The End of Money?
Why debt is essential in today's economy.
If you’ve sought advice from anyone in the personal finance space — ahem Dave Ramsey — then you might believe that debt is a matter of personal choice.
People are in debt because they flagrantly spend their money on lattes and avocado toast.
Obviously.
David Graeber offers an academic approach to debt that will radically change everything you think you know about it.
In Debt: The First 5000 Years Graeber chronicles the history of money, credit systems, and debt. As an anthropologist, he adds an important tone to the conversation around money. Specifically, how debt impacts the development of human relationships in society.
To understand why the government continues to run a deficit and why your personal balance sheet isn’t in the best shape, you have to know where debt comes from and why it exists.
This essay will share three of the biggest takeaways from the book. The most important of which you likely haven’t considered: our economy would collapse without the existence of debt.
If we all succeeded in becoming debt free as Dave Ramsey proscribes we would live in the equivalent of economic anarchy.
Takeaway #1: Debt is the lifeblood of the economy
Money is a tool to measure the system of credits and debits that make up the economy. Paper money and coins are more or less a physical representation of transferring data from one side of an accountant’s t-chart to another.
Think of it this way: when you swipe your debit card at Trader Joe’s, you’re just transferring data. The transaction represents the movement of a sum of numbers from your bank account to Trader Joe’s bank account. That’s all money really is.
Historically, coinage and paper money were used to this effect.
If this is true — that money represents a transfer of credits and debits — then Graeber argues money is basically the equivalent of an IOU. It carries value because it represents a promise from one person to another to repay a debt. The value isn’t in the money itself, but in the promise that it represents.
When you look at the securitization of debt in our modern financial system, this logic makes complete sense.
The 2008 Global Financial Crisis, for example, came about when borrowers could no longer repay their debts. Those debts had been sold off to large banks as mortgage-backed securities. When the borrowers defaulted, the banks did too.
It was all a complex system of IOUs. Borrowers promised to repay a debt and that promise was sold to bankers at a profit.
This means money is debt. And debt is money.
In the context of this idea — that debt is money — banks carried mortgage-backed securities on their respective balance sheets as assets. On paper, the debts of one group of people — homeowners — became the money of another group — big banks.
When debt is money it’s easy to understand why Graeber contends that it’s the “lifeblood of the economy.” When debt can no longer be paid money vanishes and the economy collapses. He illustrates this point by looking at the Bank of England:
In fact this is precisely the logic on which the Bank of England — the first successful modern central bank — was originally founded. In 1694, a consortium of English bankers made a loan of £1,200,000 to the king. In return they received a royal monopoly on the issuance of banknotes. What this meant in practice was they had the right to advance IOUs for a portion of the money the king now owed them to any inhabitant of the kingdom willing to borrow from them, or willing to deposit their own money in the bank — in effect, to circulate or “monetize” the newly created royal debt. This was a great deal for the bankers (they got to charge the king 8 percent annual interest for the original loan and simultaneously charge interest on the same money to the clients who borrowed it), but it only worked as long as the original loan remained outstanding. To this day, this loan has never been paid back. It cannot be. If it ever were, the entire monetary system of Great Britain would cease to exist. (72)
If you personally struggle with debt it’s not because you’re a bad person. And it’s probably not because you indulge in way too much avocado toast.
It’s quite literally because your debt has become the money that keeps the economy going. If you and everyone else wasn’t in debt, the economy would collapse.
Takeaway #2: The invisible hand of the economy is a robust “military-coinage-slavery complex”
In Eisenhower’s Farewell Address, he warned of a “military-industrial complex” that was beginning to emerge out of the expansive military establishment created in the wake of World War II.
A similar complex exists in the world of finance. Just as profit-seeking weapons manufacturers threaten to undermine American democracy, the benefactors of debt operate in much the same way.
Graeber’s study of the history of coinage reveals a startling truth: debt is used to finance military campaigns and military campaigns are used to seize assets to produce money in an attempt to repay those debts.
It is a corrupting feedback loop.
