. Who was in them? Mostly people who got carried away because of late debt payments, often those of their parents. So you had parents in this agonising situation in which their daughter was about to be taken away to serve as a prostitute because they couldn’t pay their loans. One of the more common responses was to run away. Through much of world history, when faced with an insoluble situation, people are much less likely to revolt than to figure out a way to just leave.

James Scott makes a lot of this.

Precisely – “exodus”. That’s a perfect example from the Middle East itself. So exodus was widely practiced. Of course it was much harder after irrigation and agriculture had been developed, because it’s difficult to abandon canals and so on that you’ve spent twenty years building. But when people were truly desperate, as when their daughters or sons were about to be taken off to serve as prostitutes, the common response was to run off and join the local band of nomads – people who practiced occasional agriculture on the fringes, but who remained mobile enough to evade capture. In this way the numbers of nomads would swell, which is one of the reasons why kings had to declare periodic debt cancellations: they were afraid of losing their population, and indeed of being overwhelmed by nomads and bandits. People would run off and join nomadic bands after fleeing in the manner described above, until eventually they swept back into the cities as conquerors. That’s how you got the Semitic people taking over – they were aided by half the proletariat from the towns they were conquering.

So in a sense, Middle Eastern patriarchal reaction starts as a sort of social movement, or rebellion, against the wealthy and the most graphic abuses of wealth at the time – debt slavery, and wives and daughters being sold into prostitution to service debts. Of course the form that rebellion took had terrible, ambivalent and reactionary effects. But I think we need to recognise the fact that not all resistance is libratory of everyone.

To jump ahead a bit, what was the origin of the national debt?

That’s interesting, because this period of roughly 1450-1971is a period dominated by bullion insofar as people think that money essentially is bullion – gold is a commodity used to measure other commodities – but it’s also a period where you have modern paper money. This might appear to be a paradox, but of course the value of paper money was always seen as ultimately representing gold. Now, the interesting thing about those systems – and this is something about the nature of capitalism that I think, much though I respect the Marxist tradition, has been sort of left out– is the fact that the kind of money that capitalists were using with each other was different to the kind of money used by ordinary people. There was this sort of moral idea that people shouldn’t be using credit, that they should be using coins – Adam Smith tried to eliminate credit as much as possible from his vision of the world – which corresponded to a general middle class idea that it wasn’t a good thing that everyone should owe each other money. It was physically very difficult to produce enough coins to ensure that people would be able to just go to the shop and buy everything they needed with them, though it was eventually pulled off by the nineteenth century. But the same capitalists who felt that people shouldn’t be in each debt to each other, when they made transactions among themselves, generally used as what is sometimes called “high powered” money, which was mostly monetised government war debt.

The classic example of that is the Bank of England, which was essentially based on a £1.2 million loan made by a consortium of British merchants to King William II. The King, who was fighting a war with France, asked for an emergency loan, in exchange for which he gave the merchants the right to take the money he now owed them and loan it to other people in the form of paper money (bank notes). That’s what British currency is. They also got to call themselves the ‘Bank of England’ and they had a monopoly on the right to do this. And indeed if you look at a £10 note today, there’s still a picture of the queen, and above her it still says, in small letters, “I promise to pay the bearer on demand the sum of”. It’s a promise, an I.O.U. from the Queen.

This is why all this discussion of the debt as such a terrible problem has nothing to do with the way economies actually work. The way economies actually work means that the government has to maintain a debt, and that debt is generally speaking based mainly in military spending (in the U.S. almost exactly). The debt is then monetised in the form of bank notes, and that’s what we use as money: money owed by the government in exchange for maintaining a security apparatus and a military, which of course can then further enforce the fact that this debt can be considered money, which creates a rather interesting circularity.

The U.S., to be clear, has always had a debt, since 1776. The original Revolutionary War debt has never been repaid, and couldn’t be. The only person who made a serious effort to retire the debt was President Andrew Jackson. In order to do that he also had to get rid of the Bank of the United States, which was the equivalent of the Federal Reserve. As a result, basically, local banks had to take up the task of providing all the credit in the U.S. That caused incredible speculative bubbles, because there was no real control over how they would do that (one advantage of having a central bank is that you can keep an eye on it and make sure it doesn’t engage in completely inflationary policies). This led to the Panic of 1837 and a giant economic collapse. No one has tried to do it since.

