Public Banking and Taxing the Wild Frontier: Conclusion

As the twenty-first century drags on, we face an uncertain road ahead. To catch a glimpse of hope we need not look that far back into history to find working models for both prosperity and sustainability. It has been encouraging to see activists working hard on forming public banks, for these banks can change the fortunes of every member of the economy in a time of vast wealth inequality. The times call for practical-minded solutions to big problems like climate change and economic stagnation. To seize the moment, we need only look to our own past for models that work.

Out west, cannabis is one of the biggest economic drivers of the region. Its coming into the fold of taxation and regulation at the state level offers a turning point that could lift up far more than just the people involved in the industry. By chartering a public bank in California, the cannabis industry can use banking services where once they could only use cash. It solves the problem of paying taxes in large suitcases full of dollar bills and a lack of small business loans for cannabis businesses with less start up capital. But the really exciting part comes with what the state can do with its own bank once that revenue is drawn in from pot funds. Financing large scale infrastructure projects that can transition the economy from one based on fossil-fuels and freeways into a renewable economy with clean energy all but requires that we utilize public banks. Nothing else can bring all of the funds together for such a massive undertaking that so many people believe must be done.

The pioneers of cannabis farming sought to escape from a society that suffocated their creativity and freedom of expression. They were so successful that others followed them out there in a curiously similar movement to other historical movements that brought people out west in droves. The California Green Rush, like the Gold Rush and the Timber Boom before it, brought billions of dollars to the further reaches of the American west in a hurried and chaotic fashion. It is likely that the Back-to-the-Land cannabis farmer will be mythologized in a similar way that the gold panning pioneer was in the nineteenth century. With the Redwood Curtain lifted and profits soaring, rugged individuals and hippy communes are sure to get the romanticized treatment of yet another distinct culture subsumed by modern business. Public banking offers a way out of this predicament. With its public financing model, we no longer have to play the game rigged by Wall St to benefit the already well-off. Hippies get to put a dent into the capitalist machine after all – just not the way they expected 50 years ago.

Small farmers and landed peasants have always born the brunt of specialized industry marching forward. It’s a fact that has torn apart people’s relationship with the earth for over 200 years now. It has also created enormous prosperity, especially at the national level. Innovations in banking, worker specialization, and increased scales of production set off irreversible processes into motion that need to be reckoned with democratically instead of with a blanket rejection. Alexander Hamilton’s vision won out but the implementation has gone way off course. If we hearken back to the eighteenth century, we can see a virtuous project too far ahead of its time to be appreciated in the Bank of the United States. The man wasn’t perfect (in fact, he was down-right elitist), but Hamilton did have the common good in mind when he conceived a national public bank in his mind and willed it into existence. With a quick crash course in public banking, one can grasp just how necessary establishing new banks are to creating an economy in which everyone wins.

Currently, cities and states must borrow money from Wall St banks to finance their projects. The payments made to municipal and state bondholders, plus interest payments made to banks from loans doubles the cost of any large project. Public worker’s hours and pensions are being slashed, facilities are downsizing and getting privatized, and the investor class is making off with the profits like bandits. Money that could be circulating within the public sector and distributed equitably is drying up. Fringe finance is replacing banks that no longer deem it profitable to do business with the poor, extracting wealth for basic services that could be done easily by the post office. The money pie is shrinking because access to credit has been consolidated by extraordinarily wealthy financiers in their private bank accounts and tax shelters. Public finance is the key to unlocking the economic potential just waiting to be let loose. [What We Could Do with a Postal Savings Bank: Infrastructure that Doesn’t Cost Tax Payers a Dime]

Public banking has a proven track record. Everywhere you look, from Germany to China to early America, linking governments to the technologies of banks is a proven winner. It is not only profitable for governments but the private individuals involved in financing and borrowing from it. The only ones who lose are the already ultra-rich 1%, the ones who want to keep their monopoly on the lending/money-creation powers of banks. With the sudden availability of funds opened up by the cannabis industry’s wave of legalization, the time is now to turn high profits into big ideas for a sustainable future. [Dave Dayen: The Ultimate Cash Crop: How a Pot Crisis Restarted a Public Banking Conversation in America]

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Public Banking and Taxing the Wild Frontier: Part Four

In the period following the ratification of the federal US Constitution, the financial course for the new nation had yet to be charted. Alexander Hamilton had a dream to turn the former colonies into a modern mercantilist nation on a model he borrowed from the British and its Bank of England. His idea would succeed with flying colors, but few truly understood just what he had done to make banking so indispensable to the health of this new form of economics. It would take decades for the nation to warm up to the idea of banks as an everyday feature of American life, but by that time, private banks would dominate the landscape and the old civic-minded banks would be a distant memory.

People were highly suspicious of the purity of Hamilton and other speculator’s motives, and rightfully so. Populist anger the elite eastern “stockjobbers” was well-founded, the blanket rejection of banks and all financial schemes was, however, foolish. Banking (especially of the public variety) would prove to be so successful that its detractors would come around in the long run, but the damage would already be done by that time. The option for government involvement in banking was besieged and destroyed in the first decades of the United States, that is, until the populist farmers realized that bringing banking into the government was the best and perhaps only defense against the insatiable greed of Wall Street bankers and industrialists in the antebellum nineteenth century. In hindsight, keeping public banks around was the best way to prevent gross economic hardship, but the battle-lines were drawn differently in these very different times.

The revolts and minor uprisings that occurred in this time period were all debt related. Traditional debt relations were far more fluid and amenable to the needs of common villagers before modern economics took a hold of them. The soldiers and suppliers of the Revolutionary War had not been paid. Their expedients for trade were dashed. Their protests were quelled. Before 1787, farmers outside of the merchant city regions had the benefit of the state’s former issuance of paper money to stimulate business. They began as a war-time expedient during the seven-years-war but remained afterward to everyone’s joy. In a frontier land lacking in specie (metal coin currency), paper money was a godsend. But the new constitution forbade the states from issuing any more colonial scrip and centralized the money-making function within the new federal government. The very first articles of the US Constitution are explicitly designed to prevent states from issuing their own ‘bills of credit’ and instead enshrine the return of the economy to a hard currency basis. The framers worried about the inflation these bills created, but paper money would come to dominate the economy anyways in the form of bank notes.

If bills of credit or paper money could no longer be used by farmers, then they were stuck with hard specie scarcity. Their business was less connected to the world at large, so metal money was harder to get their hands on.On top of that, exploitation by speculators, who sensed their desperation only to capitalize on it, added to their affective loathing of all things financial coming from the coastal port cities. Upon reading accounts of the financial hardships of American farmers and poor debtors, laid out in the previous post, it’s easy to see why they would be driven to such hate. But every actor needs a circulating medium of exchange to lift their fortunes. The distrust of a banker-government partnership inculcated during this period of history went a long way towards eliminating the necessary checks against the money-creating power of private banks. The banks role in controlling the increase or decrease in the overall supply of money could only be effectively curtailed and controlled by a central governing body endowed with financial powers like that of a bank. Distrust and anger at central government and public banks actually hurt prospects for economic justice by empowering private banks to carry on this highly profitable enterprise free of restraint.

Bray Hammond sticks the point well at the beginning of his grand history of banks in Banks and Politics in America: From the Revolution to the Civil War:

“The agrarian demand for paper money and easy credit which did at last appear in the States in the latter part of the 19th century arose from tardy recognition by the agrarians that they lived in a modern economy, not in dreamland, and in order to hold their own must use credit as business men did. It arose from a slow realization that farming must be a means of making money, not of withholding oneself from the world… But in the face of business enterprise and industrialization, it became impossible for farming to remain unchanged. Stock had to be improved. Machinery had to be acquired. The elements of farm capital became diversified, the land itself ceasing to be the one ingredient of weight. Money and credit forced their way into the farmer’s reckoning.” (Hammond, p.33)

It’s at this point that a shift in emphasis must ensue. A different country than the one Jefferson envisioned was taking shape around the turn of the 18th to the 19th century and we cannot simply remain pitted against all financial concoctions wherever they crop up. The future involves banks and they need to be made to work for the people or the vast majority instead of fought at every turn. The makings of a modern economy were shaping up at this time; increased specialization in the workplace and the overriding importance of overseas trade in the international game of political economy was drowning out the small farmer’s hope for New World of freeholders. The cat was out of the bag.

The scars leftover from Federalist era lingered on into the Jacksonian era of Democratic entrepreneurialism until the producing farmers figured out how debt, monetary policy, and banks effected them on the national level many decades later. The populist party sought to take over control of the money supply away from banks in the late eighteenth century with their ‘sub-treasury’ system and the non-partisan league would successfully lobby for a state-owned bank in North Dakota. But no movement in America has been able to sustain a public-oriented financial school of thought in the tumultuous times that capitalist industrialism wrought at the end of the 19th century, 20th and up until today. We have a moment right now to establish new public banks with the growing momentum of the public banking movement. It is high time that certain truths about banking become a part of common wisdom and used for the benefit of the 99% instead of the exclusive gain of the 1%.

Hamilton’s Bank of the United States was lauded by all those who understood it. It not only flipped a liability in high war debts into an asset (quite literally), it spread new money out into the economy whenever loans were dispersed. It’s bank notes functioned just like money, similar to the paper money of colonial scrip but more like state bank notes also circulating, so it increased the amount of business that could be done in two separate ways simultaneously. It offered credit for new projects in a typical lending fashion and then, as a result, bank notes could be drawn on representing the promise to repay the debt. These notes were basically paper IOU’s for the original loan/deposited coin (more on this later), but they would inevitably change hands many times in the course of business and effectively enter circulation as money. This is the what makes banks so hotly contested: they don’t just offer loans and act as special intermediaries for future business (though they do that also), they increase the amount of money in the system as a whole so long as they remain solvent (i.e. have enough hard currency to back up the notes that come back in for redemption, or withstand the depletion of specie from their vaults). That these bank notes could be used to pay federal taxes enhanced their acceptability as legitimate money.

