A critical review of David Graeber’s “Debt” (2)

NOTE TWO: Our Own Coin?

In my last post I showed why I think David Graeber’s book has been generally misread. Contrary to the predominant view Graeber clearly provides evidence that, even 5 millennia ago, silver, a commodity, was already firmly established as money. This money, according to Graeber’s own evidence, was mostly held in large hoards by temples and palace authorities. Despite sitting mostly idle in hoards, silver was nevertheless employed to express the values of other commodities.

The function of silver as the universal expression of the values of commodities, however, is not the same as its function as means of exchange, for the circulation of commodities, as currency. While there was indeed some limited circulation of silver as means of exchange, the role of currency was mostly filled, as Graeber explains, by an early form of pre-capitalist credit money — what Graeber refers to as a running tab. This running tab seems to have been largely settled in kind by a wide variety of other commodities, i.e., according to its common definition, by what is generally referred to as barter.

In ancient Sumer, in other words, we see a fairly complex ‘money’ system has already emerged based on a commodity money, silver, which is already being used to express the values of other commodities. An early form of credit has emerged based on this commodity money; debts are calculated in this commodity money, but settlement still largely takes the form of in kind payments or barter. Currency, Graeber explains, comes only much later.

I am not sure I have stated all of this in a manner that is consistent with the evidence Graeber provides us. However, absent his objection or that of another expert in the field, I will proceed on the basis of the above assumptions.

Money versus credit

I am highly skeptical of Graeber’s acceptance of what, I guess, is the chartalist view that it makes no difference whether transactions are effected in a commodity money or with an I.O.U.; both being simply promises to pay an equivalent of the value of a commodity in the future:

“A coin is, effectively, an IOU. Whereas conventional wisdom holds that a banknote is, or should be, a promise to pay a certain amount of “real money” (gold, silver, whatever that might be taken to mean ) , Credit Theorists argued that a banknote is simply the promise to pay something of the same value as an ounce of gold. But that’s all that money ever is. There’s no fundamental difference in this respect between a silver dollar, a Susan B. Anthony dollar coin made of a copper-nickel alloy designed to look vaguely like gold, a green piece of paper with a picture of George Washington on it, or a digital blip on some bank’s computer. Conceptually, the idea that a piece of gold is really just an IOU is always rather difficult to wrap one’s head around, but something like this must be true, because even when gold and silver coins were in use, they almost never circulated at their bullion value.”

Leaving aside (for the present) Graeber’s valid point that the face value of currency tends to diverge from its actual value, there are two other implications of this argument that, I think, Graeber has not considered and which deeply challenges his overall argument on debt. The first, which I will cover in this post, is the assumption commodity money, like credit money, is basically a promise of a future payment. To illustrate his essentially chartalist argument, Graeber asks us to imagine a transaction between two individuals wherein Henry purchases a commodity from Joshua on credit:

“Say, for example, that Joshua were to give his shoes to Henry, and, rather than Henry owing him a favor, Henry promises him something of equivalent value. Henry gives Joshua an IOU. Joshua could wait for Henry to have something useful, and then redeem it. In that case Henry would rip up the IOU and the story would be over.”

Graeber goes on to argue:

“[Even] if Henry gave Joshua a gold coin instead of a piece of paper, the situation would be essentially the same. A gold coin is a promise to pay something else of equivalent value to a gold coin. After all, a gold coin is not actually useful in itself. One only accepts it because one assumes other people will.”

This is a seductive argument, but it is fundamentally flawed, I think, and likely is not supported by the weight of the evidence he has spent so much time gathering.

The implications of a credit money system

It is true, as Graeber points out, that neither a coin or an IOU is itself useful; in the sense that neither can serve as means of production or means of consumption. The use value of the objects are solely limited to serving as means of exchange in a transaction. And as mere means of exchange, it can be argued that one object — an IOU, a bar of silver or a bushel of barley — is as good as another. As long as the transfer of Joshua’s commodity to Henry is completed, what actually serves as money to complete the transaction can be considered irrelevant.

