Below is a very interesting article by David Graeber
Debt: The First 5,000 Years
by David Graeber
http://www.nybooks.com/articles/archives/2013/may/09/debt-we-shouldnt-pay/?pagination=false
At the heart of the argument about how to revive a depressed
economy is the question of debt. When political leaders and economists
debate the subject, they refer mostly to public debt. To conservatives,
the economy’s capacity for recovery is impaired by too much government
borrowing. These escalating obligations, they claim, will be passed
along to our children and grandchildren, leaving America a poorer
country. Liberal economists, such as Paul Krugman and Joseph Stiglitz,
have replied that only faster growth rates and higher gross domestic
product will reduce the relative weight of past debts. Budget austerity,
in their view, will shrink demand and slow growth, making the debt
burden that much heavier.
As important as this debate is, there’s
something missing. Public debt was not implicated in the collapse of
2008, nor is it retarding the recovery today. Enlarged government
deficits were the consequence of the financial crash, not the cause.1
Indeed, there’s a strong case that government deficits are keeping a
weak economy out of deeper recession. When Congress raised taxes in
January at an annual rate of over $180 billion to avoid the so-called
fiscal cliff, and then accepted a “sequester” of $85 billion in spending
cuts in March, the combined fiscal contraction cut economic growth for
2013 about in half, according to the Congressional Budget Office.
Moreover, some of the causes of public deficits, such as Medicare,
reflect to a large extent inefficiency and inflation in health care
rather than profligacy in public budgeting.
It was private
speculative debts—exotic mortgage bonds financed by short-term borrowing
at very high costs—that produced the crisis of 2008. The burden of
private debts continues to hobble the economy’s potential. In the decade
prior to the collapse of 2008, private debts grew at more than triple
the rate of increase of the public debt. In 22 percent of America’s
homes with mortgages, the debt exceeds the value of the house. Young
adults begin economic life saddled with student debt that recently
reached a trillion dollars, limiting their purchasing power.
Middle-class families use debt as a substitute for wages and salaries
that have lagged behind the cost of living. This private debt overhang,
far more than the obsessively debated question of public debt, retards
the recovery.
The debt debate is reminiscent of Tom Stoppard’s Rosencrantz and Guildenstern Are Dead.
In a grand inversion, minor characters have usurped center stage, while
the more important ones are out of sight. The quarrel about public
debts is really a proxy for the argument about how to produce a strong
recovery. To that end, we should be discussing how to relieve the
burdens of private debts and prevent future abuses of the power of the
financial industry to create debt and engage in speculation.
As the economic anthropologist David Graeber shows in his encyclopedic survey, Debt: The First 5,000 Years, since antiquity
the
struggle between rich and poor has largely taken the form of conflicts
between creditors and debtors—of arguments about the rights and wrongs
of interest payments, debt peonage, amnesty, repossession, restitution,
the sequestering of sheep, the seizing of vineyards, and the selling of
debtors’ children into slavery.
He quotes the classical
historian Moses Finley as saying that in the ancient world all
revolutionary movements had a single program: “Cancel the debts and
redistribute the land.”
Despite the implications of Graeber’s
history for events since 2008, the present economic distress scarcely
figures in his book. Rather, he has written an authoritative account of
the background to the recent crisis. Both erudite and impertinent, his
book helps illuminate the omissions of the current debate and the tacit
political conflicts that lurk behind technical budget questions.
Graeber,
an American teaching at Goldsmiths, a part of the University of London, begins his book with an anecdote. He is attending a garden party at
Westminster Abbey. The guests are international activists and
do-gooders, corporate liberals as well as antiglobalization radicals. He
falls into a conversation with a lawyer for a foundation and explains
his involvement in the campaign to stop the International Monetary Fund
from imposing austerity on third-world nations. He mentions the biblical
Jubilee, in which Hebrew kings periodically proclaimed debts forgiven.
“‘But,’ she objected, as if this were self-evident, ‘they’d borrowed the money! Surely one has to pay one’s debts.’”Graeber
reminds her that even in standard economic theory, “a lender is
supposed to accept a certain degree of risk.” Indeed, the higher the
anticipated return, the more likely the danger of default. Yet the
premise that “surely one has to pay one’s debts” is so persuasive,
Graeber writes, “because it’s not actually an economic statement: it’s a
moral statement.” A debt, by definition, is something you owe that must
be repaid.
