Yves here. For your long holiday weekend reading, we have a tour de force in the form of a Robinson Erhardt talk with Michael Hudson. This edited version of his interview comes close to being an overview of his work over many decades, focusing particularly on the tendency of debt to create creditor oligarchies and weaken real economy functioning (such as, in ancient societies, the ability to call up men to defend the state).
By Robinson Erhardt. This transcript of a 90-minute interview on July 25, 2024 has been highly edited and refined to clarify the language and ideas being discussed. It is divided into sections and subheads to expand the original discussion, available at https://youtu.be/SO-qHypWlgE. Time stamps are at the end of the post
Robinson: Michael, you’ve been studying the history of debt and the collapse of civilizations for many decades now, at least going back to your time at Harvard’s Peabody Museum. I’m wondering if you were initially interested in this topic because of its historical interest or more because of its implications for the present.
Michael: I came to New York around 1960-1961, and went into economics because I was interested in debt. I was inspired by my mentor, Terrence McCarthy, and soon began to work on Wall Street doing financial research while taking my graduate economics degrees. I started as an economist for savings banks to see how depositors were credited with interest that banks recycled into home mortgage loans. It was obvious that savings jumped exponentially from one dividend quarter to the next, and that the banks relent their debt service into making new loans. The volume of debt was growing faster than the rest of the economy.
In 1964, I joined Chase Manhattan, and my first assignment was to analyze how much Latin American countries could afford to borrow. I was told to focus on Argentina, Brazil and Chile. To calculate their debt-carrying capacity, I had to calculate how much they could afford to pay in interest out of their export earnings. I found that they already had reached their limit to pay creditors in dollars. So there was little way that they could afford to take on more debt.
That did not make the officers in the international department very happy because they wanted to increase their loans, just as the real estate and oil departments wanted to do. It seemed to me that international lending was close to the risk limit of default for many countries.
On a later occasion I had a meeting at the New York Federal Reserve to discuss my analysis. The Federal Reserve officer said that according to my calculations, Britain couldn’t afford to borrow any more money. I agreed. It had to keep borrowing just to maintain the exchange rate of the British pound.
The Federal Reserve man pointed out that the British had been maintaining their balance – mainly by raising interest rates to attract loans to stabilize their exchange rate. I agreed that this was what had enabled them to keep paying their debts. He pointed out that this was because U.S. creditors were lending them the money. And of course that was exactly what was keeping them afloat. He said that the same thing was true with Latin American countries. The United States was supporting them, at least as long as they were “friendly.” U.S. bankers therefore could lend them the money because U.S policy was to keep them solvent. The World Bank was showing them how to carry their debt service by privatizing their property, and the IMF giving them advice as to how to make their labor more competitive by paying it less and blocking attempts at unionization, while cutting back public social spending to “free” income to pay their creditors.
Under these terms it was clear that Latin America could continue to pay U.S. banks for new loans, at least for the immediate future. That was the financial sector’s time frame. But I could see that the only way that banks could keep expanding their loans to Latin America and England was to arrange for them to borrow the money to make their interest and principal repayments.
That’s called a Ponzi scheme. A debtor keeps solvent by borrowing the money to pay the interest and amortization falling due. I began to wonder how long U.S. banks would be able to continue financing this Ponzi scheme by lending debtor countries the money to enable them to pay their creditors.
My Financial Accounting Format for U.S. Trade, Investment and Military Sspending
As Chase’s balance-of-payments economist I was asked to develop an accounting format to analyze the U.S. oil industry’s balance of payments. I was walked through the convoluted statistics and the mystery of transfer pricing by the treasurer of Standard Oil, and made a number of trips to Washington to talk with Commerce Department economists about how to obtain the relevant statistics. They walked me through what the accounts actually meant. Much U.S. oil import trade did not actually involve foreign-exchange payments. Instead of reflecting actual financial flows, trade treated imports and exports as barter, so as to dovetail into the U.S. GNP accounting format. Most payments for U.S. oil imports were paid in dollars to the U.S. firms that were supplying the oil (from offshore banking centers in Liberia or Panama using dollars) or were simply U.S. profits and fees by the companies’ head offices here. I came to understand while oil was a central element of U.S. economic strength and diplomacy. No real balance-of-payments outflow occurred for U.S. oil imports, but the GNP accounts made it appear that the trade deficit meant an actual payments outflow.
I wanted to extend this reality to the whole U.S. balance of payments to analyze the actual financial flows of a country’s exports, foreign investments and military spending. Arthur Andersen hired me in 1968 to do that, hoping to develop an expertise in forecasting deficits. That task took me about a year. I found that the entire U.S. balance-of-payments deficit was caused by military spending abroad. The private sector was exactly in balance since the 1950s, and what was counted as “foreign aid” actually generated a U.S. surplus, not an outflow.