Absent regulation, this operation is fragile and private banks are incentivized to extend credit wherever they can profit. The increase in available paper bank notes/IOU’s increases the amount of money passing from hand-to-hand in the general economy, even if you as an individual do not have an account at that bank or any bank. Those paper bank notes can always be redeemed at a local branch of the corresponding bank for hard coin in the vaults, that is, unless too many notes come in for redemption at once and the vaults are depleted.Provided the bank remains solvent, the net effect on the economy at large is immense. Having more things getting passed around as money lifts up the general economic prospects of every actor in the system, provided that the amount of notes issued are commensurate with the overall level of real economic activity. Issue too many and you get price inflation, too little and prices drop but there is less money around to get your hands on.

The national public bank of Hamilton was able to check the excessive issuance of bank notes in the way that a central bank does now. Today central banks are independent of government and merely transfer money from one bank within its system to another in the form of reserves in their central bank accounts. The first and second Bank of the United States operated slightly differently but also kept private banks and state banks that existed before them from collapsing in a heap of panic, rendering its notes useless and its contribution to the overall money supply vanishing in a flash. It made sure that the ratio of bank notes to reserves didn’t get too high and private banks couldn’t print way more notes than they could back up with coins. The first Bank of the United States, Hamilton’s bank, operated in a time when the split between public and private sectors was not so pronounced. Many believed that private investors were needed to lend credibility to the institution in the first place, the government being too young and fragile to instill any confidence. But it was a public bank that served the needs of the people at large by servicing the new and fragile government’s debt and hence its credibility as a future borrower. It increased the supply of money to stimulate industry by issuing its own US Bank Notes that had a wide circulation.

Banks whether public or private wield enormous power by controlling the size of money in the economy at any given time. This is not always well-understood by economists but when banks make loans they increase the amount of money flowing through the economy. Bank loans create more money, paying back those debts created by the loan destroys it. It’s an extraordinary tool within a modern economy and there is no reason why governments shouldn’t be involved in banking when it plays such a vital (and lucrative) role. This is what Hamilton’s bank did before private businessmen and entrepreneurs started opening up their own banks and attacking the national bank. In another one of histories ironies, it was farmer’s opposition to the Hamilton’s policies that killed the second Bank of the United States when Andrew Jackson swept into power. Little did they know that this national, central bank was the only thing preventing private banks from wildly profiting off of the economy’s need for credit, in turn playing havoc on the money supply. The full story is told in Bray Hammond’s standard financial history book in Banks and Politics in America from the Revolution to the Civil War.

According to Hammond, Hamilton did understand this crucial function of banking. It’s quite possible that only a handful of individuals grasped this operation and its significance and few understand it still today. The fact that banks create money, control its supply (in a more-or-less/marginal sort way of increases or decreases from day to day instead of absolutely), and perform a systemically vital function to a dynamic modern economy escapes contemporary economic textbook definitions of banks as mere “intermediaries.” If we replace the terms of 21st century economics with ones from the 18th century, we can still detail the same banking function:

“…[I]n the sentence before his explanation of specie deposits, Hamilton had made the observation that every loan which a bank makes is in the first instance a credit on its books in favor of the borrower and that, unless withdrawn in specie, it remains a liability of the bank till the loan is repaid. In these words he explained 20th century banking as will as 18th, and how bank lending creates bank deposits, with the difference that he did not call them “deposits” but reserved that term for specie transactions, distinguishing credit for specie from credit for the proceeds of loans. He did so because he observed banking in terms of the individual bank and not of many banks constituting a system. He was writing at a time when there were three banks only in America, each sole in its community. The effect each bank’s lending had on its own positions was in those circumstances direct and unobscured; its loans obviously increased what would now be called its deposits; for the checks drawn on it were not being deposited in other banks nor were the checks drawn on others being deposited in it. Each bank was a closed and separate system. Hamilton simply noted what in the then situation was plain and required no unusual discernment. The records of the Massachusetts Bank indicate how common it was at the very beginning to credit borrower’s accounts with the amounts lent them; and the known figures of deposit liabilities are plainly too large to have arisen from specie alone. Such credits seem in practice to have been included with deposits proper but in discussion to have been kept distinct. A deposit was of something tangible, whether for safekeeping or to apply on a capital subscription. The liability for amounts lent was called credit or book credit, as by Hamilton in the passage in which he described the procedure.

Though exempting specie deposits from the restriction could scarcely have given a bank any more inducement than it already had to acquire specie; it doubtless seemed logical to Hamilton that the liability arising from deposits of specie be distinguished from the liability representing the proceeds of loans and that it be excepted from limitations on an expansion that could occur only when liabilities were assumed in excess of the specie held. The issuance of notes and the crediting of customers’ accounts might and did entail the assumption of liabilities in excess of specie holdings, but not when the issuance of the credit resulted from a deposit of specie.” (Hammond, p.138-9. Emphasis mine.)

In other words, when a loan is made by a bank it doesn’t matter that there isn’t enough corresponding metal coin specie to match it one-for-one. Taking in deposits or specie to store in its vaults and making loans to those seeking credit are two separate functions of banking that work in tandem but don’t require a steadfast equivalence. When a loan is made, the amount of money requested by the borrower is written into their account, which they can then draw on regardless of how much specie that individual has deposited on their own. The only thing that matters is that people don’t rush in and grab all of the hard currency all at once in a panic. As long as the bank is believed to be trustworthy, it is. The bank can then keep on lending as much as it likes (more or less), printing more of its bank notes (no doubt to change hands many times), and profiting off of the regular interest payments coming in from the borrower. It’s this ambiguity that leads people to call banking a monster of instability playing fast and loose with our money. Within the accounting format called ‘double-entry bookkeeping’ is the ability to measurably increase the overall money supply by entering numbers on a piece of paper during the loan making process. Whether those two sides read ‘asset/liability,’ ‘credit/deposits,’ or ‘bank credit/specie capital’ is insignificant. It’s in the proportion of one to the other that the fluctuations in money supply increase or decrease, but the ratio itself was fluid in the early days of banking.

“The practice then was less conventional than now, for then, taking advantage of the fact that every item on a bank’s books has both an asset and a liability aspect, it might be called either; whereas now every item belongs rigidly on one side or the other. Thus deposits were sometimes what a bank held and sometimes what it owed; and circulation represented money lent as much as money owed. There is a modern parallel in the fact that bank credit may be measured either in assets or in liabilities, and though the statistical practice of measuring it in loans and investments is now well established, deposits are often taken informally as its measure, and the law provides for its control through the ration of reserves to deposit liabilities.” (Hammond, p. 141)

Banking reform would later come in the form of reserve ratios to restrict the amount of loans on one side of the page to the reserves on the other side. Playing with this ratio became the way to check bank’s influence on the economy at large and prevent collapse of banks who greedily issued to many notes without having enough coin to back them up. But fixing reserve ratios as a universal standard did not and does not provide an effective restraint upon the banking system in general. This method assumes, falsely, that issuance of loans comes attached to the specie in the vault when they are actually two separate functions within a bank. The ratio can go up or down and still be left in tact. What matters is that the confidence trick in the bank’s vaults is upheld and people don’t collectively make a run on the bank. As Hammond explains above, it doesn’t really matter if you focus in on the amount of deposits at the bank or the amount of book credit granted by a loan. They are two separate things that have been joined together within the marble walls and pillars of the bank so that a single thing (money) can be multiplied and dispersed where businesses wants it to go.

The Bank of the United States performed this function in a controlled, centralized manner that serviced a fledgling nation. It’s not so absurd to say that without it, the United States might have crumbled in its infancy under the surrounding colonial European powers and its own war debts. Hamilton’s Bank serviced the interest on the debt, enhanced the credibility of the United States of America abroad, stimulated business, and acted as an early-modern regulator of the banking system.

“its prominence as one of the largest corporations in America and its branches’ broad geographic position in the emerging American economy allowed it to conduct a rudimentary monetary policy. The bank’s notes, backed by substantial gold reserves, gave the country a relatively stable national currency. By managing its lending policies and the flow of funds through its accounts, the bank could — and did — alter the supply of money and credit in the economy and hence the level of interest rates charged to borrowers.

These actions, which had effects similar to today’s monetary policy, can be seen most clearly in the Bank’s interactions with state banks. In the course of business, the Bank would accumulate the notes of the state banks and hold them in its vault. When it wanted to slow the growth of money and credit, it would present the notes to banks for collection in gold or silver, thereby reducing state banks’ reserves and putting the brakes on their ability to circulate new banknotes. To speed up the growth of money and credit, the Bank would hold on to the state banks’ notes, thereby increasing state banks’ reserves and allowing those banks to issue more banknotes by making loans.

The Bank’s branches were all located in the fledgling nation’s port cities. This made it easier for the federal government to collect tax revenues, most of which came from customs duties. Locating the branches in ports also made it easier for the Bank to finance international trade and help the Treasury fund the government’s operations through sales of US government securities to foreigners. Furthermore, the Bank’s branch system gave it another advantage: it could move its notes around the country more readily than could a state bank. The Bank’s branches also helped to fund and encourage the country’s westward expansion, particularly with the establishment of a branch in New Orleans.” [Federal Reserve History Website]

So the utility of this bank is without question. More than a money-making machine for a handful of investors getting fat off collecting interest payments, it actually prevented the excesses of banks from spiraling out of control and wrecking the greater economy – as would happen many times after the two banks were killed. In its virtuous civic function, The Bank of the United States was almost an “anti-bank bank” that looked after all actors within the bounds of the nation instead of a small faction of wealthy investors. The number of those kinds of banks would multiply very soon and the network of private banks would come to dominate the American economy to this day. Had the Bank survived, industry would have progressed much more steadily and without the chaos of epidemic bank failures, greatly reducing the severity of depressions that jaded so many Americans. One can imagine the despair and resentment of a population left holding worthless pieces of paper that used to be as good as money, failing to understand what exactly had gone wrong.