Graeber uses Ancient Rome to articulate this point:
The entire Roman empire, at its height, could be understood as a vast machine for the extraction of precious metals and their coining and distribution to the military — combined with taxation policies designed to encourage conquered populations to adopt coins in their everyday transactions…By the waning days of the empire, most people in the countryside who weren’t outright slaves had become, effectively, debt peons to some rich landlord, a situation in the end legally formalized by imperial decrees binding peasants to the land. Without a free peasantry to form the basis for the army, the state was forced to rely more and more on arming and employing Germanic barbarians from across the imperial frontiers. (316–318)
Physical money came about so that it could be distributed and taxed in the context of financing wars. Short of war, the economy operated as a credit system built on trust and honor. You could start a tab with your local pub and if you were good to repay it, the credit would be extended to you — no coins or paper bills necessary.
This sheds new light on everything you thought you knew about history.
The Age of Exploration, for example, wasn’t merely a marvelous time of European adventurism. It was a time when European powers were enveloped in expensive wars with one another, and as a result, mired in debt.
Overseas colonies were used to recoup some of the losses incurred by those wars. America is no exception.
We’re taught to believe America was founded on altruistic principles of freedom and liberty. In reality, it was a rebellion against taxation imposed by King George III to repay England’s war debts.
Even modern day military campaigns can be traced back to debt and money. According to Graeber:
“The most significant overseas buyers of U.S. treasury bonds have tended to be banks in countries that were effectively under U.S. military occupation.” (502)
Just as Eisenhower had warned, there is undue influence from a military-industrial complex in modern America. But as Graeber elucidates, the military plays a pivotal role in keeping the economy afloat, whether we realize it or not.
Takeaway #3: Capitalism is an infinite economic system that operates in a finite world — it’s unsustainable
While debt and the creation of money are important components of an economy, the economic system itself determines just how much debt is created.
Capitalism, of course, is the primary economic system of our modern world. It posits that individuals can privately own assets and the means of production, including labor.
The problem with capitalism isn’t the premise of private ownership. It’s the realization that at some point, we will reach the limits of expansion.
This happened to Rome. It happened to European colonial powers. History tells us it will happen to America too.
Thus, Graeber argues that the days of capitalism are numbered:
There is very good reason to believe that, in a generation or so, capitalism itself will no longer exist — most obviously, as ecologists keep reminding us, because it’s impossible to maintain an engine of perpetual growth forever on a finite planet, and the current form of capitalism doesn’t seem to be capable of generating the kind of vast technological breakthroughs and mobilizations that would be required for us to start finding and colonizing any other planets. (523)
The primary way capitalism has sustained itself up until now is through debt.
Think about it: almost everything you “own” is the byproduct of debt. Your college degree. Your home. Even your car.
Through lending, banks are able to generate new money. Your indebtedness is their asset.
Debt is not only the basis of money, it’s a crucial component of our modern capitalist economy. To keep the economy going, debtors can’t actually repay their debts. To repay debt would mean eliminating the asset that debt represents and the new money it creates.
We are not only reaching the physical limits of natural resources that can be harvested to fuel the economy. We’re reaching the limits of debt too.
At some point, there will be no more future upon which individual debtors can mortgage their labor against. When that happens, the IOU debt represents — and the value it provides in the economy — will disappear. And with it, money.
Final thoughts
Graeber closes the book with a forecast of what comes next following the inevitable demise of capitalism and our debt-based monetary system:
The real question now is how to ratchet things down a bit, to move toward a society where people can live more by working less. (535)
It’s no accident that companies are studying the viability of a shorter workweek while many burned out workers are resigning en masse.
A debt-based economy isn’t sustainable. It never has been.
So what comes next?
A renegotiation of the social contract is on the horizon.
Both the government and its citizens are on the brink of insolvency. Something has to give.
And it will.
But there’s another option to consider.
We can continue to explore, just as we did centuries ago.
We can continue to expand, but this time, to other planets. It’s been more than a decade since Graeber wrote Debt: The First 5000 Years. What was technologically impossible then is inching closer to being possible now.
The real question is: do we want to learn from our mistakes or shall we continue to repeat them?
The book is Debt: The First 5000 Years. It’s a dense read, but well worth it if you want a new perspective on how money works and your role in the modern financial system.
This essay offers a fresh perspective on what money is and why debt exists.
Perspectives like this help you understand your role in the world as it currently exists and empowers you to make different decisions moving forward.
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