The firm showed my analysis to the government, and it infuriated the Defense Dept. I was told that Mr. McNamara’s office asked Arthur Andersen not to publish it, and made threats about cutting back government contracts if it did. I was let go, but they gave me all their artwork for the charts, and I published my statistics through NYU’s business school.
That experience showed me the resistance to acknowledging how the world’s financial imbalance was getting worse. My analysis of the oil industry’s incredibly high balance-of-payments return on its foreign investment had been popularized by Chase because the oil industry wanted to free itself from President Johnson’s balance-of-payments controls imposed in January 1965. My statistics showed how fast the U.S. economy got a return from its control of the world’s oil trade, and I was told that my report was placed on the desk of every U.S. senator and congressman. I had thought that Third World countries might pick up this finding, but none did.
In a similar way my book Super Imperialism in 1972 was viewed by the U.S. Defense Department as a success story about how U.S. foreign policy was obtaining a free international financial ride. Going off gold in 1971 made the dollar the basic medium in which foreign central banks held their monetary reserves. These international reserves were funding the balance-of-payments costs of U.S. military spending abroad. The right wing celebrated this finding, while neither the left wing nor foreign victims criticized dollarization of the world financial system.
My Warnings of a Broad Latin American Default Created a Backlash of Denial
I became a balance-of-payments advisor to Canada in the late 1970s and an advisor to UNITAR, the United Nations Institute for Training and Research, which published my papers on why Latin America could not afford to pay its debts. I presented these findings at a large UNITAR meeting in Mexico City.
The U.S. rapporteur deliberately misrepresented my talk, saying that I had explained how Third World countries could pay their debts with U.S. aid. I stood up and said that this was a falsification of what I and other members of my U.S. delegation (including Bob Fitch and Loren Goldner) believed. I demanded an apology from Luis Echeverria, who had convened the meeting. There was pandemonium and I walked out in protest. The Russian delegate came outside and said that I had taken over the conference by saying the unspeakable.
The “unspeakable” happened pretty quickly. The Italian funders of the UNITAR group insisted that it stop publishing my warnings about Third World debt. I realized that the idea that countries could not pay their debt was really important. It was not unthinkable at all, but it was unspeakable in polite company. In 1982, Mexico defaulted on its bonds, triggering the Latin American “debt bomb.”
I Set About Studying Debt Problems and Cancellations in the Ancient World
When William Shakespeare wrote plays about the kind of social and political intrigues that he found in England, he often placed their action in Italy or some other foreign land so as not to touch a sensitive domestic nerve. A similar logic led me to put the debt problem in its long perspective by writing a history of debt through the ages. I thought that people would be more willing to accept the idea that cancelling debts was needed to avoid economic polarization and impoverishment if they could see how societies through the ages had dealt with the problem of debts exceeding the ability of large parts of the economy to pay. Around 1980-1981, I began to draft this history. I thought that if this logic were accepted for the past, the implications for today would become less unthinkable.
I looked for examples of early recognition that if debts couldn’t be paid on a widespread basis, some authority was needed to write them down, or else a creditor oligarchy would emerge to polarize and ultimately impoverish the economy. Such polarization and impoverishment is clear enough in the modern world. If governments don’t write down Latin America’s debts, for example, the continent’s debtor countries will be obliged to go to the IMF, World Bank and the U.S. State Department. These institutions will insist that the debtor economy would have to “stabilize” its exchange rate by selling off its land, mineral rights and public infrastructure to foreign investors, using the sales proceeds to pay foreign creditors. That will strip away the assets and patrimony of debtor countries.
It was fairly easy to go back to the 19th century and see the financial ruin of Persia and Egypt as a result of debts owed to European bankers. I began taking notes going back to the medieval times and the Crusades with its revival of war debts, and to Rome and Greece such as Solon’s seisachtheia of 594 BC, and to the Biblical Jubilee year. In looking through this literature I found scattered references to earlier Near Eastern debt cancellations.
To trace down these references I began to read about Mesopotamia. Most of the writing was in French and German. I had studied linguistics at the University of Chicago for my BA, but I didn’t read cuneiform. So I began to read translations of the laws of Hammurabi and even more important, the debt cancellations or “clean slates” of Hammurabi and all the other members of his Babylonian dynasty, as well as those of neighboring lands, and earlier in Sumer.
I found that it didn’t matter that I hadn’t studied Assyriology. Having to read Bronze Age royal proclamations in translation actually turned out to be an advantage, because the translation of the royal inscriptions and proclamations was quite different in German, French, English and American. It seemed that each translator used their own preconceptions of what exactly rulers were doing when they “proclaimed order.”
The American popularizer of Sumer, Samuel Kramer, said that its royal amargi acts were simply a tax reduction. He wrote a New York Times op-ed urging Ronald Reagan to cut taxes just like Urukagina did around 2350 BC. Many Mesopotamian tax debts indeed were canceled, because the major debts in the Bronze Age were to the palace and to the temple officials, these being the period’s two large institutions. But these Clean Slates were much more than merely a tax-debt cancellation (much less a “cut”).
