Debt

by David Graeber

  By the early Song dynasty (960–1279 ad), local banking operations all over China were running similar operations, accepting cash and bullion for safekeeping and allowing depositors to use their receipts as promissory notes, as well as trading in government coupons for salt and tea. Many of these notes came to circulate as de facto money.54 The government, as usual, first tried to ban the practice, then control it (granting a monopoly to sixteen leading merchants), then, finally, set up a government monopoly—the Bureau of Exchange Medium, established in 1023—and before long, aided by the newly invented printing press, was operating factories in several cities employing thousands of workers and producing literally millions of notes.55

  At first, this paper money was meant to circulate for a limited time (notes would expire after two, then three, then seven years), and was redeemable in bullion. Over time, especially as the Song came under increasing military pressure, the temptation to simply print money with little or no backup became overwhelming—and, moreover, Chinese governments were rarely completely willing to accept their own paper money for tax purposes. Combine this with the fact that the bills were worthless outside China, and it’s rather surprising that the system worked at all. Certainly, inflation was a constant problem and the money would have to be recalled and reissued. Occasionally the whole system would break down, but then people would resort to their own expedients: “privately issued tea checks, noodle checks, bamboo tallies, wine tallies, etc.”56 Still, the Mongols, who ruled China from 1271 to 1368 ad, chose to maintain the system, and it was only abandoned in the seventeenth century.

  This is important to note because the conventional account tends to represent China’s experiment with paper money as a failure, even, for Metallists, proof that “fiat money,” backed only by state power, will always eventually collapse.57 This is especially odd, since the centuries when paper money was in use are usually considered the most economically dynamic in Chinese history. Surely, if the United States government was eventually forced to abandon the use of federal reserve notes in 2400 ad, no one would be arguing that this showed that the very idea was always intrinsically unworkable. Nonetheless, the main point I’d like to emphasize here is that terms like “fiat money,” however common, are deceptive. Almost all of the new forms of paper money that emerged were not originally created by governments at all; they were simply ways of recognizing and expanding the use of credit instruments that emerged from everyday economic transactions. If it was only China that developed paper money in the Middle Ages, this was largely because only in China was there a government large and powerful enough, but also, sufficiently suspicious of its mercantile classes, to feel it had to take charge of such operations.

  The Near West:

  Islam (Capital as Credit)

  Prices depend on the will of Allah; it is he who raises and lowers them.

  —Attributed to the Prophet Mohammed

  The profit of each partner must be in proportion to the share of each in the adventure.

  Islamic legal precept

  For most of the Middle Ages, the economic nerve center of the world economy and the source of its most dramatic financial innovations was neither China nor India, but the West, which, from the perspective of the rest of the world, meant the world of Islam. During most of this period, Christendom, lodged in the declining empire of Byzantium and the obscure semi-barbarous principalities of Europe, was largely insignificant.

  Since people who live in Western Europe have so long been in the habit of thinking of Islam as the very definition of “the East,” it’s easy to forget that, from the perspective of any other great tradition, the difference between Christianity and Islam is almost negligible. One need only pick up a book on, say, Medieval Islamic philosophy to discover disputes between the Baghdad Aristoteleans and the neo-Pythagoreans in Basra, or Persian Neo-Platonists—essentially, scholars doing the same work of trying to square the revealed religion tradition beginning with Abraham and Moses with the categories of Greek philosophy, and doing so in a larger context of mercantile capitalism, universalistic missionary religion, scientific rationalism, poetic celebrations of romantic love, and periodic waves of fascination with mystical wisdom from the East.

  From a world-historical perspective, it seems much more sensible to see Judaism, Christianity, and Islam as three different manifestations of the same great Western intellectual tradition, which for most of human history has centered on Mesopotamia and the Levant, extending into Europe as far as Greece and into Africa as far as Egypt, and sometimes farther west across the Mediterranean or down the Nile. Economically, most of Europe was until perhaps the High Middle Ages in exactly the same situation as most of Africa: plugged into the larger world economy, if at all, largely as an exporter of slaves, raw materials, and the occasional exotica (amber, elephant tusks …), and importer of manufactured goods (Chinese silks and porcelain, Indian calicoes, Arab steel). To get a sense of comparative economic development (even if the examples are somewhat scattered over time), consider the following table:58

  Populations and Tax Revenue, 350 BC–1200 AD

  What’s more, for most of the Middle Ages, Islam was not only the core of Western civilization; it was its expansive edge, working its way into India, expanding in Africa and Europe, sending missionaries and winning converts across the Indian Ocean.

  The prevailing Islamic attitude toward law, government, and economic matters was the exact opposite of that prevalent in China. Confucians were suspicious of governance through strict codes of law, preferring to rely on the inherent sense of justice of the cultivated scholar—a scholar who was simply assumed to also be a government official. Medieval Islam, on the other hand, enthusiastically embraced law, which was seen as a religious institution derived from the Prophet, but tended to view government, more often than not, as an unfortunate necessity, an institution that the truly pious would do better to avoid.59

  In part this was because of the peculiar nature of Islamic government. The Arab military leaders who, after Mohammed’s death in 632 ad, conquered the Sassanian empire and established the Abbasid Caliphate, always continued to see themselves as people of the desert, and never felt entirely part of the urban civilizations they had come to rule. This discomfort was never quite overcome—on either side. It took the bulk of the population several centuries to convert to the conqueror’s religion, and even when they did, they never seem to have really identified with their rulers. Government was seen as military power—necessary, perhaps, defend the faith, but fundamentally exterior to society.

