A critical review of David Graeber’s “Debt” (3)

by Jehu

NOTE THREE: “A vast machine for the provisioning of soldiers”

If you follow my blog you know I have been reading David Graeber’s “DEBT: The first 5000 years”. As I tried to show in the two previous posts, Graeber provides evidence, drawn on the findings of anthropologists, for several conclusions. The written record indicate that by the time of the emergence of Mesopotamian civilization a commodity, silver, had already emerged as money. For the most part, this money did not circulate as the currency but was held in hoards by the temple and palace complexes of it time.

What made it money is not that it functioned as currency, but that, even at that time, it functioned as the material in which the value of other commodities were denominated by the population of Mesopotamia.

In actual transactions, Graeber argues, the population employed what he calls a ‘running tab’; a form of virtual or symbolic currency. In actual day to day transaction, it appears the problem of coincidence of wants was resolved by an early form of pre-capitalist credit money. To use Graeber parable, if Henry wanted shoes from Joshua, Joshua extended his shoes ‘on credit’. The transaction was recorded with Henry’s IOU, which he later had to make good by providing another commodity of his own at a later time. Payment did not commonly take place in a money commodity, but was in-kind. Henry might later satisfy his debt to Joshua by ‘paying’ in barley, goats, or another use value.

This sort of in-kind payment is today commonly referred to as “barter”, more accurately, in Marx’s labor theory of value, commodity production and exchange.

Credit money versus debt

Graeber argues the primitive money system on which production and exchange was based can best be described as an IOU. Following the chartalist school, he argues all money is essentially a promise to pay an equivalent of some commodity equal in value to a given weight of silver or gold. His reasoning rests on the historical observation that as currency later emerged in wide spread use, the face value of the currency seldom, if ever, reflected the value of the material serving as currency.

I argued Graeber is in error on this point: there is a huge distinction to be made between an IOU and money, because, had Henry offered silver or barley in exchange for Joshua’s shoes, the transaction would have been completed. By definition, an IOU implies the transaction remains incomplete, because Henry has neither provided a weight of silver nor barley as the agreement requires. The agreement required Henry to provide a commodity with a value equal in a weight of silver to the shoes Joshua sold him. What commodity Henry was required to provide was unspecified in Graeber’s example. What was specified was the value of this commodity: a certain weight of silver. If Henry actually provided this certain weight of silver, rather than barley or goats, he would have completed his part of the bargain. The delivery of a certain weight of silver bars, coins etc. is, by definition, the delivery of a commodity equal to that weight of silver.

It does not matter in the least the Joshua cannot eat the silver nor employ it as means of production; which is to say, it does not matter that the silver serves only a means of exchange, not means of consumption or production. One commodity of a certain value has been exchanged for another commodity of the same value — the transaction is complete.

With the IOU it is otherwise: Joshua has given Henry a pair of shoes, while Henry has given Joshua a piece of paper with his mark. On this paper is inscribed Henry’s promise to pay Joshua a commodity of a value equal to a certain weight of silver. If Henry does not pay, Joshua can take Henry and his household into bondage until such time as the IOU is redeemed.

Had Henry paid in silver, Joshua would have no ’cause’ to seize Henry and his household as bondsmen. The chartalist argument that all money forms are simply IOUs does not hold up to even the simplest test for its validity. Graeber did himself great damage here; he blew the opportunity to do some groundbreaking work on the history of money.

The opportunity came in the form of his parable of Henry and Joshua. Let’s go back to look at what Graeber wrote. In the example Graeber describes one thing stands out: it is not clear from Graeber’s discussion exactly which of the two parties in the exchange is creating money. It is this confusion that allows Graeber to assert the chartalist view that all money is an IOU.

“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.”

Who creates money?

Based on Graeber’s description, one would think Henry had advanced an IOU to Joshua, but this is not at all true. What has occurred here is that Joshua extended to Henry credit equal to the value of his shoes. In fact, Joshua was the person in this transaction who created money out of nothing — credit money equal to the value of the shoes he sold Henry. Based on a correction of Graeber’s reasoning, we could as well say all money is credit, not an IOU.

The chartalist view of what occurred in this transaction inverts what has actually taken place: instead of Joshua creating credit money, Henry is said to have issued money in the form of an IOU. And this inversion of reality, as we will see, is absolutely necessary to maintain the state theory of money. To show why (and at the risk of being tedious), let’s step through Graeber’s parable of Henry and Joshua once more.

One day Henry passes Joshua’s shop and spies a pair of sharp looking shoes he would love to own. The problem: Henry’s crops haven’t come in and he has no means to purchase the shoes. Without means he cannot buy the shoes, as he explains to Joshua. Joshua, meanwhile, produced the shoes not for his personal use, but for sale. He hopes to exchange the shoes for barley. Henry wants the shoes but, this being the middle of the growing season, has no barley to exchange for it, Joshua has the shoes but wants barley that Henry will have at the end of the season.

Joshua says to Henry, “I’ll give you the shoes now and you bring me barley after your crops come in.”