The British approach saw these royal proclamations as an expression of free trade. Wilfred Lambert and I had a discussion at one of the Rencontre meetings on that issue. He wanted to see whether I could, as an economist, talk about Assyriology. The one word he chose to discuss was andurarum, which was the Babylonian word that Hammurabi and Assyrian rulers used for a debt cancellation. As part of the Assyrian ruler’s cancellation of debts owed to the palace, royal tariffs on imports also were waived – a particular category of some royal claims, and not limited to the barley debts that were the main aim of royal proclamations. That special case was in a sense free trade, but only one byproduct of proclaiming a Clean Slate.
Andurarum meant literally a free-flowing, meaning that bond servants held by their creditors had the liberaty to go back to their original homes. House slaves (often “mountain girls” that debtors had pledged to creditors were returned to their former masters who owned them. And land that had been forfeited to creditors was restored to debtors. (The Babylonian word was cognate to Hebrew deror, the word used in Leviticus 25 for the kindred Jubilee Year.)
The Germans had just what I was focusing on: a debt cancellation. F. R. Krauss wrote a detailed study of this. But then the French assyriologist Dominique Charpin had the least anachronistic translation of all. He called it a “restoration of order,” a return to the “mother condition” ending the disorder. The root of the Sumerian term for such proclamations, amargi was ama, “mother.” For instance, when the Iraqi President Hussein said that his war against the American invasion by George W. Bush was going to be “the mother of all wars,” he meant the paradigmatic war. Amargi was the paradigmatic social balance that Bronze age society thought should be the norm.
My Association with Harvard to Create a Scholarly Group to Analyze Near Eastern Economies
I wrote a draft of what I’d found, and my friend Alexander Marshack, the leading Ice Age archaeologist and on the Harvard faculty, sent what I’d written to the head of the Peabody Museum, Carl Lamberg-Karlovsky. He invited me up to Harvard, and suggested that I become a research fellow on the faculty in “Babylonian archaeology” and go into my academic research in depth.
It soon became apparent that I couldn’t simply write this history by myself. What was at issue was the broad context that shaped the Mesopotamian economic takeoff in which interest, money and “taxes” first arose and took shape. In order to get credibility for our study, we drew up a plan to invite the leading Assyriologist and Egyptologist scholars who could read the Bronze Age proclamations, letters and legal cases. We would hold a series of colloquia as a basis for creating a financial and economic history of the ancient Near East.
I had tried to write the original version of what became my volume, “… and Forgive Them Their Debts” to a number of publishers like the University of California. Every publisher rejected it, sending it to referees who thought that it was impossible for society to cancel the debts, because if that were the case, creditors wouldn’t have made loans anymore. One Assyriologist repeated Rabbi Hillel’s pro-creditor argument against the Jubilee Year to this effect. To counter the threat of debt cancellation, Hillel created the prosbul clause waiving the debtor’s right to have his debts cancelled in the Jubilee Year. That was the political context in which Jesus led the fight to revive the Jubilee Year practice.
What this argument missed was that most Bronze Age cultivators and other non-commercial individuals didn’t run up debts by borrowing money. They incurred tax arrears and other obligations that accrued during the crop year and were due at harvest time.
For instance, right now we’re having this conversation in a bar. It has long been typical for workers to run up a tab, to be paid on the next payday. Something similar happened in Mesopotamia. The ale women providing beer were part of a palatial or temple “public utility,” as the British word “pub” recognizes. Customers would run up tabs that were owed at the end of the harvest. Their payday was harvest time, the time that money actually was used – grain-money, weighed out on the threshing floor and paid to creditors, headed by the palace and temples.
But if the harvest was bad, the cultivators wouldn’t have the grain money to pay the debts that they had run up during the crop year. How were rulers going to deal with this situation when debtors couldn’t pay? Hammurabi and his contemporaries recognized that it was against their interest to let debtors fall into bondage to the palace for agricultural advances, to temple officials who were owed money for officiating at weddings or funerals, or to private creditors or “big men” who had advanced food or products to cultivators. If rulers permitted citizens on the land to fall into bondage to work off their debts to the large institutions or other creditors, debtors couldn’t serve in the army or work on civic infrastructure building the city walls, temples and other public construction.
Instead of a “sanctity of debt” there was a sanctity in its cancellation, at least for personal consumer debts. (Business commercial debts were left intact.) Instead of allowing the labor force to be reduced to bondage or having them forfeit their land tenure rights to creditors, rulers maintained economic balance by proclaiming a Clean Slate. That was the opposite of what the International Monetary Fund has done to Latin American debtor economies by enforcing instead of canceling debts, subjecting debtor countries and their labor to impoverishing “conditionalities.”