It’s worth looking at how this bank was incorporated, if only to admire the grandeur of an intelligent plan conceived on paper but willed into reality. With the war debts exceeding $150 million from the federal and state treasuries combined, interest payments would need to be effected soon. Direct payment with taxes would have crippled an economy that didn’t have as much specie available to do business as is, with outlying farmers feeling this pain exceptionally. The bank would offer to the public a subscription for future stock of the bank to the limit of $8 million, with the federal treasury owning $2 million for a total of $10 million. The federal government would own one-fifth of the bank and private citizens would make up the remaining four-fifths, drawing interest from the scrips they bought. Once enough specie was collected (which it was almost immediately), the game was in play and debt servicing could commence on the basis of that hard currency.

“Though the authorized capital of the Bank was $10,000,000, of which $2,000,000 was to be paid in specie, the Bank was permitted to organize as soon as $400,000 had been received from the subscribers. Whether much more was ever got from them on successive installments is doubtful, though the Bank subsequently accumulated a treasure much in excess of what the stockholders were supposed to pay. Payment for the government’s stock was accomplished under an authorizations in the charter that was taken over almost intact form Hamilton’s proposal and was presumably intended by him to give the appearance of a cash payment. In effect the Treasury drew for $2,000,000 on the United States commissioners engaged in selling government securities in Amsterdam, deposited the drafts with the Bank, and then drew against the deposit to pay for the stock. Technically this consummated the purchase of the stock with funds borrowed in Europe. But it was not desired to have the drafts go through and the specie shipped from Europe, because it would have had to be shipped back for other purposes. So the Treasury borrowed $2,000,000 from the Bank and used the amount to take up the drafts on the commissioners, with which the whole transaction had opened. The net effect was therefore to leave the government in possession of $2,000,000 of Bank stock and in debt to the Bank for $2,000,000, though technically the money owing to the Bank had not been used to buy the stock but to “restore” the funds in Amsterdam which had been “used” for that purpose.” (Hammond, p.123-4)

It was a kind of trick that can work with the use of a public bank and the stability of a government combined. Only enough specie needed to be acquired so that those who needed it could draw on it when they needed it. The rest of the subscribers, including the treasury, kept their accounts on the books and waited for the interest payments to come in from regular installments. The one-fifth of the bank that the government owned it didn’t actually pay for, it borrowed the money from Dutch financiers already keen on these machinations. Instead of physically transferring specie hand-to-hand, agents of the treasury gave to the Dutch paper promises to pay later. They then used this borrowed money to buy bank stock (which earns interest) and pay off the imbalances of the account as time goes on. It all works because there is enough specie to be drawn out of the bank on occasion, allowing the pretense of convertibility between metal money and paper money to persist. People trusted that there would be enough business in America for these accounts to be settled in the end because there was so much nascent potential on the American continent, the bank allowed them to push paying off debts forward into the future by playing with this divergence in forms of money. Essentially, it was a leap of faith on everyone’s part:

“The early Americans were short of capital, particularly capital in the form of gold and silver. If that dearth of gold and silver had been allowed to hold up their formation of banks, the circle would never have been broken; instead they resorted to arrangements which had the practical virtue of establishing the proper procedure in principle if not in fact. And in time, because the pretenses worked, they accumulated the gold and silver and made the principle a reality. It is a case where a pious lifting of oneself by the bootstraps is preferable to cynical realism or conscientious passivity. And for the most part a saner and more honest practice in capitalization established itself as soon as a surplus of wealth made it possible. Without the initial act of faith, so to speak, the surplus would have been slower in coming. The Americans had declared their political independence before it was a reality, not after; and what they did in the matter of financial competence was much the same.” (Hammond, p.124)

It’s the complexity of the move, the juggling of many different obligations all at once, that makes people resort to religious terminology to explain what in the world just happened before their eyes. But all parties simply had enough trust in the ability for a national government to persist in a stabilized capacity, collect enough taxes, pay investors their installments of interest, and receive the required initial subscription to kick things off. Hamilton was also an eloquent speaker and assured congress that his plan would work. He was right and he knew it.

The Bank of the United States brought together private business and public regulation together at a time when both needed each others help. The bank and public banks like it expanded the total money supply in a controlled and regulated fashion, while giving the government the means to pay off its own debts. When the treasury was forced to liquidate its bank stock, it profited for “$672,000 or 30 per cent, and the dividends it received while shareholder were $1,100,000.” (Hammond, p.207) Public banks are very profitable for the governments they represent, but they partner with the other banks and keep them from stashing these profits all to themselves. If large projects are to be effected without a public bank to borrow from, private banks pocket the interest from that demand for funds. Since banks create money, owning one means you can essentially borrow from yourself, like the confidence trick of the Bank of the United States.

The expediency of the bank can be mimicked in our own day and at the state level. Having a public bank for each state would stabilize the rest of the banks of that state by providing additional money to borrow at lower interests. Interests rates could be lowered across the board, or raised if too much business activity is causing inflation and over-extension of credit; and there lies the great hope: a regulated banking industry unbeholden to the insatiable demands of unchecked private banks. This is not a faux-public central bank like the federal reserve, but one that really works for the people by relieving the strangle hold that private banks have on the creation of money. Governments don’t have to be debtors begging for money to start their projects, slashing public worker hours and benefits, stagnating wages, and paying huge amounts of interest to private bankers when they own their own bank.

Public Banking and Taxing the Wild Frontier: Part Three

Much More than a Whiskey Bottle

The cannabis farmers who found the road to economic self-reliance in the redwood forests of northern California suddenly find the road closed. As the pioneers of the most lucrative industry in California and the first to take the risk nationwide, they are now being cast aside by entrepreneurs with plenty of start-up capital. Multilayered taxes, including a big excise, now threaten the small farmer haven that once was the emerald triangle. [East Bay Express: Nipped in the Bud]

When the back-to-the-land hippies fled a stultifying mainstream American culture, they discovered an older America: the Jeffersonian vision of the self-reliant yeoman farmer. They will likely share the fate of that vision however, trampled upon by industrial and efficient Hamiltonian businessman. Battles for a sustainable use of land and resources, as well as an equitable share in the industry, can and should be fought for. But the biggest battle will be fought over which version of the Hamiltonian vision will be instated in the aftermath. With the new tax and regulation of this massively lucrative industry will come the opportunity to revisit the better side of Hamilton’s legacy: his championing of public-oriented financing in the form of the first Bank of the United States.

Before we get to the first public bank in America, it’s worthwhile to explain the economic situation facing the frontier farmers of that time. Their plight at the hands of Hamilton mirrors the plight of the small cannabis farmer when you substitute weed for whiskey.

The aftermath of the revolutionary war saw a period of radical economic transformation, to say nothing of the unprecedented political innovations. Soon after the revolutionary war and the signing of constitution, congress approved of Alexander Hamilton’s funding scheme to assume all of the debts that the states had incurred and centralize them in the new United States government. This would result in a huge windfall for the bondholders of American war debt: over time they would received both the accrued interests and the principle of these bonds at face-value. Taking on this debt would be the engine that propelled the first Bank of the United States into working order and, in turn, set the country off on the right footing with respect to the rest of the world.

All seems well on the face of it, after all, ordinary farmer-soldiers bought paper war bonds too. But the economic conditions in the west were vastly different than those in the wealthier east. The long time that had elapsed since the issuance of the bonds rendered them useless to farmers in need of metal coins or specie to conduct trade. Years had gone by where nobody could be sure that these bonds would be paid back and people needed hard money to go about their lives. Most of the revolutionary war bonds ended up in the hands of the eastern merchants who could afford to hold onto them during the long wait before redemption. The lack of acceptable currency in the west convinced greedy speculators to scour the western lands and swoop them up on the cheap. Western farmers needed acceptable cash immediately and were desperate to sell these bonds and chits. This drove down the prices of to a fraction of their original worth. But when Hamilton’s financial plan was passed, the bonds suddenly gained their full value back and wealthy easterners reaped a huge windfall. Financiers of the east had swindled the frontiersmen of the west less than ten years after they had fought and defeated the British Empire.

And that’s just the tip of the iceberg. The greatest change took place when the new invention of paper currency, called colonial scrip, was taken away after the establishment of Constitution in Congress. No longer could states issue their own currency and make it easier for average person to conduct business. Paper money was the brainchild of Benjamin Franklin and a huge hit with the poor western farmers that lacked specie. It was a totally new brand of finance that facilitated inclusive economic activity, one of the most revolutionary of innovations in a time of so much revolutionary activity. The only problem was that it created currency value inflation due the ease of printing more whenever the occasion arose. The real conflict came, however, from the depreciation of the bonds that wealthy merchants held. Increasing the money supply by printing of more paper money meant that the return on the bonds came back with weaker money than it was lent with. Creditors took a reduced return on their investment but everyone else (the vast majority of Americans) benefited from the ease of doing business. The more money available, the more poor farmers could conduct trade. It was a clear class conflict between debtors and creditors: creditors hated the uncertainty of price fluctuations and taking a bath on war bonds, debtors wanted more money in the economy at large and therefore more economic equality.

Populist finance in America has a long history that rarely makes its way into mainstream canon. A number of authors have written on the subject and deserve praise for their efforts. So much of the historical activity of a people that claims such a democratic heritage was directed at wealthy financiers who got rich at the expense of the vast majority. These democratic actors had potent critiques, alternative ideas that could work, and sound minds for political economy. They simply lost the important battles of history and history, as we all should know, is written by the victors. As William Hogeland put it (the first author who opened my eyes to the history of missed opportunities for American democratic finance in Founding Finance: How Debt, Speculation, Foreclosures, Protests, and Crackdowns Made Us a Nation): “It’s Hamilton’s America… we all just live in it.”

Summarizing the economic grievances of western Pennsylvanians, Terry Bouton writes,

“During the 1780s state leaders had eliminated paper money, which was the primary medium of exchange, especially in the back country, where gold and silver coins were always scarce. They had killed a government loan office that had offered long-term low-cost credit to small farmers and craftsmen – and replaced it with a private bank that offered loans only to merchants and land speculators. The state government had adopted a plan to repay the Revolutionary War debt that taxed the soldiers and farmers who had fought and supplied the war effort so that wealthy men who had speculated in once-worthless war bonds and IOUs could make a financial killing. Those new taxes were often to be paid in gold and silver. All of these policies stripped the countryside of cash and left thousands of farmers unable to pay debts, mortgages, or taxes. The result was waves of sheriff’s auctions that swept the state, a floodtide of misery that, in [William] Findley’s home county, foreclosed about 40 percent of the taxable population.

