Yesterday?s much-anticipated S&P downgrade of U.S. treasury bonds is obviously a historic event.
It seems the world has spent the years since 2008 stumbling from one debt crisis to another. In fact, if we count the Third World debt crisis, which did after all affect most human beings on the planet, the world has been in a continual series of debt crises since the ?70s. The difference is that until very recently, the U.S. was the ultimate arbiter of who owed what to whom, and on what terms. 2008 marked the moment when that began to change. Yesterday?s downgrade of T-bonds that had long been treated as literally as good as gold by the world?s central bankers marks the first full, public admission that this is no longer the case.
Now, S&P might seem a peculiar choice as ultimate credit court, considering their decidedly less-than-stellar performance in the mortgage crisis?giving AAA ratings to a series of toxic derivatives that ultimately crashed the world economy, causing major financial institutions to have to be bailed out by the very government whose bonds they?ve just downgraded. But what?s the alternative? The IMF? It has troubles of its own, to put it mildly.
But a broader historical view reveals this is precisely the problem. Since 1971, when the U.S. abandoned the gold standard, and the world has been moving to a system of virtual credit money, we have been entering a new period of history. But it?s not entirely unprecedented.
In fact, contrary to popular belief, credit has been the predominant form of money in world history. In ancient Mesopotamia, elaborate credit systems predated coinage by thousands of years. Periods in which people assume that money really ?is? gold and silver, let alone use cash in most everyday transactions, are more the exception than the rule. Ancient empires, for instance, used coins mainly to pay soldiers, and when those empires dissolved in the early Middle Ages, society didn?t really ?revert to barter,? as its often believed, but returned to elaborate credit systems?denominated in Roman (and then Carolingian) currency that no longer actually physically existed.
The remarkable thing was that they were able to maintain these credit systems despite the lack of any reliable state authorities willing or able to enforce contracts. How did they do it? Two ways: but both involved insisting that there were values that were more important than mere money.
The first was the cult of personal honor. In most parts of the world, in the Middle Ages (Europe was only a partial exception), merchants had to develop reputations for scrupulous integrity?not just always paying their debts, but forgiving others? debts if they were in difficulties, and being generally pillars of their communities. Merchants could be trusted with money because they convinced others that they didn?t think money was the most important thing. As a result, ?credit,? ?honor,? and ?decency? became the same thing?an identification which passed into ordinary life as well. As a result in England, where probably 95% of all transactions in a Medieval village were on credit, and decent people tended to avoid the courts, people still speak of ?village worthies,? or ?men of no account.? The apogee of this system though was the world of Medieval Islam, where checks were already in wide use by 1000 AD, and letters of credit could travel from Mali to Malaysia, all without any state enforcement whatsoever. In Melaka, the great Indian Ocean entrepôt, merchants from as far a way as Ethiopia or Korea notoriously avoided written contracts, preferring to seal deals ?with a handshake and a glance at heaven.? If there were problems, they were referred to sharia courts with no power to have miscreants arrested or imprisoned, but with the power to destroy a merchant?s reputation, and therefore, credit-worthiness, if he were to refuse to abide by their rulings.
This latter brings us to the second factor: the existence of some sort of overarching institutions, larger than states, usually religious in nature, that ensured that credit systems didn?t fly completely out of hand. For much of human history, the great social evil?the thing that everyone feared would lead to the utter breakdown of society?was the debt crisis. The masses of the poor would become indebted to the rich, they would lose their flocks and fields, begin selling family members into peonage and slavery, leading either to mass flight, uprisings, or a society so polarized that the majority were effectively (sometimes literally) reduced to slaves. In periods where economic transactions were conducted largely through cash, there are many parts of the world where this actually began happen. Periods dominated by credit money, where everyone recognized that money was just a promise, a social arrangement, almost invariably involve some kind of mechanism to protect debtors. Mesopotamian kings used to rely on their cosmic ability to recreate society to declare clean slates, erase all debts, and simply start over. In ancient Judea this was institutionalized in the seventh-year Jubilee. In the Middle Ages, Christian and Islamic bans on usury and debt peonage, far from being impediments to trade, were actually what made most trade possible, since they ensured ordinary people were not entirely impoverished, and had the means to purchase the merchants? wares, and because those religious systems became the foundation for networks of honor and trust.
This provides a hint of why we have been experiencing such a succession of debt crises. In this new phase of credit money that we?ve entered since 1971, we did exactly the opposite. Instead of setting up great overarching institutions designed to protect debtors, we created institutions like the S&P or IMF, essentially, designed instead to protect creditors. It has become increasingly apparent that the system simply doesn?t work. As the U.S. government seems intent on squandering its honor and reputation for the sake of sectarian advantage, and as millions of Americans feel themselves slipping into a state that feels disturbingly like debt peonage, we might do well to look to the past for inspiration.
David Graeber teaches anthropology at Goldsmiths, University of London and is the author of the book ?Debt: The First 5,000 Years.?
-- Steve Hayes from Tshwane, South Africa Web: