Debt, Money and Marx (2012)

Book Review from the August 2012 issue of the Socialist Standard

  David Graeber’s much talked of Debt: The First 5,000 Years is what the title suggests –a history of debt since ancient times. Debt, that is, in the broadest sense, since Graeber discusses theological conceptions of debt as something humans owe to gods or to God or to society, which is rather remote from the more usual sense of owing money.

The myth of barter
Graeber sets out to refute the idea put forward by Adam Smith and followed by others that money arose out of barter. Smith argued that all humans had a “propensity to truck, barter, and exchange one thing for another”and so that barter would have been the original way in which they exchanged the products of their different trades. As barter has the inconvenience that those wanting to exchange have to have what each wants, at some stage money is invented as something that can be exchanged for anything.

As an anthropologist, Graeber is able to show that there never have been any economies based on barter. It’s a myth, but the founding myth of conventional economics and still adhered to in modern economics textbooks. In a footnote (p. 395) Graeber suggests that “the idea of a historical sequence from barter to money to credit…reappears at least in tacit form in Marx”. This is fair enough to an extent, as in his ‘critique of political economy’ (the subtitle of Capital) Marx did accept some of the historical facts as perceived by Adam Smith and others whose ideological conclusions he was critiquing.

One of these historical assumptions was that barter preceded money. The theory of money that Marx expounds in the opening chapters of Capital, however, is that money is a commodity that can be exchanged for any other commodity, i.e. it is what he called a ‘general equivalent’. This is not a theory of money as an invention or social convention to overcome the inconveniences of barter. It is, rather, a theory of the way in which the social relationship that links separate commodity producers appears externally as a thing.

Marx’s analysis of money was not a historical description of how money evolved but a theory of what money is, irrespective of how it evolved. It is therefore not affected by later researches such as Graeber’s which suggest that money as a general equivalent did not in fact evolve out of barter. This said, Marx is very much with the money-as-commodity school as opposed to the money-as-credit theorists with whom Graeber seems to have more sympathy.

Social currencies
But if money didn’t arise from barter, how did it arise? In fact, what is money? Most would say that money is something that can be exchanged for anything else, i.e. that it is a means of exchange, typically (but not exclusively) coins and, these days, notes. Graeber accepts that this is one aspect of money, but emphasises another: its function as a general unit of account allowing different products to be compared. Once again as an anthropologist, he is able to show that money in this form existed before coins.

The first example he gives is of human groups where dowries and compensation for killing or injuring someone or impugning their honour are quantified. The general unit in which these are measured can be anything and has varied from cowrie shells to cattle. As these items do circulate (pass from one person to another) he calls them “social currencies”and the groups which practice this he calls “human economies”. But these cowrie shells, etc were not used to acquire items of everyday use:

  “All of this, it is important to emphasize, can happen in places where markets in ordinary, everyday goods –clothing, tools, foodstuffs –do not even exist. In fact, in most human economies, one’s most important possessions could never be bought and sold for the same reasons that people can’t: they are unique objects, caught up in a web of relationships with human beings”(p. 208).

But if they are not used, and cannot be used to buy things are they really money?

Shekels and the State
Graeber’s second example is of the states that existed in the Middle East from 3500 to 800 BC, especially Sumer (the area between the Tigris and Euphrates rivers, now part of modern Iraq). Here there were both taxes (debts to the state) and commercial and personal loans to acquire things. These were also expressed in a common unit (a shekel which was a weight of silver) but this rarely changed hands as debts and taxes were settled in kind with such useful things as wheat, whose quantity was determined by its silver equivalent. There were no coins, but was there nevertheless money? Can money be said to exist if there is just a general unit of account without the circulation of the material which is its substance? In any event, Graeber proves his point that before there were coins there wasn’t just barter.

Coins, i.e. uniform pieces of metal stamped according to their weight by the rulers of a state, are generally accepted to have first come into existence in the kingdom of Lydia (in what is now Turkey) around 600 BC. Graeber makes a good case for saying that this was to pay the soldiers the state employed. The use of coins, he says, then spread to Miletus, a Greek city and port on the Ionian coast of the Aegean Sea:

  “It was Ionia, too, that provided the bulk of the Greek mercenaries active in the Mediterranean at the time, with Miletus their effective headquarters. Miletus was also the commercial center of the region, and, perhaps, the first city in the world where everyday transactions came to be carried out primarily in coins instead of credit”(p. 245).