At the same time that ordinary Pennsylvanians were losing cows, tools, and farmland at auction, state leaders were making it increasingly hard for them or their children to acquire new land. Officials at the land office gave preferential treatment to big speculators (including themselves). Revenue officials refused to prosecute large speculators who had not paid their taxes at the same time that they pushed to foreclose ordinary taxpayers. Judges ruled in favor of wealthy speculators over settlers in nearly every land conflict. In 1792 the state supreme court turned a clear anti-land-speculation law into a pro-speculator one. The law had put caps on the amount of land anyone could purchase to limit speculation. Defying the law’s stated objectives, however, the supreme court ruled that the limits applied only to small farmers and that wealthy speculators could buy as much land as they could afford[.]” (Bouton, ‘William Findley, David Bradford, and the Pennsylvania regulation of 1794,’ in Revolutionary Founders, p.237-8)

With the war over, it seems that the Federalist who took charge of the new government felt the poor farmers of the west were expendable. The new measures crippled the financial base of the liberty-loving rabble-rousers and bolstered the already wealthy speculators that Hamilton championed, setting a precedent that has more-or-less held up throughout American history. Populist direct action had been the bread-and-butter of the movement for independence in the colonies and the new government now regarded them and their proponents as a threat to the new order. This was all very painful for untamed patriots, with this pattern of financier-oriented policy fostering two previous militia formations before the whiskey tax, but when the excise tax came it added insult to injury. The whiskey tax struck at the livelihoods of the very people who joined Hamilton in fighting the British and creating a new republic.

What makes the whiskey tax so hurtful is not that it kept uneducated farmers in the wilderness from getting drunk, distilling and selling whiskey (often to those with the money to buy it out east) was a cost-effective strategy for earning an income through trade. After all of the financial attacks that drained the economic base of the western farmers, now their last profitable trade was being hit by an excise tax. Whiskey distilling drastically reduced the transportation costs in comparison to other goods. It allowed subsistence tenant farmers and self-sufficient landowners alike to sell a valuable product from the periphery back to core market at a reasonable profit. Hogeland explains this dynamic the best: whiskey was exceptional,

“… for being a cash crop, with eager markers both within the region that produced it far away. A gallon of good rye whiskey might sell for only twenty-five cents in the west; easy of the mountains, it could bring from fifty cents to a dollar. Hauling twenty-four bushels of milled rye over the Alleghenies took three pack animals with projected revenues of a mere six dollars; costs outran revenues. Reducing those bushels, at home or at a community still, to two eight-gallon kegs of whiskey amplified their value almost three times while reducing transport requirements to a single animal.

So with a value nearing the absolute, whiskey became currency in places where coin wasn’t seen. Always exchangeable for cash somewhere down the line, whiskey maintained good value against metal. That tended to democratize western economies… The product gave cash-starved segments of society opportunities for small-scale commercial development that might begin freeing ordinary people from debt and dependency.” (Hogeland, p.178)

So whiskey distilling kept these humble farmers economically afloat. Distilling whiskey and selling it back east, just like growing cannabis from the 1970’s to the present, kept communities moderately prosperous without going big and corporate. Their distilleries were often used communally and seasonally. The excise tax on spirits disproportionately effected those smaller distillers because the larger distillers closer to the eastern core could pay a lower tax rate by keeping the stills churning out whiskey bottles all year long. The tax was calculated with an assumption that the stills would be used year-round: impossible for seasonal independent farmers but advantageous to business-oriented distillers seeking to maximize the profits from their investment in their distillery. Large distillers could lower their prices and push out the smaller ones hit harder by the excise. This was complicated macroeconomic tinkering and Hamilton was smart enough to understand the consequences of his legislation. Frontier farmers must have seen this move as yet another targeted attack by financial aristocrats.

Resistance to the first excise taxes in Britain, as Thomas Slaughter describes early on in his The Whiskey Rebellion: Frontier Epilogue to the American Revolution, was one of the quickest and angriest responses ever engendered by a government’s tax scheme. Excise taxes are also called “inland taxes” or “internal taxes” and levy a percentage of the value of a commodity at the point of production. High war costs during the English Civil War forced seventeenth century British governments to seek more revenue. “Opposition was immediate, violent, and persisted in some regions for over a century thereafter… a mob burned down the London excise house during the 1650’s.” (p.12) The core-periphery dynamic was at play here, with London and other central regions of the empire being easier to administer than the farther reaches. “Resistance was always greatest in Scotland, Ireland, Wales, and the outlying rural parts of England.” (p.12) Yet, despite their unpopularity, excise taxes remained a feature of life in the empire. “Indeed, despite pockets of resistance, the excise surpassed the land tax and customs duties to become the single most lucrative source of government income between the years 1713 and 1799. For much of that period it constituted over 40 percent of all Treasury receipts”. (p.13) American farmers no doubt had a collective memory of these tax measures and did not wish to see a repeat in their new country. To add on top of the financial hardship and pro-speculator policies drying up their wealth an excise tax that disproportionately affected their most lucrative business would have seemed like a declaration of war. After all, the impulse to independence and revolution in 1776 was summed up by the slogan “no taxation without representation.” Thousands of farmers did not wish to see the same enemy that they had fought so hard against suddenly reappear under a different guise.

Somewhere between 7,000 and 10,000 men descended upon Braddock’s Field near Pittsburgh, Pennsylvania in 1794 to formulate a response to the excise tax. (Slaughter, p.234) These regulators came from all over the peripheral lands in an orderly and deliberate fashion. Similar actions had occurred recently in the Newburg Crisis and Shay’s Rebellion (or the Massachusetts Regulation) and they drew from a history of populist tax and creditor resistance from the traditional Anglo-Saxon past. The Whiskey Rebellion was a series of mass actions that sprang up all across the countryside – sympathy demonstrations even took place in the big eastern cities. Debt courts were shut down, road blocks were created to stall property foreclosures, and tax collectors were tarred and feathered. (Bouton, p.241) Resistance was a widespread phenomenon that a great deal of the western culture took part in. Though mostly peaceful, tarring and feathering is no benign action – these people were serious about protecting their participation in a trade that became essential to their livelihoods.

Though mass assemblies brought some orderliness to the tax-resistors, they remained divided on how to continue in the face of the impending military campaign to round them up. Some wanted to meet Hamilton’s volunteer/mercenary militia head on or even secede from the republic and found their own nation. Others like William Findley wanted to organize the people into a new party and win seats in congress. There inability to unite, together with the presence of Hamilton’s army enforcing official national law, caused them to disintegrate. Added to this were reports coming in of the atrocities committed by liberty-loving revolutionaries in France, souring the public opinion of widespread disorder and generating well-founded anxiety. The private army raised to put down the rebellion arrested what regulators they could, sometimes indiscriminately seizing individuals at will. To his credit, president Washington pardoned every person imprisoned for their seditious activity, the damage to the movement having been done. Memories of this event and other events like it led to the political collapse of the Federalist party in just a few years. The excise tax followed them out the door when Jefferson’s Democratic-Republican party repealed it.

As Hamilton’s army approached, thousands could see the writing on the wall and fled farther west into the wilderness. Resistance to rich eastern elites would thereafter be fractured or be duped into picking the wrong targets. The coalition that got Thomas Jefferson elected and shook up the electoral shape of America understandably reviled Hamilton’s bank and the means he used to establish it. As prominent figures like James Madison learned of the financial might of villainous speculators, he too turned on his Federalist ally. Madison tried to distinguish between rightful or original owners of government bonds so as not reward rich speculators, but Hamilton’s plan was complete and Madison’s plan infeasible. No records were kept for the sale of these bonds that had changed hands many times. Such was the double-edged genius of Alexander Hamilton: his mastery of finance came at the cost of alienating those around him. He could personally rout the frontiersmen and create many enemies in Washington yet still be revered for the extreme utility of his public bank.

Much to their frustration, neither Jefferson nor Madison could deny the utility of a public bank. Jefferson never understood how debt kept the money system stable and acquiesced to his Treasury secretary Albert Gallatin’s level-headed advice. The agrarian sentimentality cultivated in Virginia and reflected in much of the population of America left Jefferson unable to shape the economic future of the country he did so much to inaugurate. Madison chartered a new Bank of the United States himself to handle the debts from the War of 1812. When that bank was up for recharter, Andrew Jackson, swept into office on popular anger against the financial elite, vetoed it. It would take another 50 years or so for populist agrarian crusaders to realize that government/state owned banks were viable institutions that could protect their interests.

The scars left by rich speculators lingered on for some time after whiskey tax and subsequent repression. From then on, distrust of banks would be a feature of oppositional political thinking in America. Banks would win the future however and without a public option in the banking sector, wealthy businessmen could simply charter their own private versions. For the better part of the nineteenth century, all banks would be viewed by farmers as monstrosities that use a baffling magic trick to mess with their fortunes. But banks are not necessarily evil institutions, the measure of their social utility depend on who is in control of them. Today banks are mostly private corporations with shareholders that demand the maximization of profits as a matter of principle. It need not be this way though and, ironically, Hamilton himself illustrated the best populist alternative to the machinations of the wealthy 1% of today with the Bank of the United States.

The next piece will examine this functioning of this bank and public banking more generally.

Public Banking and Taxing the Wild Frontier: Intro

What the Whiskey Rebellion Can Teach Us About Using Cannabis Money for Public Banking

Something big is stirring out west. Since the California voters passed Proposition 64, cannabis use and cultivation has been made legal for all adults over 21 years old and the consequences of this law are far reaching. When we contrast the history of cannabis cultivation with the new practices resulting from Prop 64, a story emerges that is at once new and old. What is new is a centralized, regulated, and taxed cannabis industry replacing the decentralized small farmers of the past, what is old is a story of taming frontier economies with high taxation. It’s a story that is liable to provoke romantic sentiments for the plight of the small-time farmer in the face of unstoppable capitalist progress but we can do better. With the right degree of activist lobbying the cannabis industry can lead the charge in demanding a California state public bank – a bank that would solidify the populist legacy of the outlaw pioneer cannabis farmer.

