Debt: Wiping the slate clean

Economic anthropologist, David Graeber (2011), seems on strong ground when he argues that defaulting on debt can liberate the borrower – and bring social benefits that eventually reward the lender’s sacrifice. Plenty of recent national histories confirm this. Iceland, which reneged on the debts of its huge international banking empires, is now growing and borrowing again, whereas Ireland’s promise to honour all bank debts has left it nationally bankrupt and back in recession. Poland owes its current resilient growth and financial stability to getting a 50 per cent reduction in its communist-era debts. Meanwhile, Hungary’s insistence on honouring those debts, believing this would mean better treatment by western partners, has swapped ‘ghoulash socialism’ for a begging-bowl capitalism, its sovereign bonds now downgraded to junk status.

However, not all economists would agree. For example, Bill Easterly, also drawing on history, claims that debt relief merely clears the way for the accumulation of new debts, typically to finance barren projects run by corrupt governments and with little benefit for the general population (Easterly, 2001 cited in Barro, 2002).

But Graeber is concerned to present a moral, and not just a practical, argument for debts to be written off, and for individuals and households as well as governments and banks. His lengthy historical and anthropological study shows that while the concept of debt is as old as human society, the idea of debt that can be calculated and repaid in money is only as old as societies with governments, free markets and financial systems. He cites many past (and some present) societies in which debts arose from good actions that could not be reciprocated or bad actions that could not be atoned for. The payment of money was then an admission that debt could not be discharged, and would only be resolved by forgiveness from the creditor.

Graeber correctly attacks economists for arguing that free markets, requiring private property ownership and financial equivalence in exchange, are part of the natural order. History shows them to depend on a particular behaviour pattern – associating effort with financial reward – that has to be learnt or legally enforced. He also correctly exposes an uncomfortable duality in economists’ explanation for the origin of money. It arises from governments issuing debt to fight wars, issuing tokens to be repaid later from conquest or tax; but it also arises from private banks lending to merchants and businesses. This leads to two distinct views of the economy that peacefully co-exist in the textbooks, but are in conflict when it comes to explaining what’s gone wrong since 2008.
Unfortunately, Graeber’s conclusions – and his 2011 call for ‘some kind of Biblical-style jubilee’ - sit uneasily with some of his own evidence, and look awkward in the light of the present crisis.

In showing that money has only recently become an accepted means to repay debt, he underplays the progressive implication: many lifelong bondages and generation-jumping blood-feuds have been stopped by permitting debtors to discharge their obligations in cash. When lenders started fixing the repayable amount, and charging affordable interest rates, the power to acquire assets and receive non-wage income was extended beyond rich landowners, promoting a social as well as an industrial revolution. Graeber’s unwillingness to acknowledge debt’s progressive potential means that his latest 500-page book can assign only two pages to the global growth in micro-credit (where he focuses only on unscrupulous lenders and farmer suicides), and can see only the negative results in the revolutionary move from person-specific to transferable, tradable debt.

Tradable debt was, of course, the basis for the collateralized mortgages, credit derivatives and runaway bank leverage that are now blamed for creating the biggest financial crisis for almost a century.

Sacrificing the creditors

There is plenty of evidence demonstrating the misery of debt and it's easy to point the finger internationally at greedy nations and irresponsible politicians. But if as Graeber suggests, there was a global jubilee, a wiping the slate clean - who would pay the price? Graeber’s demand for global debt relief, which looked humane before 2008, when most debts were owed by poorer people and nations to richer ones, looks more awkward in the light of subsequent events.

Today, richer Europeans and Americans are the biggest debtor nations, and developing counties led by China their major creditors. A write-off of these debts would confirm Graeber’s worst fear - that debt has been conflated with money, and money made a paper-thin disguise for unequal power.

What are the alternatives? We have yet to see whether the path of austerity as adopted in the UK is a sound way to manage debt or simply the road to recession. The only other solution with a track record is inflation - the silent tax that redistributes wealth from savers to borrowers by eroding the value of assets and liabilities. We are not necessarily talking here about German or Zimbabwean hyperinflation. Even a modest three per cent a year inflation will halve the value of savings and debts in just 14 years. Good news for borrowers, but just as internationally not all creditors are wealthy nations, so too at the household level many savers are, for example, pensioners reliant on modest savings to top up basic incomes.

However nation states act to put their own balance sheets in order, it seems inevitable that the smallest units in the economy, the households, whether borrowers or savers, will be required to pay a price.

Now read this article about how decisions taken at international and national levels ripple down and can have major, even catastrophic effects, on individual citizens and households.