Where do debt, credit and currencies come from?

We often believe that primitive cultures lacked currencies and so they engaged in barter. Barter is awfully inconvenient and simply cannot sustain a non-trivial economy. Thus, we conclude that someone invented currencies out of convenience. Later, some astute fellow invented credit and loans.

In Debt: the first 5000 years, David Graeber teaches us that we have the story backward. History followed a pattern that looked more like this:

  1. We started out living in Smurf villages. The Smurfs are little blue fellows who have no use for money. Some contribute more, some contribute less, but nobody is counting. Typically, the more a Smurf contributes, the higher his status. Those who contribute little can be ridiculed or harassed, but everyone gets to eat as long as there is enough food.  When there is a major task, everyone joins up. This is communism and it requires a high level of trust. In short, you must have no incentive to hoard commodities. You may own your own food, but it is understood that anyone from the village who needs it can come and take it from you.
  2. Some form of symbolic currency (such as gold or silver) emerges but it is mostly for ceremonial purposes. For example, you may give some amount of silver to a family so that you can wed their daughter. However, you are not “buying” the daughter. In any case, nobody will sell you bread in exchange for silver.
  3. There is always some barter, but mostly between strangers.
  4. As trade expands, it is no longer possible to rely solely on communism and barter. So credit appears. You give a merchant a pile of wood that he will trade in for food in the next village. Because you don’t entirely trust the merchant, you keep a record of what he owes you. Maybe you want to also share in the profit so you ask for interests. This record you have created is new “money”.  You can trade this record for other things while the merchant is away. Of course, the value of these records depend on your reputation. Kings and priests have a better chance of trading such records because they are better known. These records may refer to some units of a precious metal such as gold, but no precious metal is ever exchanged in practice.
  5. Consumer debt has always been a problem. When people face too much debt, they tend to either rebel or exit the system. Some people might join nomads who later regroup and attack the cities. Eventually, governments have to defend the indebted population or face collapse.
  6. When raising a large army, you need to pay them. How? More precisely, how do you get the conquered population to trade with your soldiers? Well, you have typically just acquired a large quantity of gold by confiscating jewels and such. So you create a currency out of it which you hand over to your soldiers. Then you ask the conquered population to give you tribute (or pay taxes) in the form of this new currency. People are then forced to trade with the soldiers.

My thoughts:

  • Money came from credit. Currencies came after.
  • Gold-backed currencies and corresponding taxes were invented to sustain military might.
  • The American dollar is backed by American military might.
  • Consumer debt and usury are closely related to slavery and correlated with the fall of empires.
  • It is likely that we are genetically geared toward the Smurf-village model, that is, communism. Non-ceremonial barter was probably dangerous and uncommon. It is probably a myth that we are jungle animals who try to maximize the profit from every trade. It is maybe not surprising that people have so much difficulty with debt.

Credit: I got this book free from William Tozier. As far as I can tell, William does not benefit from the sales of this book. Rather, I believe that he wants to promote the debate on these issues.

6 thoughts on “Where do debt, credit and currencies come from?”

  1. Greaber had some good followup commentary in a blog post on the subject. I think his book is important not just in terms of setting the history of money/debt straight but also in exposing flaws in methodology which gave rise to our misguided thoughts on money. I had a few comments on the subject on my blog a while back:

    http://www.backsidesmack.com/2011/09/anthropology-and-the-secular-myths-of-economics/

    The long and short of it is our idea of money preceding debt flows from a willingness to engage in thought experiments about transactions rather than examine the historical record.

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