“Deal”, says Henry. The exchange is consummated.

The shoes have been exchanged for an IOU, a promise to pay, financed by Joshua’s extension of credit to Henry. Joshua alone is the only party who has offered anything of value in the transaction — the shoes — and he has financed the purchase of his shoes by extending credit to Henry. However, in the inverted chartalist description of the transaction Henry has offered something of value in exchange: his promise to pay.

Now the idea this IOU has any value solely rests on the assumption the IOU itself can serve as a socially valid means of exchange, which Joshua promptly demonstrates by using it to purchase a pig from Sheila. The first transaction, although incomplete, thus becomes the basis for a completed second transaction between Joshua and Sheila in which Henry’s IOU plays the role of money. Which is to say, by signing over Henry’s IOU to Sheila, Joshua has completed his transaction and Sheila has no claim against him. If she wants the IOU to be made good, she must go back to Henry to collect what he owes. Her problem is not with Joshua, but with Henry, who signed his IOU.

Sheila, in turn, signs the IOU over to Lola, with the same conditions: thus a third transaction takes place. In return for Lola’s corn, Sheila hands Lola Henry’s IOU. Again, if Lola wants the IOU to be made good, she must go back to Henry to collect what he owes, not Sheila nor Joshua.

Is an IOU money?

Now notice what has happened here: Although the IOU has been employed in three separate transactions, the first transaction remains incomplete until such time as Henry actually delivers his barley to the current holder of his IOU.

Graeber explains the problem with treating the IOU as if it is already money this way:

“[The] difficulty in the Chartalist position … is to establish why people would continue to trust a piece of paper. After all, why couldn’t anyone just sign Henry’s name on an IOU? True, this sort of debt-token system might work within a small village where everyone knew one another, or even among a more dispersed community like sixteenth-century Italian or twentieth-century Chinese merchants, where everyone at least had ways of keeping track of everybody else. But systems like these cannot create a full-blown currency system, and there’s no evidence that they ever have. Providing a sufficient number of IOUs to allow everyone even in a medium-sized city to be able to carry out a significant portion of their daily transactions in such currency would require millions of tokens. To be able to guarantee all of them, Henry would have to be almost unimaginably rich.”

Sooner or later someone is going to demand Henry make good on his IOU. When this happens, and if Henry does not make good on it, he and his family will be forced into servitude to the current holder of the IOU. When that happens, everyone in the town who accepted Henry’s fraudulent IOU will find they have given up their commodities for promises that Henry will never be able to make good on. As Graeber explains, “Henry would have to be almost unimaginably rich.”

Or perhaps not.

Here, at this point, Graeber unknowingly demonstrates the essential character of all modern fiat currencies. Had he been aware of what he demonstrated with this parable, Graeber’s book, DEBT: The first 5000 years, would have been revolutionary. Indeed, Graeber’s next statement is astonishing for its implications:

“All this would be much less of a problem, however, if Henry were, say, Henry II, King of England, Duke of Normandy, Lord of Ireland, and Count of Anjou.”

And why is this statement so revolutionary?

The implications of fiat money

Because, as Graeber explains, the fundamental distinction to be made between Henry and Henry II is that the latter is the sovereign who can unilaterally declare all of his IOUs are “money” in his kingdom and make all of his creditors eat their losses. He can, in other words, declare that his promises to pay are, for all legal purposes, identical to payment in commodity money or in kind.

The distinction between Henry’s IOUs and Henry II’s IOUs is, of course, purely legal. If Henry gave his IOU for Joshua’s shoes, Joshua could still demand payment in money or in kind. However, if Henry II gave his IOU for Joshua’s shoes, Joshua has no recourse; he must accept that he has been paid in full. Unlike the transaction with Henry, Joshua’s sale to Henry II is effectively the same as if Henry II’s troops walked into his shop and seized the shoes in the name of the king.

Indeed, Graeber explains the implication of Henry II’s IOUs:

“Say a king wishes to support a standing army of fifty thousand men. Under ancient or medieval conditions, feeding such a force was an enormous problem-unless they were on the march, one would need to employ almost as many men and animals just to locate, acquire, and transport the necessary provisions. On the other hand, if one simply hands out coins to the soldiers … one would, in one blow, turn one’s entire national economy into a vast machine for the provisioning of soldiers”.

On the surface it appears as if a valid market exchange has taken place — one person has given his shoes, the other his IOU. Simpleton economists, who never venture below the superficial appearances of the mode of production, have extreme difficulty explaining what has taken place. They know, (for instance Keynes), that this thing called money in 1930 is not at all like money before 1930, but they can’t explain what changed; nor why, before 1930, money had to be a commodity, but can’t be a commodity after 1930.

Graeber is entirely correct: Fiat money today is nothing like Henry’s IOU, because no one in ancient Sumer would have imagined his IOU was the same thing as silver. Today money is merely an IOU issued by the state; in Graeber’s own words, “a vast machine for the provisioning of soldiers.”

This is a world historical change, the cause of which has never been explained.