Review: Debt: The First 5,000 Years by David Graeber

A fascinating book that looks at the history of debt, which turns out to be intertwined with much of the history of humanity, and touches on topics such as economics, money, family relationships, morality, philosophy, religion, government, law, and much more.

Here are some of the most interesting insights I came across:

1. Should you always pay your debts?

• This is one of the first questions in the book. At first, the answer seems obvious: most people would say yes, you should always pay your debts, it’s the moral thing to do! But in reality, that’s not how debt works. If you could count on debts being paid back 100% of the time, then everyone would take up lending, as there would be zero risk (side note: while paying debt is seen as moral, lending, especially with interest, is typically seen as evil). So the very notion of debt is built around the idea that some debts will not—and in some cases, should not—be paid back.

• Example #1: you can use debt to frame a victim as having done something wrong. The mafia does this quite often: “I provide protection to you, so now you owe me money.” That is, you’re being bullied and threatened, but now you’re in debt to them for not hurting you; is paying back that debt the moral thing to do?

• Example #2: in the 2008 economic crisis, various financial institutions made wildly irresponsible loans that they knew would fail. But they also knew the failure would be so large, that it would start to collapse the global economy, and the governments would be forced to bail out those debts at any cost. Is paying back such debt the moral thing to do?

• Example #3: you borrow a cup of sugar from the neighbor. Is paying back that debt a moral thing to do? And do you even pay it back with exactly 1 cup of sugar or something else?

• Example #4: there are many examples from history of societies wiping away debts on a fairly regular basis, rather than requiring all debts to be repaid. For example, a king might clear all debts when assuming power during a time of economic hardship; also, Judaism used to have a rule where all debts would be cleared every 7 years.

2. Money is based on debt (and not the other way around)

• The classical explanation in most economic texts is that trade first started with barter: e.g., in some small village, a farmer trades 20 eggs for 5 baskets made by a weaver. Of course, barter is inconvenient, as it requires two parties to have exactly what the other wants at exactly the same time, which isn’t likely. So perhaps we start stockpiling goods, so we’re more likely to have what someone else wants. Over time, we realize that some of the goods seem to be especially useful to almost everyone—e.g., everyone values salt, and it keeps a long time, so you can almost always trade the items you have for salt, as you know that later, you’ll be able to trade that salt for other items you want. This then becomes the first system of money (the first currency). And then, over time, we realize the need to track who owes money to whom, and that’s how we develop the first system of credit.

• It turns out this classical explanation has no basis in history. Archaeologists have been trying to point out for a long time that there is no evidence of ancient barter economies anywhere. The only evidence for barter in ancient societies is in rare, specific circumstances: e.g., trade between warring tribes or groups that will never see each other again (more on the role of violence and trust shortly).

• In fact, this classical explanation is completely backwards. In reality, credit systems came first, then money, and lastly barter (though again, barter only happens in rare, specific circumstances). Let’s go through these one at a time.

• The first step was the credit system. The way most societies developed is that people lived in small villages where everyone knew everyone else, and on the basis of these relationships, people would regularly loan and gift items to neighbors: e.g. the farmer would give the weaver some eggs, then later, the weaver would give the farmer some baskets, and later still, both of them would help a neighbor assemble a house. Each time you gave something to someone else, you’d both remember what one person owed to the other, and later, try to pay it back in some way. In short, it was a system built around IOUs.

• The second step was to invent currency/money. This happened because, while IOUs work fine at a small scale (e.g., a small village), they don’t work at larger scales. So people invented physical objects to record the IOUs—essentially receipts. For example you could record the debt as tallies on a stick, break the stick in half, and give one half to each party (just like a receipt), so the two halfs can be matched up later to see the debt is legit. Or, you could record the debt on tablets or paper, perhaps with some signature or stamp as proof it’s a legit receipt. Over time, people realized these receipts themselves had value: if you knew that the weaver would honor their debt if you brought them a receipt, then you could trade the receipt itself to someone else. Over time, these receipts became the first currency. Initially, these currencies were still largely based on trust, as you still relied on knowing the person who issued the receipt well enough to believe they’d pay it. Later on, governments stepped in and issued their own currency, with their own guarantees that the debt implied by the currency would be paid, which allowed currencies to work at larger scale, as you no longer needed to know & trust each individual, but the government as a whole. Interesting side note: an IOU only remains valuable so long as it remains unpaid. So money is inherently based on the idea of debt!