Thus states (not barter) were at the origin of money. Graeber goes further and argues that markets too, as places where everyday things can be acquired in exchange for coins, were also the creation of states. In other words, markets were dependent on states from the start. This allows him to refute the free-marketeer idea that government-free markets have existed or could exist (which in fact is part of the barter myth).

Commercial credit
Commerce (merchant’s capital) existed long before industrial capital (capital invested in production) and many of the arrangements for paying for goods that were traded over long distances were developed in pre-capitalist societies: arrangements for clearing payments at mediaeval fairs in Europe, for instance, and ‘paper money’ (actually, paper trade bills: credit given to merchants till they sold their goods) in China in the 10th century AD. Cheques, Graeber points out, were in use in the Islamic world in mediaeval times, the Arabic word saqq being the origin of the English word ‘cheque’.

These are all credit arrangements which Graeber uses to back up the thesis advanced in his book that there is a historical cycle of periods during which trade is based on credit and when it is based on bullion. According to him, after the USA finally went off the Gold Standard in 1971, we may have entered another age in which the credit will come to be regulated, as it was in previous credit ages.  During these times debts were periodically cancelled (the original meaning of the word “jubilee”) and the charging of interest on loans for consumption was banned.

What is capitalism?
When discussing relatively modern times (1450 to 1971) Graeber asks “So, what is capitalism anyway?” Socialists in the Marxist tradition define capitalism as an economic system based on the production of surplus value by wage workers. These are employed by capitalists or capitalist corporations that have invested money in producing things for sale on a market with a view to profit. Graeber challenges this definition. Marxists, he says,

  “still tend to assume that free wage labor is the basis of capitalism. And the dominant image in the history of capitalism is the English workingman toiling in the factories of the industrial revolution, and this image can be traced forward to Silicon Valley, with a straight line in between. All those millions of slaves and serfs and coolies and debt peons disappear, or if we must speak of them, we write them off as temporary bumps along the road”(p. 351).

Graeber should read the chapter in Capital on “The Genesis of the Industrial Capitalist”. In it Marx deals with how the capital to launch the industrial revolution was originally acquired: “so-called primitive accumulation”(but which is better translated as “original accumulation”). He lists “colonialism, the national debt, the modern mode of taxation, and the protectionist system”as methods employed by the state in Spain, Portugal, Holland, France and England “to hasten, hothouse fashion, the process of transformation of the feudal mode of production into the capitalist mode, and to shorten the transition”. That Marx fully realised what a brutal process this was can be seen from the concluding words of the chapter where he wrote that capital came into the world “dripping from head to foot, from every pore, with blood and dirt.” This is hardly ignoring the sufferings of pre-industrial producers.

Graeber sees capitalism as this rather than as the investment of money capital in production with a view to extract surplus value from wage-labour. He has confused what states did to hasten capitalism’s coming in being with capitalism. He wasn’t the first, as Marx notes in the same chapter:

  “The great part that the public debt, and the fiscal system corresponding to it, has played in the capitalisation of wealth and the expropriation of the masses, has led many writers, like Cobbett, Doubleday and others, to seek in this, incorrectly, the fundamental cause of the misery of the modern peoples.”

People are not exploited today because they are the debt-slaves of the financial system but because they are the wage-slaves of capitalist corporations.

Graeber’s view of capitalism as the exploitation of the real economy by some military-financial complex gives credence to those who see the way forward in abolishing the supposed power of banks to create credit out of nothing (a mistaken view Graeber seems to share). Outside his profession as an anthropologist, Graeber is an anarchist and a member of the IWW and so wants to go to a society in which there will be no wage-labour. However, his inadequate theory of capitalism could lead to any growing anti-capitalist movement getting diverted into mere banking and monetary reform.