  In part, too, it was because of the peculiar alliance between merchants and common folk that came to be aligned against them. After Caliph al-Ma’mum’s abortive attempt to set up a theocracy in 832 ad, the government took a hands-off position on questions of religion. The various schools of Islamic law were free to create their own educational institutions and maintain their own separate system of religious justice. Crucially, it was the ulema, the legal scholars, who were the principal agents in the conversion of the bulk of the empire’s population to Islam in Mesopotamia, Syria, Egypt, and North Africa in those same years.60 But—like the elders in charge of guilds, civic associations, commercial sodalities, and religious brotherhoods—they did their best to keep the government, with its armies and ostentation, at arm’s length.61 “The best princes are those who visit religious teachers,” one proverb put it, “the worst religious teachers are the those who allow themselves to be visited by princes.”62 A Medieval Turkish story brings it home even more pointedly:

  The king once summoned Nasruddin to court.

  “Tell me,” said the king, “you are a mystic, a philosopher, a man of unconventional understandings. I have become interested in the issue of value. It’s an interesting philosophical question. How does one establish the true worth of a person, or an object? Take me for example. If I were to ask you to estimate my value, what would you say?”

  “Oh,” Nasruddin said, “I’d say about two hundred dina
rs.”

  The emperor was flabbergasted. “What?! But this belt I’m wearing is worth two hundred dinars!”

  “I know,” said Nasruddin. “Actually, I was taking the value of the belt into consideration.”

  This disjuncture had profound economic effects. It meant that the Caliphate, and later Muslim empires, could operate in many ways much like the old Axial Age empires—creating professional armies, waging wars of conquest, capturing slaves, melting down loot and distributing it in the form of coins to soldiers and officials, demanding that those coins be rendered back as taxes—but at the same time, without having nearly the same effects on ordinary people’s lives.

  Over the course of the wars of expansion, for example, enormous quantities of gold and silver were indeed looted from palaces, temples, and monasteries and stamped into coinage, allowing the Caliphate to produce gold dinars and silver dirhams of remarkable purity—that is, with next to no fiduciary element, the value of each coin corresponding almost precisely to its weight in precious metal.63 As a result, they were able to pay their troops extraordinarily well. A soldier in the Caliph’s army, for example, received almost four times the wages once received by a Roman legionary.64 We can, perhaps, speak of a kind of “military-coinage-slavery” complex here—but it existed in a kind of bubble. Wars of expansion, and trade with Europe and Africa, did produce a fairly constant flow of slaves, but in dramatic contrast to the ancient world, very few of them ended up laboring in farms or workshops. Most ended up as decoration in the houses of the rich, or, increasingly over time, as soldiers. Over the course of the Abbasid dynasty (750–1258 ad) in fact, the empire came to rely, for its military forces, almost exclusively on Mamluks, highly trained military slaves captured or purchased from the Turkish steppes. The policy of employing slaves as soldiers was maintained by all of the Islamic successor states, including the Mughals, and culminated in the famous Mamluk sultanate in Egypt in the thirteenth century, but historically, it was unprecedented.65 In most times and places slaves are, for obvious reasons, the very last people to be allowed anywhere near weapons. Here it was systematic. But in a strange way, it also made perfect sense: if slaves are, by definition, people who have been severed from society, this was the logical consequence of the wall created between society and the Medieval Islamic state.66

  Religious teachers appear to have done everything they could to prop up the wall. One reason for the recourse to slave soldiers was their tendency to discourage the faithful from serving in the military (since it might mean fighting fellow believers). The legal system that they created also ensured that it was effectively impossible for Muslims—or for that matter Christian or Jewish subjects of the Caliphate—to be reduced to slavery. Here al-Wahid seems to have been largely correct. Islamic law took aim at just about all the most notorious abuses of earlier, Axial Age societies. Slavery through kidnapping, judicial punishment, debt, and the exposure or sale of children, even through the voluntary sale of one’s own person—all were forbidden, or rendered unenforceable.67 Likewise with all the other forms of debt peonage that had loomed over the heads of poor Middle Eastern farmers and their families since the dawn of recorded history. Finally, Islam strictly forbade usury, which it interpreted to mean any arrangement in which money or a commodity was lent at interest, for any purpose whatsoever.68

  In a way, one can see the establishment of Islamic courts as the ultimate triumph of the patriarchal rebellion that had begun so many thousands of years before: of the ethos of the desert or the steppe, real or imagined, even as the faithful did their best to keep the heavily armed descendants of actual nomads confined to their camps and palaces. It was made possible by a profound shift in class alliances. The great urban civilizations of the Middle East had always been dominated by a de facto alliance between administrators and merchants, both of whom kept the rest of the population either in debt peonage or in constant peril of falling into it. In converting to Islam, the commercial classes, so long the arch-villains in the eyes of ordinary farmers and townsfolk, effectively agreed to change sides, abandon all their most hated practices, and become instead the leaders of a society that now defined itself against the state.

