A few years ago Radio 4 hosted a series on debt: Promises, Promises: A History of Debt, by the anthropologist David Graeber (who’s also the author of Debt: The Last 5000 Years). The series traces debt’s history from before the advent of money, all the way to today. Here are Graeber’s ideas from the series on debt and the origin of money (which is contrary to the views of many economists).
What is Debt?
Debt is a promise to pay a certain amount by a certain time under certain conditions. At its core it’s nothing but a promise, but it can be quantified - and therefore traded - unlike most other promises. Debts occur when an exchange between two people is not fulfilled, or completed. For example, if person A promises to exchange a car with person B for £2000. If person B does not pay the £2000 immediately, they are in debt.
The Story of Money
The common story goes a bit like this:
At first there was no money, so people used barter to get the goods they wanted. For example, exchanging five loaves of bread for a piece of meat. Supply and demand would set the quantities of the exchanges.
This only works when there is a double coincidence of wants - somebody has something that you want, and you have something that they want. These sorts of exchanges are rare in reality because of timing - you might have some excess meat, but don’t want the bread immediately.
For barter to work, you need a commodity that’s easily exchangeable and desired by people. To find a permanent solution, people settled on gold and silver, which had the advantage of being portable, durable and homogenous…
Graeber challenges this story:
No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money. In most of the cases we know about, [barter] takes place between people who are familiar with the use of money, but for one reason or another, don’t have a lot of it around
Instead of barter on the spot, he suggests that early exchanges were debts - the transactions would only be completed much later, when the need arose. These created a web of debts between neighbours which were denominated in rough equivalences (e.g. five loaves of bread are roughly equivalent in value to a piece of meat). Ancient law codes document all of these equivalences, including their equivalence to gold and silver. The equivalences weren’t used for trade. Instead, they were used for paying fines, and for compensation between people - i.e. settling debts.
Coinage and Debt
Credit precedes cash. Debts (including interest rates) were documented more than 500 years before the appearance of physical money. So why did money emerge? Money wasn’t needed for trade - great trading civilisations (e.g. the Phoenicians) survived without coinage for a very long time. They relied on a web of debts between people.
The first coins were found at the fringes of military expeditions. Expanding empires needed a way to feed their soldiers, but carrying provisions with them was inefficient. A better way was to pay soldiers in coins so they can buy food from local populations.
How do you force the local population to accept these coins? Emperors indebted their subjects by imposing taxes, which had to be paid in coins minted by the empire. That way, emperors created demand for soldiers’ coins and simultaneously allowed their armies to be clothed and fed.
That’s the early story of money and debt; from here it’s a simple step to collateralised debt obligations. More about that journey in the next post.