My Harvard colleagues and I realized that there was no point in just going to the public at large and writing all this without getting full backing from the leading Assyriological and Egyptology scholars – German, French, Russians, Italians, Americans and English. We held our first colloquium in 1994, and by 2008 our group published five volumes that have written (or rewritten) the economic history of the ancient Near East, the region in which modern economic civilization first arose. We covered the origins of land tenure in association with the organization of corvée labor and other fiscal obligations, the creation of accounting with its standardized weights, measures and money prices for transactions with the large institutions, the origins and terms of agrarian and commercial debts, and how rulers proclaimed Clean Slates to prevented creditor oligarchies from emerging.
Little of this history has become part the public awareness outside of the Assyriological discipline. Trade publishers have not shown interest in publishing a historical narrative that seems so unthinkable to modern Western pro-creditor ideology.
During and since these colloquia I was invited by encyclopedias and archaeological journals to write articles on how money and credit evolved. I’ve just published my main articles in Temples of Enterprise, dealing mainly with how money and land tenure and enterprise first arose and were organized in archaic credit economies, including the origins of credit and the practice of charging interest and the accompanying royal practice of regular royal Clean Slate debt cancellations. I have attempted to popularize these findings in “… and forgive them their debts.”
I realized that the way to explain how different the Bronze Age was at its takeoff to today was to emphasize what didn’t happen. If I started out simply by saying how Sumer, Babylonia and their Middle Eastern neighbors developed from the Neolithic through the Bronze Age, readers (including the referees to which publishers sent my manuscripts) would say that on purely deductive logic based on how the modern world has come to think, “It couldn’t have happened that way. That’s not how we do things, and our way is the fittest.”
What didn’t happen was that the Sumerians and Babylonians avoided doing what Milton Friedman and Margaret Thatcher would have done if they could have stepped into a time machine and gone back to Hammurabi and said, “No, that’s not what to do. Don’t interfere with the market. Leave debtors to pay the price and submit to bondage.”
If that would have happened, civilization would not have taken off. I came to realize that what is taught today in college courses about money and interest, and how they began, was a dream that was made up in the late 19thcentury by opponents of government, by the Austrian predecessors of Milton Friedman serving the financial and landlord classes.
PART II
The Origin of Money as a Means of Paying Debts, Mainly to the Palace and Temples
The Austrians opposed government regulation or control of what they thought should be private enterprise making money by charging whatever the market will bear. The best kind of economy was said to be one with no government at all. To defend this ideology they had to create an origin myth of how civilization’s economic history might have begun. Their false assumption was that no civilization could have begun with governments “interfering” with private gain-seeking. That interference was imagined to have come only later.
Ronald Reagan said on August 12, 1986 that: “The nine most terrifying words in the English language are: ‘I’m from the Government and I’m here to help.’” Reagan’s quip is that of libertarian free marketers seeking to keep private entrepreneurs, creditors, landlords and monopolies free from governments regulating or otherwise interfering with their gain-seeking – especially their rent-seeking – such as by not letting them charge enough rent and not letting creditors reduce the population to bondage.
Libertarianism is grounded in the Austrian School that arose in the late 19th century to oppose socialist reforms. The Austrians hypothesized that the beginning of civilization saw private entrepreneurs interacting to create wealth for themselves, in the process of inventing money and the idea of interest without any government involvement.
The Austrian origin myth of money that every economist is brainwashed into thinking is that money began as barter exchange. Some people would grow wheat or other crops, or would make shoes and other handicrafts, and some would provide raw materials like silver.
Participants in this swapping are said to have liked silver because it didn’t spoil. It was (erroneously) supposed to be uniform and supposedly readily divisible. Individuals who were able to save wealth wanted something that other people wanted and was quite readily available, like silver or gold – and that’s why they became money.
As I began to look at how money came into being, it quickly became obvious that it couldn’t have begun in the way that economic students were being taught. Take the simple claim that silver is uniform in quality. It wasn’t. How did one know it was pure silver? I think the standard alloy was seven-eighths in Babylon, and various purities were standard in Greece and Rome. There was counterfeiting. So it’s not uniform. Only the temples could be trusted, which is why silver money was minted by them, not by miners who dug it up and traded pieces of it for shoes or other consumables.
It’s true that metallic money didn’t rust. It’s true that it lasted. But how was a price equivalency established for someone to pay in the form of a piece of silver for a quantity of grain to go home and make bread. There had to be some standard measure of weight for a tiny piece of silver and a volume measure for grain. For that, you needed a scale, but there were not accurate scales for small weights – and even so, the Bible and Babylonians denounced merchants using false weights and measures.
Some denominations of measures had to be used in the Bronze Age Near East. A silver mina was divided into 60 shekel-weights. But most agrarian economies paid in grain. The Austrian theorists avoided this fact by raising an objection asking how people could have carried around grain in their pockets without it getting moldy.