• The third step was barter. It turns out that in history, barter is exceptionally rare. In most cases, it only shows up in societies that already had currency, but then the currency collapsed (e.g., because the government collapsed due to a war). In such societies, people would sometimes revert to barter until currency could be restored.

3. Many philosophies are based on debt too

• Many philosophies and religions are based on the idea that all humans owe a huge debt.

• Example #1: many early religions give ancestors and parents a huge place of honor, based on the idea that every one of us owes our parents, and their parents, and their parents, etc a massive debt for everything they did to make our lives possible. So you make sacrifices to your ancestors as a small token of paying back this debt.

• Example #2: many later religions see god as the ultimate ancestor, the one who created everything, and to whom you owe everything. Christianity has the ultimate version of this: you are born with original sin, which is a debt everyone has, and god makes the ultimate sacrifice, sacrificing himself (his son) to pay that debt (oddly enough, to himself), and now you owe a debt for that sacrifice forever.

• Example #3: many governments are based on the idea that we all owe a debt to society for making our lives possible. Therefore, you pay back this debt by sacrificing some rights (i.e., following the laws) and participating in various civic obligations (e.g., military, jury duty, etc). Some governments are very literal about this: e.g., some communist nations would argue citizens couldn’t leave because society had invested so much in educating and raising that person, and they can’t just go somewhere else without paying that back.

• Note that the size of debts to ancestors, god, or society is essentially infinite. You could never repay the years of sacrifice your parents made to raise you, let alone all the ancestors before them, and everyone in society in general. Perhaps it’s another kind of debt we don’t really pay back; instead, the best you can do is acknowledge this debt, and pay it forward.

4. Rights, responsibilities, and property

• One man’s right is another man’s obligation. My right to free speech is your obligation not to prosecute me when I speak.

• Many societies have the concept of property as something someone can own, use, and dispose of as they see fit.

• So what happens when we see rights as something you own? That is, as property you can use and dispose of as you see fit? Does this mean that people can choose to give away their rights? Could you willing give away your right to free speech? What about your right to bodily freedom in general? It turns out that this line of thinking—that rights can be given away or forfeited—has often been used to justify slavery.

• Note that the concept of men having “unalienable rights” may be a way to break this idea of rights as property that can be given away or lost.

5. Money replaces trust

The general pattern in history seems to be:

• You start with small societies based on entirely on relationships, trust, and credit.

• At some point, you need to be able to do exchange without relationships and trust: e.g., because society has grown too large or you’re dealing with multiple societies at war. This is when money gets introduced, often by governments, and often backed by military.

• Over time, money replaces everything else. So even the systems that used to work on relationships and trust get replaced with systems based entirely on money, where all the calculations are based on profit and loss.

• Many economists, studying in a time period where money is ubiquitous, assume that profit and loss are the core of how humans think and behave; but that’s just not the case.

6. Markets, capitalism, and governments

• Most markets arise due to governments. For example, a government issues a currency, and requires it is used to pay taxes. Markets then arise as a way to earn that currency, as it’s now required to pay taxes. So markets aren’t a natural phenomenon that always arise by themselves and should always be free; they are almost always tied to governments, rules, and regulations.

• Markets and capitalism are not the same thing. Markets are a way of turning work into money. Capitalism is about turning money into more money.

• Most modern money is government debt. The world used to be tied to the gold standard, but in the 70s, Nixon removed the gold standard from the US dollar. We are now living through the results of that change, and no one knows how it’ll work out. One interesting side effect is that removing the gold standard made the US dollar into the global store of value instead of gold. And the only reason the US dollar has value is because the US government says it does, and has the military power to back it up. In fact, the US spends more on military than the rest of the world combined, and now has the technology to bomb an spot on the earth at any time. Is that really what keeps the global economy working?

Rating: 5 stars