In Graeber’s exhaustive, engaging, and occasionally
exasperating book, three themes stand out. One is the “profound moral
confusion” in our understanding of debt. A second is the perennial
struggle over debt forgiveness, and who receives it. A third is the
function of debt in the politics of social class and social control.
Despite
extensive scholarly efforts to find an example, Graeber reports, there
is no historical evidence of an actual primitive economy that ran on
barter. Why is he making this point? In fact, two thousand years before
kings began minting coins, there was credit. Before paper,
accounts were kept on clay tablets. Landowners gave peasants provisions
on promise of repayment. And where there is credit, there is of course
debt. What appears to be a random excursion sets up a central discussion
about debt and reciprocal obligation.
Graeber observes that debt
is often conflated with sin. The version of the Lord’s Prayer drawn from
Matthew (used by most Protestant denominations) asks God to forgive us
our “debts,” while most translations of Luke (and the Catholic liturgy)
ask forgiveness for our “trespasses” or “sins.” Graeber notes that in
modern German, the same word, Schuld, means both debt and guilt.
Likewise in several ancient languages. In market terms, he writes, a
debt is “an exchange that has not been brought to completion.” One party
received the goods; the other is owed a payment. To fail to honor a
debt, therefore, is to be in a condition of guilt on both moral and
economic grounds.
But though individual failure to repay a debt is
considered ethically abhorrent, there are times when sound economics
requires debt forgiveness. In the case of a broad downturn,2
debt ceases to be purely a moral question, and becomes a pragmatic one:
Will it help the overall economy for the law to demand that debts
always be paid in full? Was it economically sensible to throw debtors
into jail? Is it sensible now to force troubled corporations or banks to
liquidate? To compel sales of millions of homes in a depressed market?
To destroy the economic potential of entire nations so that they can
service old debts that were incurred corruptly by previous governments
or banks? Society properly discourages borrowers from taking on
imprudent burdens, and the prospective loss of property or even liberty
functions as a deterrent. But in a general collapse, debt forgiveness
may become necessary if the economy is not to sink further.
My own
research explores a pivotal event in the history of debt—the invention
of modern bankruptcy, in 1706, by ministers of Queen Anne. Before 1706,
bankruptcy simply meant insolvency, and the bankrupt was packed off to
debtors’ prison. It dawned on the reformers of the day that this
practice was economically irrational. As the legal historian of
bankruptcy Bruce Mann wrote, “it beggared debtors without significantly
benefiting creditors.”3
Once behind bars, a debtor had no means of resuming productive economic
life, much less satisfying his debts. In this insight was the germ of
Chapter 11 of the modern US bankruptcy code, the provision that allows
an insolvent corporation to write off old debts and have a fresh start
as a going concern.
The British devised the concept of legal
discharge from debt not out of a sudden attack of compassion but because
the economic crisis of the 1690s had put much of the merchant class in
jail. The cause was not improvident or immoral behavior on the part of
debtors, but general economic dislocation beyond their control, caused
by the confluence of bubonic plague, recent wars with France, and a
storm that devastated the merchant fleet in 1703. The future novelist
Daniel Defoe was a leading pamphleteer promoting the idea that debtors
might settle with creditors at so many pence to the pound and then have
their debts legally discharged. Defoe had himself spent some months in
debtors’ prison in 1692 and 1693.
But when the law was finally
enacted, allowing a magistrate to settle debts with partial repayment,
only substantial merchants could qualify for relief. Common debtors
still languished in jail, since their penury had scant wider
consequences. Yet an important conceptual breakthrough had occurred.
Canceling some debts was deemed economically efficient. Legal historians
such as Bruce Mann have observed that, for capitalism to proceed, it
was necessary to shift the economic thinking and legal policy governing
debt from moral questions to instrumental ones.
Modern
macroeconomics—the deliberate manipulation of interest rates and public
deficits to smooth out cycles of boom and bust—dates only to the 1930s.