Something similar was accomplished in the first years of the republic. During the so-called ‘Whiskey Rebellion’ (a term invented to discredit the uprising) farmers on what was then the wild frontier formed militias to resist the new taxation policy of Alexander Hamilton. These rowdy ‘regulators’ protested against a financier-oriented tax plan that was onerous and unfair even though it ended up financing a beneficial new institution. Their anger was justified: western farmers had been targeted by the wealthy easterners before and now further economic burden would befall them where they could afford it the least. Protesting in those days had a different meaning than it does today. We haven’t seen someone tarred-and-feathered in centuries, nor have we seen spontaneous armed uprisings in quite some time. Instead, we should look at what all of this tax revenue generated by the whiskey tax was used for and what all of this money generated by the Cannabis industry could be used for now.

Despite the absence of tax-resisting militia-men today, the similarities between the changes taking place within the cannabis industry and the Pennsylvania regulation of 1794 are striking, especially when we look into the realm of banking. Although the new cannabis tax revenue for California can’t go towards funding a public bank (the funds generated by prop 64 will go into a special fund predesignating where the money will go), the cannabis industry needs a place to safely store its profits and a public bank is the only kind of bank that can fit the bill. Marijuana is still a schedule one illegal substance at the federal level (amazingly, given its proven medicinal properties), so businesses operating in cannabis do not have access to nationally chartered banks under FDIC requirements. A huge industry generating many billions of dollars is forced to operate with duffle bags full of cash. A state owned and operated bank, on the other hand, bypasses this oddity and creates a win-win for both Californians and the cannabis industry.

Public banks have an enormous benefit for the economy within which they operate. Hamilton conceived the first Bank of the United States and the means to fund it entirely on his own. It helped stabilize the finances of the nation in its infancy after it had accumulated massive war debts both foreign and domestic. By a stroke of genius, those debts were parlayed into a system that convinced investors to do business with the unproven new nation and continue to allow the government to borrow on favorable terms. War debts became the basis of the new economy under this program of ‘Assumption’ and bondholders would continue to hold confidence in doing business with the American government. The only problem was the start-up costs came from poor frontier farmers already beset by economic suppression. It was a giant slap in the face to the people who had fought for liberty and independence, but the bank that financed it stabilized a nascent country in precarious circumstances. Today we have much more willing tax base, in spite of the many resentful cannabis farmers getting edged out by the high cost of going legit, and with the help of persistent public banking advocates a Public Bank of California that benefits the entire state is within reach.

The differences between these two events separated by over 200 years are numerous but three important elements bring them together: a profitable yet unregulated agrarian economy suddenly besieged by taxes, a maligned commodity that is much more than what it seems, and the establishment of a public bank (potentially this time). Like the cannabis farmer on the west coast, the whiskey distiller on the frontier lands of western Pennsylvania, Massachusetts, Kentucky and elsewhere used distilled spirits as a cost-effective means for earning an income. Whiskey was downed by almost everyone in America and the frontier people could sell it to the easterners with a fraction of the transportation costs compared with other goods. At their high points both whiskey and weed were so valuable that they were used as money. [see Terry Bouton, ‘William Findley, David Bradford, and the Pennsylvania Regulation of 1974’ in Revolutionary Founders: Rebels, Radicals, and Reformers in the Making of the Nation]

The burdens of taxation hit communities like these particularly hard. The whiskey rebels turned to the traditional form of protest to try and stop the tax collectors from charging distillers: armed mob threats against tax collectors, shutting down courts, and erecting liberty poles for gathering points. We’re pretty far away from seeing people using such tactics in 2018. However, a public banking movement has been boiling up for years now in both cities and states from Oakland to New Jersey. [Public Banking Movement Gains Grounds in Cities and States across the US]  If the cannabis industry can rally for a bank that would accept its money as deposits it would be a complete game-changer, offering a beacon of light to the similar public banking projects already underway in 20 other states. [How Public Banking Is Winning the West]

Populist finance has seen a resurgence since the Occupy movement put the spotlight on the greed of private banks and the vast disparity in wealth between the rich and the rest of us. [link from occupy.com] While frontier regulators of the late-eighteenth century opposed all financial schemes, today progressives understand that dealing with massive wealth inequality will take drastic measures at the state and national levels. Taking on Wall Street will require more than agrarian regulators marching against the tax man or, in other words, good-old-fashioned direct action. California State Treasurer John Chiang has been conducting public hearings after the formation of the Cannabis Banking Working Group and there the public made its desire for public banking known. Instead of giving them the brush-off, Chiang responded positively and it seems the lobbying by public banking advocates has been met with some success. [Activists Urge California Public Bank not Limit to Cannabis Revenue] The issue now is whether or not the prospective new bank will be extended beyond just the cannabis industry to cover the needs of general California business.

These developments are encouraging for populist finance. In an era beset by financial parasitism and high private debt levels, public-based solutions to money and banking point the way towards prosperity and equality. What will follow is a story about two moments in American history that connects the populist practices of the whiskey-fueled past with our pot-blazing present.

Strike Debt from Money

Since Positive Money UK instigated a debate at the UK Parliament over the creation of money [UK Parliament Debated Money Creation for the First Time in 170 Years], here is a round of links touching on the idea of debt-free money and/or reforming the monetary system in such a way that debt could not drain away money from cities, nations, and people:

Here is the full video of Steven Baker’s time on the floor beginning the debate: http://youtu.be/bXOkmD8Eozs

Bill Still gives his commentary on the parliamentary debate in his five-part series from his YouTube channel:

Number 1: Intro. Number 2: “Store of Value”. Number 3: QE. Number 4. Number 5: “Tested to Destruction”

The main takeaway from Still is a mantra that he often repeats:

“It matters not what backs money but who controls the quantity.”

What is behind money, as if money were a mere appearance that needed a substantial thing to back its value before it became real, is irrelevant if the amount in circulation can be controlled by other means. As long as the supply of money relative to market activity is stable, whether money is explained as gold, or state credit, or a “store of value”, or a debt token or anything else will not make a difference. Keeping the supply of money stable means taking steps to ensure that money is introduced into the economy in sound, healthy ways (vs. letting banks do so by issuing loans).

When bank loans are payed back, money is destroyed and the supply shrinks. When too many loans are issued, more money is in circulation and therefore people are more indebted. Indebted people are expecting that their incomes and investments will continue to grow with the economy, but when interest rates are constantly lowered at the source of money (in central banks like the Federal Reserve), banks have access to “cheap money” (i.e. they pay very little interest on what money they borrow) and they inflate value of money with excessive loans through fractional reserve banking. When all signs are pointing up and the illusion of constant growth keeps people thinking they can make money simply by riding the flow of time, it is hard to put a stop to the fountain of easy money and contract the supply.

This video from the Caspian Report explains the 2008 financial collapse and how the cheap money created by banks for the housing market was inflationary. The way banks are able to issue credit at will during booms distorts the value of money, further inflating it and leading to a greater bust.

Ellen Brown’s latest piece on Cypress style bail-ins that could come to the US in order to cover the banker’s massively over-leveraged derivatives market. This could be the outrageous spark that will push people to reign in the Too-Big-To-Fail banks. The question is: how many people will tolerate having their deposits seized to keep already maligned mega-banks solvent?

Her solution is for states, cities, and the federal government (really any public body) to own their own banks and stop borrowing money from private banks that must turn a profit for their shareholders and employees.
[The Public Banking Institute]

The big message about money is that the mechanisms in place to control the total quantity of money are obsolete. Money must be created without borrowing and without going into debt at the personal and governmental level to prevent banks from sucking money out of the circular economy. Striking debt from the process of creating money would be a simple fix to help turn the tide against systemic domination by rentiers and financiers.

Super Imperialism: Michael Hudson on Dollar Hegemony

One year after the United States dropped its currency backing from gold, Michael Hudson saw a new power formation taking shape and wrote a book called Super Imperialism: The Origins and Fundamentals of U.S. World Dominance. He saw a new dynamic taking place that few would notice in the 1970’s and that few notice still today: America has either planned for or stumbled upon a technique for Imperial rule across the globe that has never before been seen in history. The United States has found a way to use their situation as a heavily indebted nation as leverage for forcing nations around the world to pay it modern day imperial tribute. Due to the complex relationships and mechanisms of central banks and international economic power disparities, America has built an empire based on debt, consumption, currency values, and war that has never appeared before on the earth. I will focus on Chapter 15 of his big book The Bubble and Beyond called America’s Monetary Imperialism for its short, dense explanation of Super Imperialism.

The dynamic that allows for this economic imperialism is very much graspable – it only requires a few steps of reasoning – but it is clouded in economic-speak. Michael Hudson has done a brilliant job in making understandable Super-Imperialism, but I am going to try and explain it again without inducing too much headache. It has taken many weeks of reading, rereading (an excessively marked up text), talking with friends, and talking in the Politics of Debt reading group to come to grippes with it, but this is perhaps the most important phenomenon encircling the earth and the most formidable barrier to enacting global change.

To begin, money in Europe has been backed by a material substance like gold or silver (bullion) since the rise of colonial empires ransacking the Americas and the end of the Middle Ages. The U.S. officially joined the gold standard crew in 1944 during the Bretton Woods system, and since it had most of the gold had the dollar become the reserve currency. In 1971, President Nixon took the United States, by far the most productive and affluent nation on the planet, off of the gold standard. No longer would the value of the American dollar be “pegged” or “coupled” to a fixed value denominated in the weight of gold. Having a steady, base supply of some universally acknowledged material to rest behind the value of a currency makes international trade easier and the currency value less erratic. A standard system of weights and measures allows for many parties to feel safe in exchanging currencies, knowing full well what everyone else will value the money they possess in the same way. A stamped bullion coin or paper money redeemable in a bullion substance would be trusted and retain its value in spite of fluctuating particular country’s currency values – so the logic goes. But this bullion system fixes the value of money so well that the coins or paper needed to pay taxes and conduct business can become scarce. When the supply of a currency runs out, people and states will no longer have the means to conduct trade and might default on their obligations to pay back loans, bonds, and other debt/borrowing instruments.