So what is the economic basis for the concern about the size of the debt?

The only economic basis is that, especially if we had high employment rates (which the US doesn’t), deficit spending could eventually lead to inflation. But at the moment that’s what we want – the last housing bubble crashed and they’ve been trying desperately to blow on a popped balloon ever since. That is basically what federal policy is – the Federal Reserve is in fact printing money like crazy (they call it ‘quantitative easing’ so you don’t quite know what’s happening). So the idea that we face a danger of inflation exactly reverses the problem.

If, on the other hand, the government retired the debt, the problem would be that once again local banks would have to create all the credit, which is exactly what they’re not doing at the moment (there is a ‘credit crunch’). So that would be particularly catastrophic at the moment.

So I would say that the only real danger of running extreme deficits would be that eventually you’d have a loss of faith on the part of the international community. The deficit, which was caused primarily by increased military spending and the 2008 economic crisis, was funded largely by selling treasury bonds abroad. Treasury bonds have come since 1971 to substitute for gold as the basic reserve for people who don’t have huge vaults like we do (that is, U.S. treasury bonds now function as the standard unit of account for debt). There is some danger that eventually, if the U.S. runs a huge deficit over a sustained period of time, somebody might decide that maybe treasury bonds are no longer the safest investment choice – though it is not clear what the alternative might be. There has been some murmuring along these lines – Russia has been muttering about it, and China occasionally makes noises about possibly diversifying, but they don’t do anything about it. The irony of course is that the only thing that could really speed this long-term process up is exactly what the Republican Party has been doing: threatening to default, which they claimed we might have to do because of the debt. This is precisely backwards.

So a country can’t go ‘broke’, really?

Certainly not a country with a giant army. Argentina can go broke. If you look at countries that actually go broke, they are countries that lack the power of seigniorage. Now, ‘seigniorage’ is another of those great words that economists use so you don’t know what they’re actually saying. It essentially refers to the economic advantage you get from having the political power to decide what money is. If you look at countries that have real, genuine debt crises – Argentina, Ireland, Greece – they don’t have their own currency (Argentina’s was pegged to the dollar). If you’re using somebody else’s currency, you can get in big trouble. Countries that do control their own currency, on the other hand, have a range of options available to them. They can always just print money – that might have bad economic effects, but it is one way to escape a debt trap. The U.S.‘s position is even better than that, because not only can the U.S. print money, it can print money that is used, essentially, as gold. So we can write cheques that not only will people not cash, but that will be treated by others as if they were gold, and stored in their vaults. That’s an insane advantage. What people are thinking when they talking about trying to undermine that, God only knows.

So for example, everybody always says that the U.S. owes China all this money. No we don’t – or at least, not in the sense that the U.S. will ever have to pay it. Foreign holders of T-bonds just roll them over every five or ten years, the bonds mature and they use them to buy new ones. Japan does the same thing. Now, as I say, central banks tend to use treasury bonds as their reserve currency, but certain countries buy much more than their share. China’s got into that game recently, which is complicated and interesting, but if you look historically, there is a pattern: during the Cold War it was mostly West Germany that bought huge amounts. Nowadays, South Korea and Japan are big ones – Japan actually owns almost as many American treasury bonds as China – as are the Gulf states. What do all these countries have in common? U.S. military bases. So: U.S. debt is largely based on maintaining military spending; the military is sitting on these countries that then finance that debt by making these loans that they know will never be repaid. You can call that ‘protection money’ in either sense of the term, depending on your point of view. In a way it’s a mix of both, because they are getting physically protected, but it’s also a shakedown. China, meanwhile, seems to be playing a complicated game, essentially selling the U.S. loads of cheap consumer goods on credit that they know will never get fully paid back; but if nothing else, there seems a tacit agreement that as long as they do that, the US will look the other way on technology transfers, patent violations, and so forth.

According to the schema set out in your book, since 1971 we’ve seen a shift back away from bullion towards credit.

Yes. And I argue that in periods dominated by credit money – there is no period exclusively of either – people come to recognise that money is essentially an I.O.U., a social relation. And if money is just a series of promises and commitments between people, clearly those things can be rearranged, if needed.