  It was possible because from the beginning, Islam had a positive view toward commerce. Mohammed himself had begun his adult life as a merchant; and no Islamic thinker ever treated the honest pursuit of profit as itself intrinsically immoral or inimical to faith. Neither did the prohibitions against usury—which for the most part were scrupulously enforced, even in the case of commercial loans—in any sense mitigate against the growth of commerce, or even the development of complex credit instruments.69 To the contrary, the early centuries of the Caliphate saw an immediate efflorescence in both.

  Profits were still possible because Islamic jurists were careful to allow for certain service fees, and other considerations—notably, allowing goods bought on credit to be priced slightly higher than those bought for cash—that ensured that bankers and traders still had an incentive to provide credit services.70 Still, these incentives were never enough to allow banking to become a full-time occupation: instead, almost any merchant operating on a sufficiently large scale could be expected to combine banking with a host of other moneymaking activities. As a result, credit instruments soon became so essential to trade that almost anyone of prominence was expected to keep most of his or her wealth on deposit, and to make everyday transactions, not by counting out coins, but by inkpot and paper. Promissory notes were called sakk, “checks”, or ruq’a, “notes.” Checks could bounce. One German historian, picking through a multitude of old Arabic literary sources, recounts that:

  About 900 a great man paid a poet in this way, only the banker refused the check, so that the disappointed poet composed a verse to the effect that he would gladly pay a million on the same plan. A patron of the same poet and singer (936) during a concert wrote a check in his favor on a banker for five hundred dinars. When paying, the banker gave the poet to understand that it was customary to charge one dirham discount on each dinar, i.e., about ten per cent. Only if the poet would spend the afternoon and evening with him, he would make no deduction …

  By about 1000 the banker had made himself indispensable in Basra: every trader had his banking account, and paid only in checks on his bank in the bazaar.…71

  Checks could be countersigned and transferred, and letters of credit (suftaja) could travel across the Indian Ocean or the Sahara.72 If they did not turn into de facto paper money, it was because, since they operated completely independent of the state (they could not be used to pay taxes, for instance), their value was based almost entirely on trust and reputation.73 Appeal to the Islamic courts was generally voluntary or mediated by merchant guilds and civic associations. In such a context, having a famous poet compose verses making fun of you for bouncing a check was probably the ultimate disaster.

  When it came to finance, instead of interest-bearing investments, the preferred approach was partnerships, where (often) one party would supply the capital, the other carry out the enterprise. Instead of fixed return, the investor would receive a share of the profits. Even labor arrangements were often organized on a profit-sharing basis.74 In all such matters, reputation was crucial—in fact, one lively debate in early commercial law was over the question of whether reputation could (like land, labor, money, or other resources) itself be considered a form of capital. It sometimes happened that merchants would form partnerships with no capital at all, but only their good names. This was called “partnership of good reputation.” As one legal scholar explained:

  As for the credit partnership, it is also called the “partnership of the penniless” (sharika al-mafalis). It comes about when two people form a partnership without any capital in order to buy on credit and then sell. It is designated by this name partnership of good reputations because their capital consists of their status and good reputations; for credit is extended only to him who has a good reputation among people.75

  Some legal sc
holars objected to the idea that such a contract could be considered legally binding, since it was not based on an initial outlay of material capital; others considered it legitimate, provided the partners make an equitable partition of the profits—since reputation cannot be quantified. The remarkable thing here is the tacit recognition that, in a credit economy that operates largely without state mechanisms of enforcement (without police to arrest those who commit fraud, or bailiffs to seize a debtor’s property), a significant part of the value of a promissory note is indeed the good name of the signatory. As Pierre Bourdieu was later to point out in describing a similar economy of trust in contemporary Algeria: it’s quite possible to turn honor into money, almost impossible to convert money into honor.76

  These networks of trust, in turn, were largely responsible for the spread of Islam over the caravan routes of Central Asia and the Sahara, and especially across the Indian Ocean, the main conduit of Medieval world trade. Over the course of the Middle Ages, the Indian Ocean effectively became a Muslim lake. Muslim traders appear to have played a key role in establishing the principle that kings and their armies should keep their quarrels on dry land; the seas were to be a zone of peaceful commerce. At the same time, Islam gained a toehold in trade emporia from Aden to the Moluccas because Islamic courts were so perfectly suited to provide those functions that made such ports attractive: means of establishing contracts, recovering debts, creating a banking sector capable of redeeming or transferring letters of credit.77 The level of trust thereby created between merchants in the great Malay entrepôt Malacca, gateway to the spice islands of Indonesia, was legendary. The city had Swahili, Arab, Egyptian, Ethiopian, and Armenian quarters, as well as quarters for merchants from different regions of India, China, and Southeast Asia. Yet it was said that its merchants shunned enforceable contracts, preferring to seal transactions “with a handshake and a glance at heaven.”78