There was little attempt to understand how and what kind of transactions occurred in the Bronze Age. And not only the Bronze Age but down to medieval Europe, most payments weren’t paid during the year, but only once a year when the crop was in. Economies were credit economies for most of the year, with payment only being made on particular occasions to settle debts that had been run up.
For instance, right now we are here at Austin’s Ale House. Many Babylonians went to alehouses, and ran up tabs to be settled at harvest time, on the threshing floor. This was well documented and mentioned in royal Clean Slate proclamations that cancelled these debts. And that required that the ale women’s debts to the palace or temples for supplying this ale to also be annulled.
Nobody had lent actual money to the cultivators who were the ale women’s customers, and the ale women had not paid money to their suppliers. Resources were advanced on credit, to be paid when the harvest was in. Agrarian communities conducted trade on credit, with monetary settlement mainly by being made once a year for an entire crop season’s transactions, not for each transaction in spontaneous barter arrangements. I’m talking about personal obligations for goods and services, not financial transactions by traders, who used silver among themselves. The economy’s payment and credit relations were divided into two separate categories: Mercantile payments were denominated in silver, and the agrarian economy’s obligations were denominated in grain.
So grain and silver became the first two major vehicles for monetary payment. Fresh grain on the threshing floor, and refined silver alloy produced by temples to ensure standardized purity. Denominations for both means of payment were based on 60ths. Most monetary transactions were for paying debts, mainly to palace or temple collectors or individuals associated with these large institutions.
Royal Debt Remissions When Conditions Prevented Debtors from Being Able to Pay
But what happened when the harvest failed? That’s something that has bewildered economists and historians who have been indoctrinated with modern-era economic ideas. The inability of large numbers of people pay brings us back to the problem that I mentioned earlier. Ancient societies had to treat these “acts of god” as simply requiring the remission of claims for payment when such misfortunes occurred.
This was not only a Mesopotamian phenomenon. When the British East India Company conquered India, it ended the practice followed in the Islamic North of cancelling debts in times of such misfortune. That had been long-standing practice. Rulers realized that if the crops failed, they had to act to prevent the population from losing its land and falling into bondage. A common response to failure to do this was for debtors to run away. Such debtor flight has been described ever since the late second millennium BC. And debtors in bondage couldn’t serve in the army. Or they might defect to attackers promising to cancel their debts – a common Greek military strategy for generals to win over local populations.
Economic liberty on the land meant being able to produce your own means of support. Hammurabi’s laws sought to preserve this condition – or restore it, if disturbed – by stipulating that if the storm god Adad the storm god floods the land, grain-debts wouldn’t have to be paid. Wartime was another occasion for such debt cancellations. And even without such problems, it was recognized that debts mounted up in the normal course of life. To clear this backlog of obligations hanging over agrarian individuals, every new ruler started his reign by proclaiming a Clean Slate – every ruler of Hammurabi’s dynasty, and those of earlier Lagash and other neighboring lands.
The Aim of Strong Rulers to Prevent a Creditor Class to Emerge and Overthrow Them
A key element of this restoration of social order was to prevent an aggressive creditor class from emerging and seeking to convert its wealth into its own political power, as creditors did in the late Roman Empire, and tried to do again in the Byzantine Empire in the 9th and 10th centuries when the nobility sought to appropriate land pledged as collateral, and began to use their dependent labor to create their own armies against Constantinople.
But Constantinople won. The Byzantine E invited the rival general to have a dinner to seal the peace. He sat down with the general and asked what the best way would be to prevent future fights by the nobility and live in peace. The Emperor explained that he was not going to retaliate against his former rival and would leave the wealthy families with their own land and the monetary wealth that they possessed, but that they could not take the land from the peasantry. The Byzantine Empire needed a free peasantry because it was threatened by invaders from the east and needed both the nobility and the peasantry to help defend the realm.
The former rival general said just what a classical Greek tyrant Thrasybulus advised in the 7th century BC to his contemporary Corinthian ruler Periander who had overthrown the aristocracy, cancelled the debts that had held the peasantry in bondage and redistributed the land (which is what the Greek tyrants did, and why they were disparaged by subsequent oligarchies, who turned the label “tyrant” into an invective). When asked by Periander what to do to prevent the deposed Corinthian oligarchy from trying to recover its former despotic power, Thrasybulus walked over to an adjoining wheat field and pointed to the stalks of wheat at different sizes. He took a sickle and made a sweeping motion to make the stalks even, so that they were at the same level.
This visual metaphor was clear enough. With a similar logic the Byzantine general explained the need to tax away the income of the wealthiest families (but leaving them with their landed estates) to prevent them from egotistically trying to take over. Otherwise, they would do what wealthy and entrenched families do, and try to get rid of palace power.
