Debt: The First 5,000 Years

In this chapter, Graeber discusses the origins of money according to traditional economic theory. Traditional economists believe that barter was the primary mode of exchange before the invention of money and markets. In a barter system, people exchange goods and services for other goods and services directly instead of purchasing things with money. For exchange to take place, there needs to be “a double coincidence of wants” (22). The exchanger needs to find someone who has what they want, and that person must also want what the exchanger has.

Adam Smith, the father of modern economics, invented this myth of barter, which falls under the commodity theory of money. Smith vehemently disagreed with the idea that government created money. Instead, he believed “that property, money, and markets not only existed before political institutions but were the very foundation of human society” (24). Smith argued that bartering was part of human nature: “But humans, if left to their own devices, will inevitably begin swapping and comparing things. This is just what humans do” (25). To Smith, this desire to exchange goods and services led to the division of labor and creation of specialists, such as arrow-makers, farmers, etc.

A key issue arose from this division of labor. Bartering only works when people are mutually interested in one another’s goods and services and those items are available. People had to thus stockpile their commodities to ensure they had goods others might want. Smith claims that people invented money to solve the double coincidence of wants and reliance on stockpiles. Governments arose to protect this system of exchange by “guaranteeing the money supply” (27).

Graeber, like other anthropologists and archaeologists, believes that “there is something very wrong with this picture” (22) of first barter, then money, and then credit painted by Smith and other economists. There is currently no documented archaeological or textual evidence that this account took place in real communities and marketplaces.

Barter only exists in three cases. The first is that barter occurs between “strangers, even enemies” (29) where there are no intentions or expectations of meeting again. Barter also occurs between people who are not strangers, but “who feel no sense of mutual responsibility or trust, or the desire to develop ongoing relations” (33). Finally, barter occurs when people who are accustomed to using money in the marketplace are living in a situation (such as a prisoner of war camp) where money no longer exists. Communities could never survive on systems of barter since people would never build relationships with one another. Moreover, people would constantly be trying to extract the best deal and taking advantage of others since they do not care about the person and never expect to see them again.

Graeber suggests that pre-money societies, which he terms “gift economies” (36), used credit rather than barter. A person would go to their neighbor and simply ask for something, such as shoes. The neighbor would give them the shoes. There is an expectation that the person will gift back their neighbor something in the future that the neighbor needs.

The conceptual challenge with gift economy systems is how to quantify a gift. According to Graeber, “there actually is a rough-and-ready way to solve the problem” (36). People rank goods. There is the social expectation that people exchange gifts of equivalent value. For example, pigs and shoes may be considered objects of the same value, which means an individual can gift one in return for the other. However, if the original gift was jewelry, a person could not give a pig or shoe in return since jewelry has greater value than the other two items. Since the community members expect to have ongoing relationships with one another, they assume that the balances of gifts will eventually equal out. In gift economies, the problems of both the double coincidence of wants and stockpiling goods disappear because neighbors will always need something from one another in the future.

In Chapter 3, Graeber explores one alternative to Smith’s myth of barter, the idea that money is credit. British economist Alfred Mitchell-Inness was the first to espouse this idea, which became known as credit theory of money. Credit Theorists argue that “money is not a commodity but an accounting tool” (46) that measures debt. Debt is the promise of one person to pay a certain amount of something to another person. Credit theorists believe that there is no fundamental difference between money (e.g., coins or paper money) and credit (e.g., loans). Money is only valuable because people trust other people will accept it in exchange for goods or services. Thus, money is simply an “I owe you” (IOU).

Trust in money as credit works in small villages where everyone knows one another, but this type of system could not lead to a “full-blown currency system” (47). German economist George Friedrich Knapp came up with theory to address this problem known as chartalism. This theory, which is related to credit theory of money, argues that states created money to control economic activity. Chartalists insist that the actual form of money does not matter. Money could be pure silver, dried cod, or sticks. The state simply needs to accept the object as currency for it to become so.

