Debt: The first 5000 years

The author radically challenges our understanding of debt. An alternate history of the rise of money and markets with debates conventional economic wisdom. For 5,000 years humans have lived in societies divided into debtors and creditors. Debt and debt forgiveness have been at the center of political debates, laws and religions.

Chapter 1

On the experience of moral confusion

Due to the magic of compound interest, money has been flowing for decades from the poorest nations to the richest ones. The chapter opens up challenging the idea: "They'd borrowed the money! Surely one has to pay their debts."

According to standard economic theory, the statement "one has to pay one's debts" isn't true. The lender is supposed to accept certain degree of risk. The greater the risk, the higher the interest charged. If all loans were guaranteed retrievable, one could walk up to the Royal Bank of Scotland and get a couple million citing any idiotic personal reason ( let's try gambling ) and the bank would not have cared.

The idea of paying one's debts is more a moral statement than an economic practicality. It lines right along with accepting one's responsibilities, fulfilling one's obligations. This is a kind of line that makes terrible things sound bland. The author talks about Madagascar during a malaria outbreak in which ten thousand people died because the government had to cut the monitoring program and they could not afford to maintain the mosquito eradication program due to lack of funds. IMF's austerity program had a role to play there. One might think that it would be hard to make a case for the loss of ten thousand human lives is really justified in order to ensure that Citibank wouldn't have to cut its losses on an irresponsible loan, but try following the thought with "Surely one has to pay one's debts" and this becomes a lot more unremarkable.

Debt has come to be the central issue of international politics, but nobody really knows what debt is. The very flexibility of the concept is the basis of its power. Today, it serves as a means to justify relations based on violence. Violent men have been able to tell their victims that their victims owe them something. World debtor nations are almost exclusively countries that have at one time been attacked and conquered European nations, often the very countries to whom they owe money. When France invaded Madagascar and declared it a French colony, one of the first changes was to impose heavy taxes on the Malagasy population, to reimburse the cost of having been invaded, and to provide money for building infrastructure that the French wanted to build. Even though Madagascar has not done any comparable damages, the Malagasy people were told that they owed France money, and to this day, they are still held for it.

Debt is also a way of punishing winners who weren't supposed to win. The Republic of Haiti was a nation of former slaves who rose up in rebellion and managed to defeat Napolean's armies sent to return them to bondage. France immediately insisted that the new republic owed them 150 million francs in damages and expenses for a failed military expedition. The other nations agreed to impose an embargo until the amount was paid. The name "Haiti" has become a symbol for debt, poverty and human misery ever since. Read more about how Haiti was forced to pay for freedom

The United States has itself accrued debts that dwarf those of the entire Third World combined. Are these loans? Are these tributes that an emperor wants from his subjects?

One extreme possibility that leads to more moral confusion is when the usurers themselves are the ultimate moral authority. Take the example of Brahmin moneylenders under whom, the debtors never raised a voice of concern living under the idea that this is how things worked. In medieval Hindu codes, not only were interest bearing loans permissible, but it was emphasized that a debtor who did not pay would be reborn as a slave, or horse or ox.

The Catholic church has forbidden the practice of lending money at interest. Looking over world literature, it is almost impossible to find a single sympathetic representation of a professional moneylender.

There are two effective ways to wriggle out of the moral dilemma of lending money at interest - Shift the burden of responsibility to a third party, or insist that the borrower is even worse. The second approach is far more common. But it leads to both parties being equally guilty; the whole affair is a shabby business; and most likely, most are damned.

A debt is the obligation to pay a certain sum of money. As a result, a debt, unlike other obligations, can be perfectly quantified. This allows debt to become simple, cold and impersonal, which in turn allows them to be transferable. One does not need to calculate the human effects; one need only calculate principal, balances, penalties and rates of interest. If you end up having to abandon your home, if your daughter ends up in a mining camp, that's plain unfortunate, but incidental to the creditor. Money is money.

This leads to money's capacity to turn morality into arithmetic, and to thus justify things that would otherwise by outrageous or obscene.

History provides fascinating hints of what we might expect. In the past, the practice of lending involved the creation of institutions designed to prevent everything from going haywire - to stop the lenders from teaming up with the bureaucrats and politicians to squeeze everyone dry. They are accompanied by institutions to protect the debtor. But now, we began with institutions like IMF to protect not the debtor, but the creditors. We have little idea what to expect.

Chapter 2

The Myth of Barter

When economists speak of the origin of money, debt is always an afterthought. First comes barter, then money and then credit comes later. However, some of the very first documents that have come down to us are Mesopotamian tablets recording credits and debits, rations issued by temples, precisely in grains and silver. Some of the earliest works of moral philosophy imagine morality in terms of debt, in terms of money. The standard economic-history version has little to do with how economic life is actually conducted. This is partly because credit and debit are somewhat scandalous for economists due to the emotional context of the transaction ( A loan by a close family friend is not the same as the loan taken from a stranger ). The story of money from economists always begins from the a world of barter. The problem is that no one has ever located any proof of the existence of such a society.

Aristotle speculated that first families must have produced everything that needed for themselves. With time, some would have specialized in something. Money would have emerged from such a process. Aristotle was never clear about how.

Pending 10 chapters coming soon

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