Today, to facilitate global international trade, currency values are measured against the dollar of which it appears there is no limit. Due to the U.S. leaving the Bretton Woods System of a common gold standard, the standard shifted from the gold backed dollar to just the dollar. Instead of the base measure of value being something scarce as in gold and other bullion, the dollar itself became the standard and could be printed and keyboard-stroked into existence at the behest of the Federal Reserve and lent out wherever – creating a glut of money. Sound inflationary? It is. Since the Federal Reserve was created in 1914, the dollar has lost ~95% of its purchasing power. In other words, things should be a lot cheaper to buy.

The United States of America had been borrowing heavily to finance its deadly and ill-fated war in Vietnam. The costs were skyrocketing and other nations were demanding that the U.S. be able to repay for the bonds it issued – in gold. The American economy was in a recession and its currency was shrinking relative to its supply of gold. The result of these pressures including the limitations on how much money could be spent by the U.S. military due to it’s massive debt run-up was the executive decision to simply unpeg and decouple the US dollar from the gold standard:

“A double standard has been implicit in the world’s economic rules since the dollar was decoupled from gold in 1971, when the U.S. trade deficit of $10 billion was the equivalent of more than half the U.S. gold stock. But today there is no gold convertibility and hence no major constraint on U.S. spending abroad or at home. The United States has not subjected itself to any of the distressing fiscal conditions that all other countries feel obliged to follow.” (Hudson, 368)

The US dollar could now be printed without limit. The US military could spend without limit. The deficits that the US treasury could run up had no limit. The United States could only do this because of its privileged position relative to the rest of the world nations: it was a military powerhouse and had a bustling economy. Other nations relied on the US consumer-based economy to sell their exports to, while they worried about the great disparity created by their military build up:

“The world still remembers how it was the Vietnam War that forced America off gold, as the US balance-of-payments deficit during the 1960’s stemmed entirely from overseas military spending. By 1971 the United States stopped redeeming foreign-held dollars in gold, and the dollar ceased to be a gold proxy. As the U.S. payments deficit shifted to the private sector, it expressed itself in the form of a demand for foreign products. This was welcomed by foreign countries on the grounds that at least it helped spur their domestic employment. But America’s military adventurism has no visible side benefits for Europe, Asia, or other countries. It has given the U.S. Treasury-bill standard the coloration of a political and military threat as well as being merely an economic form of exploitation.” (Hudson, 369)

The standard of gold had been shifted to the standard of US Treasury bills. Now that the burden of a fixed relationship between the dollar and gold had been removed, Treasury bills could be loaned out and dollars could be printed on the promise that America could pay them back with interest. Dollars would be loaned out to “developing countries” through the IMF and World Bank (which, of course, submit to the dollar standard) and any surpluses that these countries earn must be recycled into more U.S. Treasury bills by market constraints I will describe below. The size and scope of the US economy and the flood of money coming in to developing countries (as well as the coercion of economic hit-men and the neoliberal austerity/free-trade theories) convinced them to receive the glut of dollars to finance their industrial expansion. Mainly, developing countries would use these dollars to build up their productive enterprise and sell their exports on the world market, with the US sucking in much of the goods produced overseas.

“Now that the dollar had been demonetized, all that foreign central banks can do with their excess dollars is send them back to the U.S. Government by buying Treasury Bonds. If they do not do this, their currencies will surge against the dollar, threatening to price their manufacturers and food exporters out of foreign markets.” (Hudson, 368)

The constraints forced on non-U.S. countries to pay back their debts were not felt by the U.S. itself: being the primary hegemony both militarily and economically, the U.S. can spend whatever it likes and go into debt as much as it wants. Doing this actually helps the U.S. maintain the Imperial order of global trade and resource appropriation from developing countries via the asymmetry in the demand to repay debts and global market competition. This is the strange opposition, whereby an indebted country has been de facto colonizing other nations with surpluses from their trade: the U.S. goes into debt to finance military build up among other things (though obviously not for improving the lives of its own citizens) and the rest of the world must send their surpluses back to debt-empire, if they make a surplus at all. Of course, if “undeveloped” countries do not do well on the world market by selling all of the goods from their land with modernized production and (usually) cheap labor, they must pay back their debts (unlike the U.S.). To ensure this happens, austerity ravages the national purse and sucks the money out of an economy more forcefully and public agencies, enterprises, and infrastructure are privatized. The U.S. elite will get their tribute, whether by dollar-backed “ordinary” market means (a flood of dollars which must be used continually or else leave them at a trade disadvantage) or else austerity enforcement that demands the debts be payed with interest regardless of the performance of the economy in the world market.

Hudson summarizes a bit:

“Unlike former modes of Imperialism, it is a strategy that only one power, the united stares has been able to employ. Also novel is the fact the U.S. Treasury-bond standard does not rely on the corporate profits or the drives of private companies investing in other countries to extract profits and interest. Monetary Imperialism operates primarily through the balance of payments and central bank agreements, which ultimately are government functions. It occurs between the U.S. Government and the central banks of nations running balance of pavement surpluses. The larger their surpluses grow, the more U.S. Treasury securities they are obliged to buy.” (Hudson,370)

All non-U.S. countries are in a bind that forces them to support America’s military “adventurism” abroad. If the massive loans they receive to industrialize do not work out, their debts are collected on at the expense of public services, jobs are lost, and the people flee the destitution in their own land. If they succeed in world markets and play ball with the dollar, they enable the U.S. Treasury to continue selling it’s Bonds and Bills and increase the disposable money or liquidity (money is a very liquid substance under the fiat system vs. solid gold) to finance credit creation all over the globe. Their currencies being tied to the dollar standard, they are obliged (read: economically constrained) to keep currencies devalued, which in turn keeps them tied to the international market system and sends their natural resources away as exports.

The crux of this phenomenon is the dollar standard: because every other currency is denominated in dollars when they trade internationally, the U.S. feels empowered run up its national debt and continue to pay back the interest on the Treasury Bonds it sells with even more Treasury Bonds.

The people clamoring about the national debt astronomic expansion don’t usually make the connection between the debt and its imperial function of suppressing foreign currency values. Likewise, Modern Monetary Theorists who believe the national debt can be run-up without limit because of the governments status as a currency issuer also fail to take into account international dollar hegemony and the effect it has on global markets and the geopolitics of imperialism. A currency does not need to be created with debt attached to it: “[Foreign countries’] Treasuries can create their own money based on their own economic needs rather than letting their central bank reserves be a derivative of the U.S. payments deficit.” (Hudson,378). The IMF-American hegemony on world markets has built up such a giant house-of-cards that getting off of the dollar standard would be risky and upset the by far and away most superior military force on the earth. America’s massive national debt is proportional to its military might.

“Using debtor leverage to set the terms on which it will refrain from causing monetary chaos, America has turned seeming financial weakness into strength. U.S. Government debt has reached so large a magnitude that any attempt to replace it will entail an interregnum of financial chaos and political instability. American diplomats have learned that they are well positioned to come out on top in such grab-bags.” (Hudson,374)

In other words, if any country tries to subvert the dollar standard the military will bring down the hammer. This is why the Russia-China deal to strengthen economic ties in Asia and Eastern Europe in response to sanctions put on Russia for the Ukraine-Crimea episode is so important: a new block that could successfully subvert the dollar hegemony would be a major geopolitical power maneuver. Hudson sees this dollar hegemony mechanism at work in the Ukraine standoff between Russia and America. It is probably the main reason why the U.S. is pushing so hard on “fast-tracking” the Trans-Pacific Partnership, forcefully and secretly opening up Asia and pretty much the entire Pacific Ocean to unregulated, wild-west Capitalism to counter China’s growing influence as a trading power. As long as these major economic zones with resource-rich lands and cheap labor are using the dollar standard, they will be forced into the vicious cycle of buying Treasury Bonds and exporting their goods overseas – further financing military spending.

Again, thanks to dollar standard and the double standard, whereby the U.S. gets to run up its debts while other countries must honor them and other countries must measure their currency value relative to the this debt-based currency, it doesn’t matter that the U.S. debt climbs sky-high. The national debt actually solidifies America’s position as the central market player regardless of how well it does in GDP growth. The black hole of American debt and consumption draws in all of the money that countries make on the private market from exports back into the Treasury Bonds that will guarantee a decent return, but just add on to the U.S. national debt. America feels it can keep printing dollars and loaning them out to whomever because in between the time it takes to pay off the debt that comes attached to the Treasury Bond credit, private businesses have already sucked in the goods of these productive and indebted borrowing countries. If they don’t pay it back, the austerity hawks come flying in. America gets to continue running up its debt because the countries it imports from get loads of dollars, which they can only recycle back into more Treasury Bonds. The dollar becomes like a black hole that all currency must spiral back into when countries with different currencies profit off of global market trading.

Hudson:

“[The United States] pays for its net imports and buyouts of foreign industry [typo] with Treasury bonds that its diplomats have long hinted they have little intention of paying off. Central banks end up with paper or electronic IOUs bearing 4 or 5 percent interest, which the U.S. simply adds to the balance of what it owes, while U.S. investors but foreign companies, resources and hitherto public enterprise expected to yield in the neighborhood of 20 percent in earnings and capital gains.” (Hudson,374) *my italics.

The dollars received for real tangible things like public infrastructure, products shipped out on the supply chains, and the benefits of the land are nearly universally valuable in the short run, but, if confidence in the U.S. Treasury to pay back the ever-increasing debt and growth in the U.S. economy dwindles, the long term viability of the dollar will be made obvious and collapse. And since the Federal Reserve has decided to rescue insolvent predator banks that are massively leveraged against real assets with securities and derivatives, the hopes for a return to growth and an even more bustling U.S. economy not burdened by parasitic banksters are looking more and more bleak. On the domestic side,

“… the U.S. real estate and financial bubble has been welcomed as post-industrial “wealth creation,” it is rendering the American economy uncompetitive in world markets and hence unable to pay off its foreign debt by running a trade surplus. U.S. labor is obliged to pay for high-cost housing and pay debt service on the loans it needs to stay afloat in today’s economy.” (Hudson,372)

The infinite demand of debt repayment extends not just to foreign countries but to America’s own people. When the latest speculation caused bubble popped in 2008, the Fed decided to bail out insolvent banks and let them continue their destructive easy-money siphoning behavior while most Americans are teetering on the edge of missing their monthly expense payments. As has been well reported (but never enough), America is one of the most unequal nations on earth, far more than the population even believes it to be. This is largely because of a minuscule amount of financiers earning economic rent on artificially inflated assets, which Hudson details in other parts of the book.