But long before there was macroeconomics, there was the option of debt
relief. In the first decade of the eighteenth century, British leaders
did not comprehend that public borrowing and spending could be useful
counterweights to private business slumps. But the government grasped
that if the commercial class was kept in jail, the economy would
collapse.
The struggles over what was called “the money issue” in
nineteenth-century America were also about the terms of credit and debt.
Farmers and artisans thrived when credit was plentiful; they suffered
when financial panics caused bankers and merchants to call in loans and
thus shrink the money supply. One remedy for credit scarcity was a
central bank that could make more money available, but popular mistrust
of concentrated wealth delayed creation of one for more than a century.
When the Federal Reserve was at last legislated in 1913 after a
succession of financial panics, Congress put it under the control of
commercial bankers. Not until the Great Depression and the Franklin
Roosevelt era did the US government became serious about debt relief,
with a series of policies that refinanced distressed home mortgages,
reformed and recapitalized banks, extended relief to bankrupt consumers,
financed a huge war debt at below-market interest rates, and wrote off
some of the international debts of allies and enemies alike. (Britain,
America’s closest ally, received near-total forgiveness of wartime
Lend-Lease debt.)
Germany, today’s enforcer of Euro-austerity, was
the beneficiary of one of history’s most magnanimous acts of debt
amnesty in 1948. The Allies in the 1920s made the catastrophic error of
helping to destroy Germany’s economy with reparations and debt
collection policies. In the 1940s, after a brief flirtation with World
War I–style reparations, the occupying powers agreed to behave
differently: they wrote off 93 percent of the Nazi-era debt and
postponed collection of other debts for nearly half a century. So
Germany, whose debt-to-GDP ratio in 1939 was 675
percent, had a debt load of about 12 percent in the early 1950s—far less
than that of the victorious Allies—helping to produce postwar Germany’s
economic miracle. Almost every German can cite the Marshall Plan, but
this larger act of macroeconomic mercy has disappeared from the
political consciousness of Germany’s current austerity police. Whatever
fiscal sins the Greeks committed, the Nazis did worse.
The debt
write-offs of the 1930s in the US and the 1940s in Germany were a
short-lived interlude in a long history in which debt politics as
applied to common people usually favored creditors. From biblical times
through the nineteenth century, debt peonage—a state of servitude in
which the debtor is stripped of rights—and debtors’ prisons were more
the norm. The question of who gets debt relief reflects the distribution
of political power—and power normally lies with large creditors such as
banks. The Roosevelt era stands out as an exception.
Library of Congress
A sign in Birmingham, Alabama, during the Great Depression, 1937; photograph by Arthur Rothstein from The Bitter Years: Edward Steichen and the Farm Security Administration Photographs, published recently by D.A.P./Distributed Art Publishers
The double standard in debt relief that favored
large merchants, present at the creation of bankruptcy law in 1706,
persists today in many different forms. It gets surprisingly little
attention in the debt debates. Despite the tacit assumption that “surely
one has to pay one’s debts,” the evasion of repayment is both
widespread and selective. Corporate executives routinely walk away from
their debts via Chapter 11 of the national bankruptcy law when that
seems expedient. Morality scarcely enters the conversation—this is
strictly business.
Even more galling is the fact that the
executives who drove the company into the ground often keep control by
means of a doctrine known as debtor-in- possession. A judge simply
permits the company to write off old debts, while creditors collect so
many cents on the dollar out of available assets. Every major airline
has now been through bankruptcy, and US Airways has gone in and out of
Chapter 11 twice. In this process, all creditors are not created equal.
Since banks typically have liens on the aircraft, bankers get paid ahead
of others. Major losers are employees and retirees, since Chapter 11
allows a corporation to break a labor contact or reduce pension debts.
Shareholders also lose, but by the time bankruptcy is declared, the
company’s share value has usually dwindled to almost nothing. Much of
the private equity industry uses the strategy of acquiring a company,
taking it into bankruptcy, thus shedding its debts, and then cashing in
on its subsequent profitability. Despite the misleading term private
“equity,” tax-deductible private debt is the essence of this industry,
which relies heavily on borrowed money to finance its takeovers.
