Who Do We Owe?

This post delves into the often overlooked complexities of our financial systems and the deep-rooted mechanisms of debt that have shaped our world. In exploring the history of money, state power, and the intricate relationship between banks and citizens, we see how dissatisfaction has long been embedded in the foundations of economic systems. Just as Zen practice challenges the conventional pursuit of constant pleasure and accumulation, our financial history reveals a pattern of never-ending striving, often at the expense of broader social equity. The financial system, much like the pursuit of material satisfaction, is a cycle of continual debt, obligation, and inequality. All of this often equals suffering, or at least dissatisfaction. Understanding this cycle is key to understanding the dissatisfaction that runs through modern society—how it originates from systems that promise wealth and prosperity, yet often deliver nothing more than perpetual indebtedness.

Originally published in Substack https://substack.com/home/post/p-163455665

The Roots of Debt and Power

During the Middle Ages, rulers realised they could manipulate their finances by giving more power to bankers. Anthropologist David Graeber (2011) writes that the history of modern financial instruments and paper money traces back to municipal bond issuance. The Venetian government began this practice in the 12th century when it needed money for military purposes. They collected loans from taxpaying citizens, offering a 5% annual interest rate in return. These bonds were made transferable, creating a market for government debt. Since these bonds had no set maturity date, their market prices fluctuated wildly, as did the probability of repayment.

Similar practices spread quickly across Europe. The state ensured tax compliance by requiring citizens to lend money with interest. But what exactly is this interest? This concept originates from Roman economics, where interest (lat. interesse) was considered compensation for the lender’s loss if repayment was delayed. In practice, the Venetian state agreed to pay this Roman ”interest” — a penalty for late repayment — to citizens who lent money to the state.

Such a system undoubtedly raised questions about the legal and moral relationship between citizens and the state. However, it spread quickly, as it made financing wars and conquests easier for states. By 1650, most Dutch households owned government debt. The true paradox of this system appeared when such bonds were monetised, and citizens started using these promises of repayment as currency for trade.

These government bonds sparked an economic revolution, transforming independent townspeople and villagers into wage labourers, forced to work for those with access to higher forms of credit. Gold bars imported from the Americas were rarely used for daily transactions. Instead, they travelled from Spain’s Seville to Genoese bankers’ vaults, then onward to China, where they were exchanged for silk and other luxury goods.

The Birth of Paper Money: Shifting Trust and Power

Government bonds were, in principle, already paper money, but it wasn’t until the establishment of the Bank of England in 1694 that true paper money emerged. The bank issued notes that were not government debt obligations but were tied directly to the king’s war debts. This money marked a shift in the nature of currency, now determined by speculative forces — interest rates and profits derived from military success and the exploitation of colonial resources.

This development led to a market-based economy, still characterised by a complex relationship between militarism, banking, and exploitation. The value of money shifted from direct human trust and the exchange of precious metals to government bonds, promising profits. This practice of issuing debt extended from government bonds to shares in corporations, suggesting that money could be endlessly created through interest-bearing loans.

The US dollar today is still a form of debt issued by the Federal Reserve, a coalition of banks. This arrangement mirrors the initial loan system introduced by the Bank of England, where the central bank loans money to the US government by purchasing government bonds, which are then turned into money through further lending.

Supporters of market economies claim that such systems have existed for 5,000 years. Yet, when examining the history of monetary economies, we see that the earliest market economies, such as 17th-century Holland and 18th-century England, experienced disastrous speculative crashes, like the tulip mania and the South Sea bubble.

Ultimately, the money we use is an extension of public debt. We engage in trade based on government promises, which are essentially loans from future generations. State debt, as politicians have noted since its inception, is borrowed from future generations. On one hand, this arrangement increases political power in the hands of the state; on the other, it suggests the government owes something to its citizens. The problem lies in the fact that state debt originates from the deprivation of freedom, war, and violence. It is not owed equally to all people but primarily to capital owners. The word ”capitalist” originally referred to someone who owned government bonds.

Debt and Global Ruin?

Enlightenment thinkers feared that state debt could lead to global ruin. The introduction of impersonal debt carried the ever-present risk of bankruptcy. While individual bankruptcy meant losing property, imprisonment, torture, hunger, and death, no one knew what state bankruptcy might entail.

For centuries, capitalism operated in a state of perpetual anxiety, with thinkers like Karl Marx, Max Weber, Joseph Schumpeter, and Ludwig von Mises confident that the system could not last beyond two generations. Graeber describes how, in 1870s Chicago, many wealthy industrialists built homes near military bases, convinced a revolution was imminent.

