Understanding Debt

Referencing the Google Talks video here on Debt: The First 5000 Years by David Graeber.

In this video, David Graeber reflects on thoughts I’ve had for some time about how credit works and how it transforms into debt. It’s interesting that he distinguishes between credit and debt, emphasizing that they are not the same. Debt is more like an "I owe you" dynamic, which aligns with Robert Kiyosaki’s notion that money is debt. But the question arises: who do we owe?

Graeber explains that communities have used credit systems for centuries without fully realizing it. It was beneficial to have someone indebted to you because it created future opportunities for reciprocity—a "scratch my back, and I’ll scratch yours" kind of relationship.

The shift to using money became necessary when dealing with people outside one’s community. This became evident with the expansion of empires, which needed to feed their soldiers but couldn’t simply send food to them. Additionally, no community wanted to have credit with someone who might die soon or never return. As a result, empires minted coins so that soldiers could spend in foreign lands and obtain resources from local communities.

Empires, both ancient and modern, have exploited this system by indebting conquered communities and extracting resources through interest and taxes. When debt becomes overwhelming and no one can repay the state, revolutions often occur. There’s an old saying that revolutions involve revolters writing off debts and redistributing land. Afterward, the new society typically reverts to a credit-based system.

To prevent revolutions caused by debt, kings and leaders throughout history have periodically declared debt forgiveness, wiping the slate clean. This meant that anyone who owed money no longer owed it, and those who were owed money couldn’t claim it. It’s a radical idea, but I think it was necessary. It makes sense that anyone lending money should be more responsible for whom they lend to, and should not rely solely on earning interest from loans. Instead, they should focus on the overall welfare and success of the person they are lending to. This is essentially what Islamic banking aims to achieve with zero-interest lending.

However, my concern is that such a model may be slow and could reduce the incentive for many to enter the banking sector. In our capitalist economy, where large deposits are common, no one would want to handle those deposits without a significant upside. Since banks currently make most of their profits from loans, this would cut off their primary revenue stream and increase the risks associated with lending. It would also force banks to conduct even more rigorous due diligence before making an investment. Although, to be fair, banks are already quite stringent with their lending. Ultimately, they care most about that “sweet” loan interest, which is a hard habit to break.

In today’s world, we’re still grappling with the nature of money, credit, and debt, and witnessing how these concepts impact people’s lives. Our strong belief that debt must always be repaid comes at a significant cost, one that has played out many times throughout history. Various solutions have been proposed to address this issue, such as debt jubilees, interest-free loans, loan forgiveness, Bitcoin, and more. These solutions are emerging to tackle the problem of debt being used as a tool to enslave the lower tiers of society, while the wealthy, who hold most of the debt and property, continue to benefit.