Homeowners,
however, are explicitly prohibited from using the bankruptcy code to
reduce their outstanding mortgage debt. White House legislation proposed
in 2009 would have allowed a judge to reduce the principal on a home
mortgage, as part of the effort to contain the economic crisis. Congress
rejected the measure after extensive lobbying by the financial
industry. Consumers may use bankruptcy to shed other debts, but a
revision of the law signed by President Bush in 2005 subjects most
bankrupt consumers to partial repayment requirements, while bankrupt
corporations get a general discharge from their debts. Thanks to the
influence of the same financial lobby, the rules of student debt provide
that the obligations of a college loan follow a borrower to the grave.
Nor is there Chapter 11 for nations. The “relief” provided by the European Union or the IMF
typically takes the form of additional loans that the debtor nation
uses to pay interest on old debts. The government ends up deeper in
debt. Ireland, with low public debt levels in 2008, became in effect a
ward of Brussels because the Irish state assumed the debts of insolvent
Irish banks that had irresponsibly funded bad debt. The European
authorities used a similar double standard in the case of Cyprus,
condemning ordinary savers to lose up to 60 percent of their assets, in
order to pay for the speculative sins of financiers.
Large banks,
meanwhile, have benefited from extensive debt forgiveness thanks to
governments. In the fall of 2008, every major US bank was on the verge
of insolvency because banks had recklessly incurred debts to finance
speculative investments, often using derivative instruments such as
credit default swaps that had been created by the same group of large
banks. When their debts overwhelmed their assets, the government did not
permit these banks to fail (except for Lehman Brothers), or even to use
Chapter 11 (which would have wiped out shareholders). Government simply
made the banks whole, through the Troubled Asset Relief Program (TARP).
The Federal Reserve has continued relief through extensive purchases of
dubious bonds from banks. The entire economy gains from the stimulus to
demand, but bankers who would otherwise lose their jobs are the
immediate beneficiaries.
Despite the shift in the thinking about
debt from a purely moral question to at least partly an instrumental one
where business is concerned, the earlier emphasis on sin lingers when
it comes to common debtors. Proposals for debt relief for homeowners,
college graduates, or Greece encounter resistance cloaked in the
language of moral opprobrium and “moral hazard,” the danger that debt
relief will reward and thus induce reckless behavior.
Public
policy remains stymied on the question of how to clean up the two large,
now nationalized entities that hold or underwrite most of America’s
mortgages, Fannie Mae and Freddie Mac. The answer is not to conclude
that the United States put too much faith in home ownership, which
remains a fine way for the nonrich to accumulate financial equity. The
original Federal National Mortgage Association (FNMA),
nicknamed Fannie Mae, was a public entity. It used government borrowing
to purchase mortgages and replenish the working capital of lenders.
Public FNMA had no scandals, and when it was working
effectively, from its founding in 1938 to its privatization in 1969, the
US rate of home ownership rose from about 40 percent to over 64
percent. The trouble began when Wall Street invented complex, exotic,
and easily corrupted mortgage bonds, and private Fannie began purchasing
high-risk mortgages in order to protect its market share. The remedy is
to restore Fannie to a public institution with high lending standards,
not to kill it.
Thanks to a small number of
insurgent voices and evidence from Europe and the US about the negative
effects of austerity policies, the double standards of debt relief are
beginning to command skeptical attention. Stiglitz and Krugman, both
Nobel laureates, have long questioned the prevailing assumptions about
the wisdom of austerity, and they have lately been joined by more
orthodox economists.
Carmen M. Reinhart and Kenneth S. Rogoff, whose 2009 book, This Time Is Different: Eight Centuries of Financial Folly, was reviewed in these pages by Krugman and Robin Wells,4
are best known for demonstrating that the most severe downturns of the
entire economy typically follow financial crashes. In passing, This Time Is Different
mentioned a provocative concept, “financial repression.” The idea was
that when debt is strangling an economy, it may make sense to hold down
interest rates, and let inflation decrease debt, or otherwise constrain
financial burdens on families and companies to help the rest of the
economy realize its potential. The Federal Reserve, under Ben Bernanke,
has kept interest rates exceptionally low, incurring criticism that it
is risking inflation. Rogoff, formerly chief economist of the IMF, goes further. He would have the Fed deliberately
set as a target an inflation rate of 4 or 5 percent as an open strategy
of reducing debt burdens by inflating them away, an idea that horrifies
the bond market.