This helps explain why non-Western economies such as those of the ancient Near East, and even the early Greek and Roman tyrants and kings were so successful in preventing oligarchies from gaining power to impoverish their economies, as they later were able to do from the 4th century BC onward, waging civil war to overthrow the regulatory power of rulers that was needed to protect the population’s basic needs and means of self-support.
I think that the addictive drive for economic power to dominate others subject to dependency relationships as debtors, renters or trade customers, dominating and impoverishing society around them, should be the center of modern economics. We’re seeing the One Percent doing what similar elites have always tried to do. We can seewhy creditors like the freedom to deny liberty to their debtors, and treat this as part of the natural order. The financial sector controls most monetary wealth, and is horrified at the thought that debtors might be freed from having to pay their loans. There is almost an abhorrence at viewing Bronze Age economic history and that of early antiquity as a success story in restraining the emergence of an oligarchy to use debt leverage to impoverish the population and appropriate its self-support lands for themselves, putting house to house and plot to plot together so that no more room in the land is left for people, as the Biblical prophet Isaiah put it.
Where is the economic discussion today about how to make a mixed and balanced public-private economy? Students are indoctrinated about how to let the free market, dominated by the wealthy financial sector, operate so that let the wealthy can do whatever they want. The Romans did not need a Margaret Thatcher or Ronald Reagan to advise them about economic freedom. To Rome’s oligarchy, freedom was their right to do anything they wanted to the rest of the population.
That’s what an economically and politically privatized free market leads to. Its freedom is for the creditors and landowners to charge rent, and for monopolies to take as much as they can from their victims. This is the opposite of what Adam Smith, John Stuart Mill and the other classical economists meant by a free market. They meant a market free from landlords, free from monopoly rent and free from privatized creditor power.
That basic fight to free societies from “economic rent” and its associated oligarchic rentier power has been going on ever since antiquity.
PART III
The Timeless War of Creditors Against Debtors
My articles about the origins of credit, money and interest share a common frame of reference. From the inception of economic practices and enterprise in the ancient Near East down through classical antiquity and medieval Europe to today wealthy classes have wanted to make themselves into an oligarchy in control of their government and religion to protect, legitimize and increase their wealth, especially their rent-extraction privileges as creditors, monopolists or landlords.
That should be the context in which one looks at every epoch’s economic view of the world, above all its perspective concerning how “free” a market should be, and just whose freedom is being endorsed. That has been the great question throughout the history of civilization, from the Bronze Age Near East when rulers regularly proclaimed Clean Slates to restore economic order to check incipient oligarchies, through the five centuries of civil war in the Roman Republic and Jesus’s fight against the emerging Jewish oligarchy, to today’s civilizational fight between the NATO West dominated by U.S.-oriented rentier oligarchies and the global majority centered now on the BRICS.
We see the same fight through the ages by financial elites opposing any government power able to restrict their self-serving rent-seeking and creditor power at society’s expense. We see it today in the pro-creditor economic policies of the International Monetary Fund, the World Bank and the “libertarian” ideology, all of which seek to centralize power to allocate resources and plan economies in the financial sector instead of democratic government. Today’s neoliberal idea is to get rid of government authority (except where it is controlled by the rentier sectors) and let banks in the privatized financial sector control money and credit, which is the most important public utility.
China’s government has financed its remarkable industrial takeoff without having to borrow from private creditors. There was little money to borrow from its domestic population, so the Bank of China printed its own money. Unlike typical financial practice, it did not demand personal wealth to be pledged as collateral, because stock and bondholdings or substantial real estate did not yet exist. The government did not need to turn to bondholders to increase its public spending – and in any case, there were no domestic bondholders to borrow from in the wake of its Revolution. China did what any sovereign national government can do – what Abraham Lincoln did in the Civil War. It simply printed the money. Every government that has fought a major war has had to do this. Yet so entrenched was the idea that this option was not available to governments that when World War I broke out in 1914, most economists and other observers insisted that the war would have to end in just a few months, because there was no money or credit available to continue the fighting. But governments simply did what private creditors abhorred: They printed their own money for their domestic needs. Their borrowing was for imports of arms and other products denominated in foreign currency, leaving a residue of inter-governmental debts that became the source of Europe’s postwar economic disaster.
Upon the return to peace, the financial class has demanded that governments revert to reliance on private bondholders. Shortly before the war the fight to control credit policy – and hence, the allocation of resources and control over the purposes for which money is spent – came to a head in the United States in 1913 with the creation of the Federal Reserve System and its takeover of U.S. Treasury functions. Until that time the U.S. Treasury had organized the supply of credit within the United States and set interest rates. It had 12 local districts to coordinate the supply of credit, especially to move the crops in the autumn.