All of this means bad times are ahead if the system of money flows and debt repayment disparities are not drastically altered. The biggest and most glaring issue is that the U.S. has demonstrated that it is willing to flex its military muscles at the behest of its elites and could very well spin the almost totally corporate controlled media into believing that it is checking some other nation’s aggression by going to war. An economic alliance of non-dollar using countries like the industrially productive nations of Brazil, Russia, India, and China (BRICs) could subvert the U.S.’s hegemony by selecting an alternative currency to base all of their transactions on, but how anyone could challenge the United States militaries intervention on behalf of the bankers and capitalists is anybody’s guess. Delegitimizing domestic protest and other internal strife that threatens the life of the vampire squid is where one of the most important sites of conflict will be in the global market dominance game.

The American war machine, coupled with the financiers is a powerful block that is desperately trying to maintain the massive wealth and power it has built up. With looming earth-systems collapse on the horizon, the military will do what it has always done in times of crisis and financiers will never let go of the money they have gained by their political maneuvering. Achieving reform like the tariffs for the sake of monetary symmetry that Hudson recommends will be difficult and receive hard pressure with all of the tools at the disposal of an elite financier-capitalist class. Hudson is a rare thinker who understands the need for large debt write-downs for those which cannot and where not designed to payed back in full. The economic gains of the financial class are entirely debt-leveraged and should be taxed away. What comes after a potential jubilee debt-cancellation or Debt Strike will be the really interesting part: a return to competitively growing global markets and military imperialism would only raise the specter of disastrous global warming. A steady-state economy that is built on stopping expansion of production as well as allocating money more equally is the only kind of “reform” that earth and its unfortunately “developed” people could be grateful for.

Be sure to check out his website as well as videos like these:

http://youtu.be/sjV5FEKVs8A

Debt and Moral Grounding: Beginning David Graeber’s Debt

To come to a better understanding of debt and the role it plays on our lives individually, socially, and on a global level we are going to need some help. While at one time the function of a particular logic of indebtedness might have been fully apparent to those who suffered as a result of it, we can’t seem to get a collective grip on debt at present time. A purely economic formulation of how debt functions risks freezing time and giving us only a small slice of the effects that debt takes on people. Economic theories tend to ignore the history of money as it was used in diverse societies and opt for a static, state-of-nature (or similarly ahistorical) account of money, credit, and debt.

To speak or write of a single thing called debt means that there is a common thread extended through most human societies that can be isolated apart from other aspects of a society, though its impact will be transfigured and interpreted in a spectacularly wide range ways depending on geography, cultural heritage, and everything that makes cultures unique. Extracting this thing (which is more properly a logic doing work on its own) called debt from its context is necessary for theorizing it, but this does not mean that one can theorize in the obscurity of a few models, graphs, and esoteric phrases meant to be understood by a select few and mediated by them to the greater public. Economic theory has moved towards specialization and has enormous influence on the actions of representatives taken (supposedly) on behalf of whole societies, but could the discipline of money, markets, trade, labor, and production have really forgotten the most basic element of living in a social arrangement?

There are more prescient economists who are sensitive to a greater array of history than the European story since the Enlightenment era thinkers began musing on human nature and political economy in books printed by a press for wide distribution. More historical information is required though when an entire discipline is rife with political clout, and an anthropologist with an eye towards what is wrong with economics can supply this research. David Graeber brings together an extremely diverse selection of ethnographic research into one book meant to critically assess our knowledge of money – what it is and does to people. He posits many working hypotheses of his own beyond the critical function of dispelling mainstream arguments and even writes a chapter titled: ’A Brief Treatise on the Moral Grounds of Economic Relations’, which I will eventually go over. The book is a kind of grand narrative of the humanistic kind that takes a huge supply of historical records and seeks a link that will bind humans in common. The notion of a “baseline communism” is one that has stuck in my memory as the crux of his ethical position. Morality and money, the effects that the later has on shaping discourse on the former throughout the course of history, are detailed very well, but the authors own morality must be remembered in the stack of historical evidence that Graeber has compiled for us. Lest we allow the mistake of obscurity that befalls economists wearing blinders in regards to the great variety in history, we must not let Graeber’s moral sentiments or, perhaps, ideology* obscure our understanding of debt.

Graeber is quite the crafty storyteller, and ’Debt’ is real page turner. His stated goal is neither to give a purely objective account of debt in human societies nor tell an entertaining story, but he does weave high theorizing in with anecdotes, folk tales, verified documents and artifacts. The first chapter is called ’On the Experience of Moral Confusion’ and muses on how one could justify horrendous macro-economic policies that do severe damage to people under the rubric of debt repayment. It is a sincere and far reaching question to ask: Why do people insist that debtors must repay their debts to creditors as a moral imperative, no matter the physical suffering?

“If one looks at the history of debt, then, what one discovers first of all is profound moral confusion. It is most obvious manifestation is that most everywhere, one finds that the majority of human beings hold simultaneously that (1) paying back money one has borrowed is a simple matter of morality, and (2) anyone in the habit of lending money is evil.” (p.8)

Before getting into the chapters read and discussed by the Politics of Debt group, it is important to note that two separate works are in operation in this book and perhaps deliberately: 1) the historical work of discovering old social customs, recording dates as precisely as possible, supplying evidence to make a case about an actual occurrence, etc. and 2) a moral appeal to humanity that values one action/reaction to another across every human. The diversity in human culture and the range of diverging values they take on in response to ethical dilemmas is on full display (perhaps even better than it has ever been presented to me) but that universal humanist morality can creep into even tightly evidence-based arguments unawares – especially in the hands of a masterful storyteller.

So I will proceed with caution, keeping a close eye on the moral confusion that might arise from reading such a sweeping history itself; on the other hand, an oversimplified clarity could be misleading. The trick is in absorbing the insights that a politically active anthropologist can provide, while keeping the humanist morality separate.

The first few chapters of the book are dedicated to setting the scene with the received schools of economic theory and then demonstrating how easily their axioms and starting assumptions become flatly wrong. The myth of barter assumes that all societies function like the one in which classical economic theory developed: dominated by exchange. Treated like a collection of individuals all alone in their rational decision making power making deals with other similarly isolated individuals, classical economics extends its own social context into those other societies not yet “fully developed”. Economics needed a myth to show why the discipline itself is necessary for making business more efficient and resources better allocated throughout society. The myth that money emerged to simplify transactions already taking place but without the efficiency of money posits a negative of the ideal that economics strives for, equilibrium and efficiency, but does not remove the individualism. The goal of the classical economist here is to understand the origins of “the economy” and in so doing the reason why money exists (supposedly to help facilitate trade). But these moneyless societies did not trade in the way assumed by the economics textbooks – the theory is “exporting” its own social norms into the “old ancient” societies under its study. It is a “classic” example of begging the question: many other cultures didn’t need money and didn’t trade like modern European cultures, from which economics as a field of study, did. Mainstream economists ignore the role of debt and loose agreements among neighbors in a common social setting, to say nothing of the variety in ways different cultures handled indebtedness.

The goal of economists’ adventures in creating fictional scenarios of other, primal peoples before their own time is to explain what money is and how it came to exist. Graeber demonstrates how a theory of money must account for debt:

“The difference between a debt and an obligation is that a debt can be precisely quantified. This requires money… money and debt appear on the scene at exactly the same time.” (p.21)

So debt is bound up with money in that both can be measured and subjected to cold calculation in Graeber’s theory. But debt can exist as a social relation without hard cash or coinage.

“We did not begin with barter, discover money, and then eventually develop credit systems. It happened precisely the other way around. What we now call virtual money came first. Coinage came much later, and their use spread unevenly, never completely replacing credit systems.” (p.40)

So is all money simply debt? Does the IOU credit system, whereby people loan to each other without necessarily establishing precise numerical rules for repayment, always underpin money? The idea of debt-free money will come up later on, but Graeber explicitly states that debts incurred within a society predate money. People have gotten along just fine without a substantial unit of measure to give each other for favors; but when that standard currency comes into play, it is as a form of debt. This is undoubtedly true in a fiat system, where money is created “out of thin air” and so a debt is charged from the bank or entity that put the cash into existence. Currencies pegged to a supply of some material like gold or silver are different: their value is tied to something tangible and not based on a promise. A debt on the other hand involves a transaction whose completion has not yet occurred. There is a time lapse in-between the moment a debt is declared and understood by both parties and when the debt is eliminated by repayment, assuming that all debts could in fact be payed off (they all can’t).

Graeber does think that money comes into being as a kind of debt: the preexisting debt is “monetized” or unitized into a universally recognized store of value. Money obviously involves exchanges and transactions between individuals as a condition for the possibility of the establishment of its value. Money is something exchanged on the spot, bringing the relationship to an equilibrium state and allowing both individuals to walk away. “A debt”, he says, “is just an exchange that has not been brought to a completion” (p.121). Money then becomes a way to resolve the situation of debt. So far so good.