Lauren Greenfield/Institute
A street in California’s Inland Empire,
east of Los Angeles, in 2009, where the number of houses facing
foreclosure was so high that the area was nicknamed ‘Foreclosure Alley’
Reinhart, in a subsequent paper co-written in 2011 with M. Belen Sbrancia,5
reviewed the experience between 1945 and 1980, and found that there had
been continuing financial repression. Real interest rates (i.e.,
adjusted for inflation), they calculated, were negative on average for
the entire period, helping to “liquidate” public debt, partly because
the Federal Reserve had a policy of financing the large expenditures of
World War II at low costs. During the same era, tight regulation limited
speculation by large financial institutions and other investors, so
that cheap credit could flow to the real economy without inviting
financial bubbles. The 1933 Glass-Steagall Act, for example, prohibited
commercial banks from underwriting or trading securities. Yet despite a
controlled bond market whose investors suffered negative returns of -3
to -4 percent, the years between 1945 and 1980 were the era of the
greatest boom ever.
These findings defy a core precept of
conservative economics, the premise that economic growth requires
financial investors to be richly rewarded, an idea disparaged by critics
as trickle-down economics. The postwar era, by contrast, was an age of
trickle-up. Some creditors lost in the short run, but broadly shared
prosperity stimulated private business. Eventually, the rising tide
lifted even the yachts.
Another former IMF
official, Anne O. Krueger, an appointee of George W. Bush, recently
reiterated her call for Chapter 11 bankruptcy for indebted countries.
When she first proposed the idea as deputy managing director of the IMF
in 2002, Krueger was fairly shouted down by officials of the US
Treasury and leading bankers. In January 2013, she argued that “a clear
mechanism [to allow nations to use bankruptcy] could have prevented all
sorts of problems in the eurozone.” With a Chapter 11 law, Greece could
have written off old debt and used new borrowing to finance new growth,
just like a private corporation. Even acknowledging past bad behavior
(as in the case of many corporate bankruptcies), a Chapter 11 for
countries could sensibly combine incentives for honest bookkeeping with
macroeconomic policies that write off old debt for the sake of recovery.
The
discussion about relief of private indebtedness, however, is still
mostly offstage. The particulars no longer involve the sequestering of
sheep or the seizing of vineyards. But the ten million Americans at risk
of losing their homes to foreclosure, or recent graduates who cannot
qualify for mortgages because of their monthly payments on college
loans, have become modern debt-peons. At the same time entire economies
abroad, indentured to past debts, find themselves in a metaphoric
debtors’ prison where they can neither repay creditors nor resume
productive livelihoods.
These debt traps are not immutable.
Government could refinance mortgages directly using the Treasury’s own
low borrowing rate, as was done by Franklin Roosevelt’s Home Owners’
Loan Corporation. Fannie and Freddie, remade into true public
institutions, could provide the refinancing. The Obama administration’s
existing mortgage relief program, run through private banks, excludes
the most seriously underwater homeowners. The terms largely prohibit
significant reductions in mortgage principal owed, and these limitations
should be liberalized by the administration.
For students, an
Obama administration program permits about 1.6 million of the 37 million
college borrowers to finance education costs by paying a small
surcharge on their future income taxes, instead of incurring debt. This
option could be made universal. The group Campus Progress proposes
allowing college debtors, who currently pay an average of almost 7
percent interest, to refinance their debt at the ten-year Treasury
borrowing rate of about 2 percent. This would save young adults $14
billion this year alone. The EU could refinance the debts of small,
depressed nations using eurobonds, and the European Central Bank could
make clear that it will buy as much sovereign debt as it takes to defend
government bonds from speculative attacks.
The crack in the
intellectual consensus on public and private austerity is the beginning
of a more realistic national debate about debt. But such debt relief
policies are a long way from being enacted. The sheer political power of
creditors and the momentum of the austerity campaign suggest that more
damage to the economy may be done before any large change takes place.