But J.P. Morgan organized a group of bankers prevent monetary management from being a public utility. Their aim was to centralize monetary policy in the hands of the major financial centers. There had to be some form of a treasury, but the Federal Reserve too over most of its powers, and the private banks established a tight control over the Fed. They even went so far as to exclude any Treasury or other Washington official being a member of the Federal Reserve board. And instead of being centered in Washington, the main branch was the New York Fed, with leading branches in Boston, Chicago for the grain trade, and Philadelphia.
This financial coup shifted control of money and credit to the bankers, enabling them to decide just whom to provide credit to, and for what purposes. And as we are seeing today, bankers are not financing industrial capital formation. Much greater financial gains can be made in deindustrializing the U.S. economy and making “capital” asset-price gains from rising prices for real estate, bonds and stocks. Banks lend mainly for the purchase of these assets, which is what drives up their price – on credit.
This focus on making gains financially, by lending against property and financial assets already in place, is a result of the banking system’s focus on collateral-based lending. Banks make a loan when there’s collateral to cover it. In the public sector the loan usually to purchase an asset. Often the asset being bought is the collateral that is pledged to the bank in exchange for financing the purchase. Some 80 percent of bank loans in the United States are for real estate. Loans also are made against stocks and bonds. Private capital firms can borrow to take over a company (often by making an offer to buy all its stock from existing holders), by pledging the company itself as collateral. The result of this collateral-based lending is to steer bank credit into the real estate and financial markets.
This is the essence of financial bubbles. The more lending that is supplied, the more prices are bid up. This is what has happened with U.S. real estate since 1945, and stock prices since the 1980s advent of leveraged buyouts. You could say that today’s debt-burdened deindustrialization of the United States and other Western economies is the residue of an 80-year financialized bubble economy.
It didn’t have to be this way. As noted above, China financed its industrial take-off by creating public credit to finance tangible capital investment and real-estate construct buildings not already in place. The idea was to create new capital formation and construct new buildings, not to make a financial gain on rising prices for these assets. Today’s Western policy of financializing economies is something quite different from what was envisioned by the 19th century’s industrial capitalism. The idea at least of German and Central European banking up to World War I was to industrialize the financial system to provide credit for new capital formation, largely in a partnership between banks, the government and heavy industry. But today’s West has financialized industry, not the other way around.
All this is a far cry from how credit first led in the ancient Near East to the institution of money as a means of denominating debts that the population ran up, mainly to the large palatial and temple institutions for agrarian barley debts, or for the advance of money or consignments of goods to merchants, with their valuation (and the payment due) denominated in silver. I have traced how the money and credit system has evolved into a full-blown financial system from the ancient Near East through Greece and Rome, the Crusades and the creation of fiscal states in the 17th and 18th centuries. The broad line of evolution has been from money created by the state to the modern fiscal state being created primarily for the aim of minimizing risk for creditors making war loans.
The Papacy’s Reversal of Christian Opposition to Usury in Order to Arrange War Financing
Governments in antiquity were creditors, not debtors. Royal indebtedness occurred only with the Roman Church’s attempt to bring fellow Christian realms under control of the papacy. That required armed force, and armies required financing. The Crusades and the numerous other wars waged by the papacy were directed mainly against fellow Christians in Germany, France (the Cathars), Sicily, the Balkans and the Byzantine Empire. Arranging financing for Rome’s warlord fiefs to fight these wars initiated the financialization of the West. These loans were at interest, bringing an international merchant-banking class into being – as well as reversing Christian opposition to usury/interest.
From the start of the Crusades in 1095 through the 16th century, the Roman Church was the unipolar organizing power over Western Europe. Popes treated secular kings as their vassals and set out to gain control of Christendom’s four other patriarchates: Constantinople, Antioch, Alexandria and Jerusalem, collectively known as the Eastern Orthodox Church.
At the end of the 1st millennium Constantinople was by far the dominant power, the New Rome and hence its emperor was the “real” Roman Emperor. The old Rome and its papacy seemed to be merely vestigial holdovers of early Christianity, having sunk so low a level by the 10th century that even Catholic historians refer to the papacy as the Pornocracy (Rule of the Harlots) under the control of leading Tusculum families (in Rome’s suburban hills) that treated it as their local personal property without much of a religious dimension.
That decline led to a reform movement, largely by the Germans, which soon evolved into an imperial plan not only to Christianize the papacy but to gain control over all Christendom as part of a great unipolar transformation, starting with the Great Schism of 1054 that split Roman Christianity from the Eastern Orthodox Church. The Papal Dictates of 1075 spelled out the tactics of this power grab in detail.
The problem with this imperial plan was how to gain this inherently adversarial authority without an army or money to hire mercenaries. Church lands were larger than the royal estates throughout Europe, but they and their revenues were under local control to support charity and other social activities. What Rome did have was the authority to appoint and sanctify kings of its choosing, and to excommunicate opponents of Roman demands for military and financial support.