But in beginning the “treatise” chapter he says: “To tell the history of debt, then, is also necessarily to reconstruct how the language of the marketplace has come to to pervade every aspect of human life – even to provide the terminology for the moral and religious voices ostensibly raised against it.” (p.89). We do not need to follow him along with the story of the history of debt in order to understand the logic of debt – this can be done much more quickly and without all of the anecdotes, jokes, and spiritual manifestations. Nor do we need to create new categories that explain the effects of the moral confusion that debt instills. But Graeber does: recurring themes in human societies are given to help us chart the complicated intertwining paths that debt sets us out on. A historical focus prevents the abuses of abstraction found in classical and neoclassical economics, but Graeber is going even farther. Three different forces are contrived and put to work in communities that switch between each other in terms of their role in guiding our behavior: Communism, Hierarchy, and Exchange. He writes that “Much as in the case of the great religions, the logic of the marketplace has insinuated itself even into the thinking of those who are most explicitly opposed to it. As a result, I am going to have to start over here, *to create a new theory pretty much from scratch.*” (p.90). (my emphasis) To find a conception of debt untainted by the market, a new theory is going to be devised. But Graeber is going for something very grand here in a pure conception of debt (i.e. one that cuts through the moral fiber that holds up all cultures and escapes the Capitalist terminology of our current era). We could very well say that indebtedness is simply an uncompleted exchange during which all sorts of strange and pernicious things can happen (usually involving money) but also a necessary component of society, but then we would only get the rule, the logic of debt and not all of those negative effects. Since he wants to correct and detect those misuses of the logic of debt and he has a wealth of data on so many different societies at his disposal, we get terms that will hold for the entirety of human history. This, however, opens him up to criticism for mixing copious amounts of research with a normative standard he perceives to be at the ground of each and every society under consideration.

Not that this vast store of information does not belong in an understanding of debt; it can indeed correct many false assumptions about how debt functions in society – as it does with the majority of modern economic thought. But the big risk is in mixing novel terminology with these details of societies and producing something new and creative with what sounds scientific, or totally evidence based. This is a much bigger issue that goes farther than Graeber: just how scientific is economics? anthropology? To the extent that they gather evidence, hold experiments, make predictions, and much more, science is at work. But we will not understand debt in this scientific way if economic relations require a moral ground, as the title of chapter five implies. The issue is whether debt as a logic can be amoral, and whether Graeber is infusing his history with a morality of his own. Strange things are indeed happening when debt is attempted to be comprehended in a logical fashion. Whether debt logic is extractible from its moral underpinnings, or whether morality follows debt in all cases.

So we are not given a statement of what debt is* until we are treated with a trinity of notions that imminently constitute society: Communism, Hierarchy, and Exchange. The categorization is helpful for conceptualizing debt and it gives us a way to frame separate cultures in a way that links them together in a web of debt. The utility of this trinity, its use-value if you will, for understanding debt is why I will follow Graeber’s story, but it must be remarked that it is precisely here that – in setting forth his own “moral grounds” for economics – that there is room for critique.

Communism is here not a revolutionary utopian or scientific program at the end of a progressivist vision of history, but the bedrock of human social relations. The minimal sense of “from each according to there abilities, to each according to their needs” is often repeated as the principal slogan of communism and the glue of society. I’m wary of this move: the phrase came about in the context of a Marxist revolutionary theory that posits history as a science and leading to a great evental, social whole. The reversal of Communism back into not the high theory (which incessantly demands revolutionary practice as an entrance fee to its discourse) from which it came but each and every society at its base just doesn’t smell right. Why the -ism? Graeber is attacking classical economics and its pursuing individualism (which binds people into contractual, one-to-one relationships with other individuals) very well, but I wonder if this appeal to baseline communism is merely the other side of the “coin”. It is hard for me to believe that a theory that came out of the same debates as the classical school, and is similarly triumphal in their progressive analysis of history could come to embody *all societies.

“In fact, “communism” is not some magical utopia, and neither does it have anything to do with ownership of the means of production. It is something that exists right now – that exists, to some degree, in any human society, although there has never been one in which *everything has been organized that way and it would be difficult to imagine how there would be…
But all social systems, even economic systems like capitalism, have always been built on top of a bedrock of actually-existing communism” (p.95)

It is this baseline communism that will be thwarted by the debt malfeasance of the violent and parasitic members of the commune hoarding cash. The creeping threats of exchange and hierarchy are what invade the commune, subsuming it their own separate logic. The three phenomena coexist in every society but not harmoniously, seeing as it is the functional and integrated form of communism that is the least responsible for intra-societal violence and slavery.

Exchange is responsible for the drift that pushes people away from each other and puts them in a dual state of equality and separation. When one is engaged in exchange, possession of things and commodities, competition, and gift giving can take place.

“In exchange, the objects being traded are seen as equivalent. Therefore, by implication, so are the people: at least, at the moment when gift is met with counter-gift, or money changes hands; when there is no further debt or obligation and each of the two parties is equally free to walk away.” (p.108)

When two people are isolated and yet on the same level (without one being higher or lower than the other) sharing takes on a different dimension (or dimensionality if you will) that allows a measuring of one by the other. So if that same level is to be occupied by both, an equalization must occur so that they do not fall into contestation. But this happens all of the time, and the art of gift giving is a way to politely exchange without breaking out into offensive battle. Exchange keeps people on the same playing field, resulting in entertaining games but also impersonal, commercial transactions where the parties can cancel out the relationship and forget the affair. The debts we have with each other are then a way to bring each other together while equal exchange implies separation.

Hierarchy is the outright rejection of equivalence. The vertical levels are well understood, the contests and games become lording over each other. Hierarchies are stabilized relationships where one is considered better than the other, higher and rightfully so. A justification of one’s status as greater and more revered are assumed: “The moment we recognize someone as a different *sort of person, above or below us, then the ordinary rules of reciprocity are set aside.” (p.111). Kings and royalty, aristocrats, the caste system – you get the picture. Interestingly enough though, Graeber asserts “that the logic of identity is, always and everywhere, entangled with the logic of hierarchy.” The custom and essence of a person, their social role and their inner most being, are a result of sedimentation into hierarchies: “…a certain action, repeated, becomes customary; as a result, it comes to define the actor’s essential nature.” So a persons nature is inextricably linked to their customary role as it has become crystallized into a universally acknowledged quality of that person by everyone else. Essentialism: gone. But what remains is a social core: baseline communism is a “quality” of all social arrangements and is indestructible.

Graeber has done a fine job of critiquing the self-promoting fantasies of (neo)classical economists and their reliance on exchange-based understandings of morality as equality, of Justice as reciprocity. Debt similarly falls into this camp of exchanging things between two parties who are on the same plane and must. By the time he finally gets around to asking “What, then, is debt?” On page 120, it is already firmly placed into the sphere of exchange and not a part of the logic of baseline communism or hierarchy.

“A debt, then, is just an exchange that has not been brought to a completion.
It follows that debt is strictly a creature of reciprocity and has little to do with other sorts of morality (communism, with its needs and abilities; hierarchy, with its customs and qualities). True, if we were really determined, we could argue (as some people do) that communism is a condition of permanent mutual indebtedness, or that hierarchy is constructed out of unplayable debts. But isn’t this just the same old story, starting from the assumption that all human interactions must be, by definition, forms of exchange, and then performing whatever mental somersaults are required to prove it?…
Debt is what happens in between: when two parties cannot yet walk away from each other, because they are not yet equal. But it is carried out in the shadow of eventual equality.” (p.121-122)

So debt is a relation between separate individuals who are equal in theory but not-yet. During this present, this not-yet, hierarchy solidifies.

Critiquing the reciprocal notion of Justice and the tendency to view society, the economy, and the marketplace as a place of equilibrium where things balance out is Graeber’s starting point, and he quickly shows (well, relative to the rest of the book) that it is unreliable as a ethical and economic tool. Given the enormous historical data and factual evidence he presents, it is hard to argue with him that human relations involve far more – including common decency and clear customary boundaries. But doesn’t communism take the privileged position in his triangle, on the bottom, maybe, but resting firmly on a secure ground of the baseline? Triangles need to be in perfect balance themselves if they are to rest one point on a surface, the slightest tilt will make one side fall to the ground and rest much more easily… This issue of origins in value and morality will come up when Nietzsche, Lazzarato, and Wortham come into play, and chapter four, Cruelty and Redemption, looks at On the Genealogy of Morals. The topic of origins is tricky.

Having dispelled equality and reciprocity as standards of economies and ethics, we still are in a study of debt; and in debt, we are in an exchange model that presuppose this one-to-one symmetrical relationship – at least in sometime, the not-yet. To further understand the logic and politics of debt, and without an possibly anthropocentric communism at its base, even more help will be required. Scanning through the internet, the best full critique of Graeber’s book I’ve seen so far is this one from Jacobin Magazine by Mike Beggs: Debt: The First 500 pages. Here is a taste of things to come from that article:

The mint can print any numbers on its bills and coins, but cannot decide what those numbers refer to. That is determined by countless price-setting decisions by mainly private firms, reacting strategically to the structure of costs and demand they face, in competition with other firms. Graeber interprets Aristotle as saying that all money is merely “a social convention,” like “worthless bronze coins that we agree to treat as if they were worth a certain amount.” Money is, of course, a social phenomenon. What else would it be? But to call its value a social convention seems to misrepresent the processes by which this value is established in an economy like ours – not by general agreement or political will, but as the outcome of countless interlocking strategies in a vast, decentralized, competitive system.

I will remain on the topic of values, ethics, and origins for a few more posts before the issue of money, monetary policy, and contemporary heterodox economics enters the stage. But just to conclude, and since this is the topic of the Politics of Debt class at the time, here is another pertinent quote from the Jacobin Magazine article:

“…unlike Graeber’s critique, not much of monetary theory itself rests on the historical origins of money. Economics deals with the operation of a system. It attempts to explain the system’s stability, how the parts function together, and why dysfunctions develop. The origins of the parts may say little about their present shape or roles within the system. Modern monetary economics has been concerned above all else with explaining the value of money, and the conditions of its stability or instability. This is a problem that concerns the role of money in organizing exchange via prices. The imaginary barter economy without money but somehow still with a highly developed division of labor is a counterfactual, a tool of abstraction, which in fact the textbooks are often careful not to describe as actual history.

As for arguments that money is essentially about debt, or essentially a creature of the state: this is to make the mistake of reducing something involved in a complicated set of relationships to one or two of its moments. Economics has generally met the challenges of credit and state theories of money not with fear or incomprehension, but with indifference: if credit or the state is the answer to the riddle of money, the wrong question may have been posed.”