But that is just the problem here: what the bar of silver and the bushel of barley have in common is that they complete the transaction between Henry and Joshua. If Henry gave Joshua a coin or a bushel of barley, their business with each other is finished with each other and, absent another transaction, they never need engage one another again. If they engage in another transaction tomorrow, this new transaction is entirely separate from the transaction they had today. Should Henry and Joshua meet again the next day, they meet again as buyer and seller of commodities, as equals in the market.

On the other hand, if Henry gave Joshua an IOU, rather than a coin or a bushel of barley, the IOU leaves the transaction incomplete: Henry is in debt to Joshua. Should Henry and Joshua meet again the next day, they meet not as buyer and seller of commodities, as equals in the market, but as debtor and creditor. What Henry has done is given Joshua a promise to complete the transaction by repaying Joshua his credit at a later time in the form of another commodity of equivalent value. The promise to pay, in the case of the IOU, is not at all the same as actually paying in bars of silver or barley.

Even if, subsequently, Joshua took Henry’s IOU and used it to buy a commodity from Sheila, who then used the IOU to buy a commodity  from Lola, etc., this only transfers what remains an unfinished transaction — a debt — between Henry and Joshua to Sheila and then to Lola. Henry’s debt — promise to pay a commodity of an equivalent value to Joshua’s original commodity — has now been transferred to Sheila. Henry now owes Sheila the value equivalent to Joshua’s original commodity. The original transaction — where Henry offered payment in the form of a commodity equal in value to Joshua’s — remains uncompleted, although, with the transfer of the IOU, Henry now owes Sheila, not Joshua.

By giving Joshua his IOU, what Henry has done is made the transfer of Joshua’s commodity to himself possible. However, he has not yet fulfilled his part of the bargain, namely to provide Joshua with a commodity  (money or good) of equal value and thus remains in debt to the holder of Henry’s IOU. Henry has only promised to provide an object of a value equal to his IOU in the future. He may or may not fulfill his promise.

The downside of being your own coin

This caveat is important to our analysis because it highlights the essential difference between commodity money and credit money. Assuming some degree of civilization, if Henry does not fulfill his promise Joshua (or Sheila in case of a later transfer) can appeal to the state to enforce the terms of his agreement with Henry. If Henry doesn’t fulfill his promise, Joshua can seek collection of the outstanding sum, i.e. to compel Henry to live up  to their agreement. On this basis, Joshua can seize Henry’s property — including, as Graeber explains, Henry’s land and animals, his servants, his children, his wife, and even Henry himself — to satisfy Henry’s debt.

Graeber thus offers an explanation for why, periodically, it became necessary for the state to abolish all debts: Contrary to the strenuous objection of radical Right libertarians in our own day, even if we assume simple barter between individuals, once this trade is based on some universal equivalent, wealth becomes increasingly concentrated in fewer hands — and this millennia before the emergence of so-called ‘crony capitalism’:

“It usually started with grain, sheep, goats, and furniture, then moved on to fields and houses, or, alternately or ultimately, family members. Servants, if any, went quickly, followed by children, wives, and in some extreme occasions, even the borrower himself. These would be reduced to debt-peons: not quite slaves, but very close to that, forced into perpetual service in the lender’s household-or, sometimes, in the Temples or Palaces themselves. In theory, of course, any of them could be redeemed whenever the borrower repaid the money, but for obvious reasons, the more a peasant’s resources were stripped away from him, the harder that became.”

Absent an extraordinary intervention a social catastrophe loomed, Henry’s debt to Joshua could only be extinguished through payment of a commodity or coin. Thus, periodically, the state was forced to intervene to ‘wipe the slate clean’ of all debts:

“Faced with the potential for complete social breakdown, Sumerian and later Babylonian kings periodically announced general amnesties: “clean slates,” as economic historian Michael Hudson refers to them. Such decrees would typically declare all outstanding consumer debt null and void (commercial debts were not affected) , return all land to its original owners, and allow all debt-peons to return to their families . Before long, it became more or less a regular habit for kings to make such a declaration on first assuming power, and many were forced to repeat it periodically over the course of their reigns.”

The fact we were our own currency had a dark side: if we could not pay our debt, we could be “repossessed” by our creditors. Thus, to keep the whole of society from sliding into servitude to a tiny handful, the debt of society had to periodically be wiped out by a royal decree.

There is, however, another far more important implication for Graeber analysis of money, the gravity of which I will examine next.