Adam Buick

Blogger's Note:
David Graeber replied to this review in the October 2012 issue of the Socialist Standard.

The Evolution of Money: From Barter to Inflation (Pt. 1) (1980)

From the February 1980 issue of the Socialist Standard

Since inflation is a monetary question and nothing but a monetary question, it cannot be understood without first knowing what money is. To most people money is the notes and coins they use to buy things, a convenient technical device for ensuring the smooth exchange and distribution of goods. While it is indeed such a medium of exchange, the currency we use today is not, strictly speaking, money at all, but only tokens for it. But to explain money it is convenient to start with this role of medium of exchange.

Exchange, as the exchange of goods, only exists in societies where there is private property: the goods involved pass from one property owner to another. In societies where there is no private property, where wealth is regarded as the common property of all the members of society, there is no exchange. People don't get what they need through exchange but directly, either by being given it or by taking it in accordance with established rules for sharing wealth. The original human societies were organised on this basis, without property and without exchange –and without money.

Exchange probably originated not within such primitive communistic societies but between them, and would have been on the basis of barter, the direct exchange of so much of one good for so much of another. Barter is the most primitive form of exchange and has obvious problems which don't need explaining at length. A person with two pots who wants a blanket must find another person with a blanket who wants two pots before any exchange can take place. At a certain stage in the evolution of exchange, the need becomes apparent for a good which can be exchanged for all goods. Then the person with the two pots can exchange them for this good and then later exchange this good for a blanket. The good that can be exchanged for all other goods is precisely money, and this gives us the basic definition: money is the good or commodity that can be exchanged for all others.

Various goods have functioned as money in the history of humanity, from cowrie shells to cattle (the word 'pecuniary' comes from pecunia, the Latin word for cattle), but in the end the most convenient have proved to be the precious metals, silver and gold. With barter, goods exchange in proportions determined by the amount of time it took to make them. Primitive people would have had a pretty shrewd idea of how long it took to make particular goods and would have regarded an exchange as fair where the goods involved had taken more or less the same period of time to make (or to gather from nature). Thus, if two pots habitually exchanged for one blanket, a blanket took twice as long to make as a pot.

In other words, commodity exchange is essentially an exchange of equivalents. When one good becomes money, this is not altered. The person with the two pots is not going to exchange them for the money-good unless both goods are considered equivalents. The money-good itself must therefore have value, must be the product of labour. This leads us to the second function of money, that of being a store of value. Someone who has exchanged their goods for the money-commodity is not obliged to exchange the latter straight away for some other good. They can keep and, if wanted, store and accumulate the money-good.

The money-commodity can best perform its role if it is not too bulky — if, in other words, it concentrates a relatively large amount of value in a relatively small bulk. This is precisely what the precious metals do. They are 'precious', or valuable, because it takes considerable labour to obtain a small amount of them. This feature would be a disadvantage had the precious metals not another characteristic — that of being easily divisible. A precious stone such as a diamond also concentrates much value in a small bulk, but because it cannot be easily divided it can't serve as the money-commodity, since the differing values of goods to be exchanged (the different times it took to make them) demand that the money-good be available in finely distinguished different amounts.

The precious metals, gold and silver, because they possessed these two features and had a fairly stable value, eventually emerged everywhere as the money-goods. Once one good has become money then exchange becomes buying and selling. Selling is the exchange of a good for the money-good, while buying is the exchange of the money-good for a good. This is still the case today but is no longer obvious because of the complications brought about by the subsequent evolution of money. The price of a good is its labour-time value expressed in amounts of the money-good. (1) This, being the standard of price, is money's third function. Prices were in fact originally expressed directly as weights of gold or silver.

The next stage in the evolution of money is the introduction of coins. About 2,500 years ago a ruler of Lydia (now Turkey) struck the first coin by stamping its weight on a piece of precious metal (electrum, an amalgam of gold and silver). This stamp served as a guarantee that it really did weigh the amount indicated. And this is all coined money is: a piece of the precious metal which is the money-commodity stamped with a guarantee of weight. At first anybody could issue coins, merchants as well as rulers, but this soon became a government monopoly.