Debt and interest are significant factors in our world today. Graeber recounts how the International Monetary Fund (IMF) was created when OPEC countries poured vast amounts of oil wealth into Western banks during the 1970s oil crisis. These banks could not find new investment opportunities, so they started persuading global South dictators and politicians to take loans. These loans began with low interest rates but soared to 20% during the tight monetary policies of the 1980s. This aggressive lending process led to a debt crisis in the global South in the 1980s and 1990s. To refinance these loans, the IMF required nations to cut food subsidies, abandon free healthcare and education, and so on.

The tragedy of such loans is that the global South has often repaid them multiple times. The initial loan often ended up in the pockets of dictators, and as interest accumulated, the debt never truly had an endpoint. The IMF created a way to generate money out of nothing, without a concrete limit. But what moral right did they have to act in this manner? What moral obligation do these countries have to repay something they have already paid?

Since the late 19th century, American economic thought has shaped global political and economic development. In the 1800s, anti-capitalist views in the United States, such as producerism, argued that labour, not capital, created true wealth. President Abraham Lincoln, a prominent producerist, stated that capital was merely the fruit of labour. However, from the 1890s, a new ideology emerged, promoted by industrial magnates, bankers, and political allies, arguing that it was capital, not labour, that created wealth.

This cultural campaign, championed by steel magnate Andrew Carnegie, argued that concentrated capital under wise leadership could reduce commodity prices so much that future workers would live as well as past kings. Carnegie believed that high wages for the poor were not beneficial for the ”race.”

It is crucial to remember that the Marxist term ”worker” never referred to factory workers. In fact, during Marx’s time, more working-class individuals were employed as maids, servants, shoeshiners, waste collectors, cooks, nurses, taxi drivers, teachers, prostitutes, janitors, and traders than in mines or factories.

The idea of wage labour, working under supervision in factories performing tasks set by a boss, originates from colonial plantation slavery and the hierarchical command structure of trading companies’ fleets.

Shaping of Modern Economies

By the early 20th century, this ideology of capital producing wealth became entrenched in Western thinking. Several events in the United States changed the relationship to work, family, leisure, and especially consumption. Advertisements for consumer products began to take their modern form in the 1920s, and with the Great Depression of the 1930s, the idea of a shorter workweek was no longer discussed.

In 1914, Henry Ford, the founder of the Ford Motor Company, reduced his factory’s workday from nine to eight hours, doubled workers’ wages, and promised to share profits with employees. The main reason for this was the shortage of good workers, as few were willing to work on Ford’s assembly line. The promise of better wages and potential company profits resolved this issue, providing a quick economic gain for Ford’s company.

Ford believed that, although the company would lose money initially, it would recover because workers would now have more money to spend on Ford products. Ford turned his employees into loyal consumers. However, this extra pay was tied to social expectations. Ford’s sociological department would visit workers’ homes unannounced to assess cleanliness, safety, and alcohol use. Any deviations would result in a deduction from their bonus.

Ford’s shareholders took him to court, claiming his duty was to maximise profits for shareholders, even if done legally. The court ruled that while Ford’s humanitarian sentiments were admirable, his company existed to make profits for its shareholders.

In the US, the debate about a shorter workweek continued until World War II, after which post-war economic growth led citizens to forget the issue, as shorter working hours would have meant lower wages, which in turn would have led to less money for consuming the products promoted by the media.

The United States has been an exceptional example of how the middle class has been built and, in recent decades, undermined. Despite consistent GDP growth since the 1960s, wages have stagnated since the early 1970s, even while workers were the best educated in the world. Globalisation and technological change have reshaped business practices.

Large companies like Amazon still employ thousands, but this is a fraction of what would have been needed before automation. AI algorithms optimise business operations, replacing human labour with machines. Today, the rule is that the working class continues to grow poorer while GDP rises.

Afterword
As we reflect on the origins of debt and finance, it becomes evident that the complex relationships between states, banks, and citizens have had far-reaching consequences for the modern world. From the early municipal bonds issued by Venetian rulers to the creation of the US dollar and the global financial system of today, the trajectory of money is intricately linked to power, conflict, and inequality. What was once a simple exchange of goods and services has evolved into a global network of debt and credit, often with severe repercussions for ordinary people. The lessons of history remind us that economic systems, while essential for progress, often come at the cost of social justice and equality. As we move forward, it is crucial to question the morality of the systems that govern our financial world and to explore alternatives that prioritise the well-being of all individuals, rather than just the few who control the flow of capital.

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References

Graeber, D. (2011). Debt: The First 5,000 Years. Brooklyn, NY: Melville House.

Graeber, D. (2018). Bullshit Jobs: A Theory. New York: Simon & Schuster.

Harvey, D. (2005). A Brief History of Neoliberalism. Oxford University Press.

Klein, N. (2007). The Shock Doctrine: The Rise of Disaster Capitalism. Penguin.

Mazzucato, M. (2018). The Value of Everything: Making and Taking in the Global Economy. Allen Lane.

Standing, G. (2011). The Precariat: The New Dangerous Class. Bloomsbury Academic.