One of the challenges of the commodity theory of money is why states need to collect taxes when they could simply grab control of the gold and silver mines. The credit theory of money addresses this dilemma. Credit theorists argue that governments collect taxes to dictate how people measure credits and debts. This brings enormous power to the government because they are creating value out of whatever they want. In doing so, they can funnel this money where they want, e.g., provisioning soldiers. Under this theory, markets are a byproduct of needing to pay armies. Thus, early states collected taxes to create markets to fund armies. While this theory explains why early states collected taxes, it does not justify the right of the state to do so.

Graeber turns to primordial debt theory (which falls under credit theory of money) to see if it allows for a better understanding of taxes and debt. This theory holds that each person is born indebted to one another, to ancestors, to society, and to our god. Primordial debt theorists see all people as criminals since we owe debt to everything. Since governments become guardians of the “primordial debt we all owe to society for having created us” (59), this justifies why the government can collect taxes. Taxes are simply a measure of the debt we owe the society that made us.

Primordial debt theorists argue that creating real money comes about when we start trying to calculate the specific debts we owe. People needed to be able to mathematically specify how much they owed someone, especially to settle disputes. A system of equivalence, where a young healthy cow equals thirty-six chickens as one example, helps people to establish moral relationships with one another.

However, Graeber believes that the premise of primordial-debt theory is wrong for three reasons. The first is who we are indebted to. Primordial-debt theory assumes we are in debt to everything, including society. This very notion assumes that the world is organized by societies and that people know which society they belong to. Graeber argues that “for many people in history, it was not at all clear whose government they were actually in” (66). Since there is “no natural unit called society” (66), this still leaves us with the question of who we owe debt to.

The second issue is how we pay back a debt that is grand and unspecified. Debt is something we are supposed to imagine being able to pay back. Yet, how are we supposed to pay back debts to society—or to gods?

Third, it is unclear “who exactly has the right to speak for the cosmos, or humanity, to tell us how that debt must be repaid” (68). It is preposterous for an individual or a state to think they speak for the entire universe, yet this is what has happened. States become guardians over the endless debts that allowed humans to exist.

Graeber suggests that primordial debt theory “is the ultimate nationalist myth” (71). The logic of the state is that its people owe their very livelihood to this entity. This is a debt that we can never truly repay. Since we are indebted to the state, it allows the state to dictate how we repay some of this debt, whether with taxes or our lives if we are called to defend the state. Graeber believes that like barter, primordial debt is a myth.

Graeber begins this chapter by asking whether the primordial debt theory (i.e., money is an IOU) or the barter theory (i.e., money is a commodity) has the correct understanding of money. He then affirms that both are correct. Neighbors never needed money to engage in barter. Thus, money could not just have been created to make barter easier. However, a system of pure credit money is also impossible because trust is itself a sacred commodity and thus hard to come by. The key insight here is that “pretty much anything could function as money, provided everyone knew there was someone willing to accept it to cancel out a debt” (74).

Graeber then goes on to reject both the primordial debt theory and barter theory’s views of morality. He argues that we are neither not fully indebted to anyone (barter theory) nor are we fully indebted to the universe (primordial debt theory). Using the work of the famous philosopher Friedrich Nietzsche, Graeber shows how when we start with Smith’s “assumption that human thought is essentially a matter of commercial calculation, that buying and selling are the basis of human society—then, yes, once we begin to think about our relationship with the cosmos, we will necessarily conceive of it in terms of debt” (79-80).

Nietzsche, like Smith, believes that humans are creatures of exchange and society comes later. Thus, how we view our responsibilities to other people takes shape in market language (debt and exchange). Unlike Smith, Nietzsche did not believe that people owe each other nothing. Instead, Nietzsche believed there would always be creditors and debtors. Thus, when humans began to form communities, they applied this same logic to their relationship with the community. Since the community provided peace and security, people believed they were in its debt. Nietzsche shows that starting from barter theory means we end up with something akin to primordial debt theory.

Graeber concludes this chapter by demonstrating how world religions frame relationships with God and morality using “the language of the marketplace” (87). As one example, Christian theology refers to Jesus “as the ‘redeemer’” (80). Redemption is the act of clearing a debt. Thus, the language of financial transactions is at the core of Christianity.