The names of coins were originally weights of the metal of which the coins were made. Thus a pound (£) was originally, in early medieval times, a pound (lb) of silver. But over the years, if only because coins lose weight through wear and tear (but in practice for other reasons as well, as we shall see), the names given to coins came to differ from the names of the units of weight. This did not mean that the money-commodity had ceased to be measured in terms of weight; it merely meant that the money-commodity could always be translated into the more usual unit. Indeed, the new unit of monetary weight was legally defined in terms of the general unit of weight. Thus, in Britain for most of the nineteenth century, the gold coin known as a sovereign or pound was legally defined as being slightly more than a quarter of an ounce of gold (one ounce of gold was equal to £3 17s l0½d). In other words, 'pound' was an alternative name for about a quarter of an ounce of gold. Similarly, other names of currencies – dollar, mark, franc –were also alternative names for (other) weights of gold (or silver).

Gold and silver coins can lose weight not only through wear and tear but also through people deliberately filing them down, a criminal offence generally punished in the past by death. But there was a third way which was perfectly legal and unpunishable, since the 'criminal' was the government itself! Governments discovered soon after the invention of coins that issuing underweight coins – stamping one weighing, say, only 0.24 ounces as a 'pound' or 0.25 ounces –was an easy source of finance, at least in the short term. Such debasement of the coinage, however, had an unfortunate side-effect: it led to a rise in prices, not just of some goods but of all goods, a rise in the general price level. Since exactly the same mechanism operates here as with modern inflation, let's examine it in more detail.

Exchange, remember, is the exchange of equivalents (of equal amounts of socially necessary labour), selling is the exchange of a particular good for a certain amount of the money-commodity; and price is the expression of the value of a good in terms of amounts of the money-commodity. Say that four blankets are worth the same as an ounce of gold. That means that it takes as much socially necessary labour to produce four blankets as it does to produce one ounce of gold. The price of one blanket would then be a quarter of an ounce of gold, or £l.

This is an underlying real economic relationship which remains in force whatever the government does. If the government debases its coins by stamping 'pound' (quarter-ounce) on coins weighing only one-eighth of an ounce, (2) then this economic reality does not change. One blanket will still tend to exchange for a quarter-ounce of gold. If the government, by debasing the coinage, in effect changes the weight designated by the name 'pound' from a quarter-ounce to one-eighth of an ounce, then the price of one blanket will no longer be £1, since this now signifies one-eighth not one quarter of an ounce. The price will now be £2, the new way of indicating a quarter-ounce of gold. All other prices will also rise in the same proportion of 100 per cent. Prices will in fact tend to rise in the same proportion that the coinage has been debased. This would not happen immediately and all at once but would be spread out over a period of time as the effect of the debased coinage worked its way through, but the end result will be the 100 per cent rise in prices.

What will have happened is that the government's action will have changed the standard of price. This is a purely monetary matter and is in the end just a question of definition, of the weight of the money-commodity named by the word 'pound'.

The general level of prices can also change for real economic reasons as well as through the action of a government, intended or otherwise. If the amount of socially necessary labour required to produce an ounce of gold changes — if its value changes — then the prices of all other commodities are necessarily affected. To come back to our example of four blankets equal to one ounce of gold, we saw that this meant that four blankets and one ounce of gold contained the same amount of socially necessary labour, let us say five hours. Suppose that as a result of a new mining machine the average time it takes to produce one ounce of gold falls by ten per cent, to 4½ hours, while the time taken to produce four blankets remains unchanged. Four blankets will now no longer tend to exchange for one ounce of gold but for the amount of gold that can now be produced in five hours, 1.11 ounces. Since no government monkeying with the currency is involved here, 'pound' remains the name of one ounce of gold, so the price of four blankets now rises to £1.11. This happens to the price of all other goods too. This has in fact occurred a number of times in history, the last being in the thirty years up to the First World War when the value of gold fell due to the opening up of the South African and Alaskan gold mines.

A rise in the value of gold, on the other hand, due for instance to geological difficulties in working mines as they get older, would have the opposite effect, leading to a fall in the general level of prices.