The shift to credit tends to prompt two questions: 1) what’s to stop people just going crazy with it and creating new forms of money with reckless abandon? 2) What is to stop people from thereby falling into debt traps and becoming enslaved? The usual solution is to create some kind of control, which is why you had periodic debt cancellations in Mesopotamia; jubilees, bans on usury, and various other mechanisms that appeared in the Middle Ages; and so on. This makes sense, because if money is just a social construct, and is recognised as such, then people will be more open to changing the rules that govern it. And in fact in the Middle Ages this was completely recognised. Aristotle’s position that money is an agreement we make with each other, which was very much a minority view in antiquity, got widely adopted in Europe. If it’s an agreement, we can renegotiate it at any time, and people did. They would cry out and cry down the value of money, and shift it around all the time.

So the question becomes: why didn’t that happen this time? Why have they not, since 1971, set up these overarching institutions to protect debtors, which is what they’ve always done in the past? Why did they not create controls so that money couldn’t just be created with reckless abandon by those in power as a way of enslaving everybody else? In fact, what’s happened is exactly the opposite of that. They’ve created overarching institutions, like the IMF, to protect creditors. That essentially is what the IMF is: it is part of a huge financial global bureaucracy developed gradually over the past 30-50 years, dedicated to the principle that no-one is ever allowed to default on a loan. Which is crazy – even according to standard economic theory the profits from a loan are supposed to be a reward for taking a risk. This leads to insane speculative bubbles, a situation in which 90-95 percent of all money is actually speculative with no connection to production or trade, and people becoming effectively enserfed.

In America, for instance, pretty much everybody is in debt. The great social evil in antiquity, the thing that Sharia law and medieval canon law were trying to ensure never happened again, was the scenario in which a family gets so deep in debt that they are forced to sell themselves, or sell their children, into slavery. What do you have here today? You have a population all of whom are in debt, and who are essentially renting themselves to employers to do jobs that they almost certainly wouldn’t want to do otherwise, to be able to pay those debts. If Aristotle were magically transported to the U.S. he would conclude that most of the American population is enslaved, because for him the distinction between selling yourself and renting yourself is at best a legalism. This, again, is why I say that our definitions of freedom are bizarre – we’ve managed to take a situation which most people in the ancient world would have recognised as a form of slavery and turned it into the definition of freedom (your ability to contract debts, your ability to sell your labour on the market, and so on). In the process we have created the very thing that all that old legislation and all of those old political practices were designed to avoid.

However, it’s also true that we’re talking about 1971 to the present, which is 40 years. Out of a 500 year economic cycle, that’s not a lot. It’s the very beginning, and it’s also clear that the system I’ve been describing hasn’t worked out too well. The IMF has been kicked out of one country after another, it’s essentially persona non grata in East Asia, it’s been kicked out of Latin America, just a few weeks ago it was kicked out of Egypt. Really they just have Africa and Europe left as their stomping ground, and there’s a major reaction to their prescriptions in Europe right now.

In 2008 the whole elaborate make-believe magical credit world hit a brick wall, and they didn’t solve the problem. One of the reasons I wrote this book was that in the wake of the crisis I thought that there was an opportunity for us to sit down and start talking about stuff again. And there was a brief moment, right after 2008, when people said ‘oh, everything we thought we knew was wrong’. I mean, the Economist was running headlines asking whether capitalism had been a good idea. It didn’t last long, though. There was a big ‘oops!’ feeling, and then people starting saying that maybe we can reinstate the old system more or less how it was before. That’s the stage we’re in at the moment. Every year that goes by brings us closer to the time that it will happen again, and everyone pretty much knows this. So credit has come crumbling. That’s why I thought this was a timely moment for this book, because we need to have a serious conversation about debt. If things unfold the way they have done in the past, we will end up going in the complete opposite direction from the way in which things have been going for the past 40 years – away from new-fangled forms of slavery and debt peonage; away from endless creation of magical credit bubbles that then burst; and away from this idea that debt is a sacred obligation that immediately outranks any other promise you can make. But we still have these ideas in our heads – there’s a psychology there that’s going to be difficult to overcome.

Jamie Stern-Weiner studies politics at King’s College, Cambridge, and is co-editor of New Left Project.  

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