Understanding Debt

Reference to Google Talks video here on Debt and its first 5000 years.

In this video, David Graeber reflects some thoughts that I have been having for a while on how credit works and what it turns into, called debt. It is interesting that he mentioned that credit and debt are not the same thing. Debt is an 'I own you'. This is quite similar to what money is today when Robert Kiyosaki mentions that money is debt. Who do we owe?

He mentions that human beings in communities have been using credit systems for a long time. We never realised it was the case but we were. It was beneficial to have someone indebted to you so that they could benefit you in the future. It was also like scratch my back and I scratch yours.

The point when using money become apparent was when you are dealing with people who are not in your community. This is clear with the expansion of empires that needed to feed their soldiers but couldn't just send food to them. It was also true that no community would want to have credit with someone who would die soon or never come back. Therefore, instead of credit, the empire minted coins to allow soldiers to spend in foreign lands and also get resources from local communities.

It has also been greatly exploited by these empires, both old and new, to indebt conquered communities and extract resources from them through interest and taxes. When this gets bad and no one can pay their debts to the state, there is a revolution. The saying goes is what if a revolution takes place the revolters will write-off the debts and redistribute the land. Once this happens, the new society will move back into a credit-based system.

In order to mitigate the revolutions caused by debt, kings and leaders would write-off the debts of a nation and its people and declare that there is a clean-slate. This means that anyone who owed money to someone did not owe them anymore and someone who was owed money wasn't owed anymore. That's crazy but I think it is necessary. In fact, it makes sense so that any person who is owed money should be responsible about who they give their money to. They also should not rely on making money from interest on the loan or rented money but on the overall welfare and success of the person they are giving money to. This is what Islamic banking is trying to achieve with zero-interest rates. My only concern is that their model of making money is slow and such a system would greatly reduce the incentive for most people to join the banking sector. Especially with our capitalist economy that has large amounts of deposits, no one will want to do the work of storing such deposits without a significant upside. Since banks make money from loans, this would cut their main source of revenue and increase the risk required to give out money. In fact, they would make it so that people have to do rigorous due diligence when making an investment. Despite this, banks are still rigourous as they are very stingy with money so there is no difference. In the end, banks care about that sweet interest on the loans they give. That is a hard drug to make banks let go of.

In the modern age, we are grappling with questions on what is money, credit and debt. We are also seeing the effects of these concepts in the real world and how they affect people's lives. Our cult conviction on how debt must always be paid is coming at costs that we have experienced many times before us. It is also important to note that various developments have been made to combat this. Things like Jubilees, interest-free loans, writing-off loans, Bitcoin and so on. They are coming to address a problem of debt in the form of money being used to enslave a large class of people on the bottom-tier of society by the people at the top who are being owed all the debt and have all the property.