The amount of money in circulation — the total weight of the coins made of the money-commodity (say, gold) which circulate as the currency — is determined by the workings of the economy and depends on three factors and their changes in particular:

1. the number of buying and selling transactions to be carried out, or the level of economic activity;
2. the total of the prices of the goods and services involved in these transactions (reflecting their value as measured by the amount of socially necessary labour they contain);
3. the average number of transactions carried out by a single coin in a given period (since coins of course circulate and are not cancelled after use), or the 'velocity of circulation' of money.

Other factors can be introduced, such as the number of debts to be settled and taxes, to be paid, and their amounts, but the basic formula is:

• Amount of money (total weight of gold) needed =
• Number of transactions x total price Velocity of circulation

This has been expressed algebraically as M = TP/V, and is known in the history of monetary theory as the Quantity Theory of Money.

Various versions of it exist, not all of which are correct. But if it is understood not as an equation but as a formula for what determines the amount of money (weight of gold coins) needed by the economy, then it is a key concept for understanding inflation. For it is saying that the amount of money needed by the economy at any time is a real economic fact determined by other economic facts, and as such not something that can be changed at will by government action. In fact it continues to be valid even when gold itself does not circulate as the currency and has been replaced in this role by paper and metallic tokens.

Adam Buick

1. "A relation between a weight of metal and the value of an object" is how Belgium's leading economist, Fernand Baudhin, who died in 1977, defined price in his Dictionnaire de l'économie contemporaine (1973 edition).

2.  This of course is an unreal example, but the mathematics is easier to follow.

Link to Part 2.

Overproduction Baffles the Capitalists (1931)

From the December 1931 issue of the Socialist Standard

“The Times" on September 5th, had an editorial on the present world economic situation that was strangely frank and illuminating, as the following extracts will show:—

   How disastrously the financial machinery of the world is out of gear was strikingly illustrated the other day, when, in order to effect an exchange of commodities, the Brazilian Government and the Federal Farm Board of the United States had to resort to the primitive method of direct barter. They signed an agreement exchanging 1,050,000 bags of coffee for 25,000,000 bushels of wheat. That method of meeting the situation is, at any rate., better than some of those which have been adopted. In Texas and Oklahoma the military took charge of the oil wells, not to prevent any interference with production, but to stop production, and in Kansas orders were given to stop production in specified areas  . . .
    The cotton growers of the Southern States were recently urged by the Federal Farm Board to destroy one-third of their crops, and, though they indignantly rejected this suggestion, they themselves are seriously considering proposals to prohibit the growing, gathering or ginning of cotton next year. In Brazil hundreds of thousands of bags of coffee have been draught and destroyed by the Coffee States Council.  . . .
     Every one knows that there is over-production in the sense that there is more cotton, more wheat, more sugar, more coffee, and, apparently, more of every kind of food and raw material on the market than the consumer is able to buy at prices remunerative to the grower. . . .
    Over-production is hard to imagine in the sense that more wheat, for example, is being grown than the world can use. At any rate it cannot be said to exist so long as there are people who cannot get enough bread to eat.  . . .
    Half a dozen professors of political economy, discussing the practical questions on which their studies should enable them to throw light, can disagree among themselves as wholeheartedly as any half a dozen business men in a railway carriage. But somehow or other, with or without the aid of the scientific economist, answers will have to be found for the economic riddles over which the world is now bewildered. Until they are solved, or, perhaps, solve themselves, there can be no general return to prosperity.

Detailed comment would spoil this picture.

Too much of everything, but we are poor because we can’t buy! America can’t sell so she takes to barter. The owners in the producing industries have taken fright and are destroying or restricting production! The sum total of opinion in Tory, Liberal, Labour and T.U.C. camps is that the only way out for this country is a general cut in wages or an increase in prices—a reduction in buying power! Under it all is the hope, frankly expressed above, that somehow or other things will straighten themselves out.

The capitalists, their guides and scribes, are impotent in the face of productive machinery so prolific that the wealth turned out is clogging and weighing the system down. The only real answer they have is to find a means, satisfactory to the bulk of their class, for restricting production and parcelling out markets.

Gilmac.