Norman mercenaries and raiders had been moving south through France into Italy during the 11th century. In 1061, Pope Nicholas II recruited the warlord Robert Guiscard by agreeing to make him king if he could conquer Sicily along with southern Italy and make it a fiefdom of the papacy. A similar deal was made with William the Conqueror in 1066 to lead an army from Normandy into England and pledge fealty to Rome. These two fiefs of the popes agreed to pay tribute and let Rome appoint the bishops in their kingdoms, giving Rome control over their revenues.
Germany’s kings were not warlords installed by Rome. They were elected by the German princes, and held the title of Holy Roman Emperor and King of Italy. Having tried to reform the papacy in the late 10th and early 11thcentury, they resisted papal control of their bishoprics and finances. They appointed their own bishops and tried to absorb the German church into civil administration instead of allowing it theocratic independence.
The issue of papal control over the appointment of the bishops in charge of local church revenues led to an investiture fight between Rome and foreign kings, and domestically between kings and their nobility in response to Roman demands for royal taxes to finance the imperial papacy. When England’s barons drew up the Magna Carta in 1215 to give them the right to block King John from imposing taxes without their consent, the king asked Pope Innocent III to excommunicate these barons for opposing his divine rule. Innocent did so, issuing a bull annulling the Magna Carta and backing the divine right of kings not to let their nobility limit their ability to impose taxes to finance Rome’s wars against other Christian countries. But that had little effect in stopping domestic resistance to royal taxation.
Wars needed foreign funding, because the ability of kings to tax was indeed limited by this domestic resistance. Chroniclers of the time described how papal emissaries presented John’s son Henry III with blank signed papal bulls serving as promissory notes committing him to take on loans from Italian bankers that Rome was sponsoring to provide the money to pay troops to attack the Germans and fight other Christians, especially against lands that adhered to Eastern Orthodox Christianity.
To be more specific, in 1227, Innocent IV had excommunicated Germany’s Frederick II, and in 1245 directed Henry III to borrow from merchant bankers in Florence, to be paid by taxing his country to finance a war against German control of southern Italy. This was the inception of papal support for Italian banking, and it led to civil war in England after Parliament sought to strengthen the Magna Carta by drawing up the Provisions of Oxford. Pope Alexander IV nullified these provisions and issued a bull excommunicating its supporters. Rome won the civil war and prevented Parliament from developing the power to block the war debts that secular kings were directed to take on.
As mentioned above, there were five patriarchates of Christendom, and Rome was the least important on the eve of the 11th century. The center was Constantinople. Rome excommunicated its patriarchs repeatedly in its drive to take them over, along with their finances. The Crusades were mainly fought against the majority of Christians, and their aim was to impose Roman control over all Christianity.
The popes recognized that if they were going to go to war, they needed to organize war financing (as explained above), and that called for reversing the most basic teaching of Jesus and his early Christian followers. Rome had to change the Christian opposition to usury because the merchant families who became bankers financing the papacy’s wars insisted on charging it. The Schoolmen, Christian academics, created a scholastic difference between interest and usury. Usury was redefined as “interest” when Christians charged it, at least for purposes blessed by Rome, headed by war loans. This was the same spirit in which President Nixon said that “When the president does it, it’s not a crime.”
The effect was to legitimize the growth of great banking families that steadily became richer by lending to kings to wage war. After the Crusades ended in 1291 the papacy’s power began its long decline. But it had brought into being a financial class, whose growth in time came to overshadow that of Rome. The main long-term effect of the papal reform movement and its Crusades thus was to reverse Christianity’s core moral teaching opposing usury in the process of creating a new imperial and intolerant Christianity.
b>The creation of Parliamentary Fiscal States Committed to Pay War Debts
Starting in the early 14th century France’s king Philip IV broke from the Church, sponsored what became a series of Avignon popes, and confiscated the wealth of the Church’s Knights Templar banking order (as well as that of the Jews and Lombards in France). During the ensuing two centuries secular kings became even larger clients for bankers, borrowing to fight their own secular wars. And by the late 16th and early 17th centuries bankers, European kings had the same problem that Latin America had in the 1980s and again today: They couldn’t pay the debts that were growing at compound interest as debts falling due were simply rolled over, with interest added to the principal. The only way that bankers could keep them afloat was to keep lending them the money to pay at least the interest that was accruing.
The problem for bankers was that if they didn’t lend kings the money to pay, the kings would have been obliged to default. That would have prevented the Fuggers and other bankers from paying their own depositors. So they lent the kings of Spain and France new war loans, hoping for some kind of miracle. That’s what is called the confidence fairy.
The only property that kings could avail themselves of to pay their debts was the royal domain, which was the king’s own private holding. But their realm’s other income and assets were not the king’s to pledge unilaterally. Royal debts were not really “public” in character; they were only those of the palace sector. There was not really a “state” or “government debts” in modern terms. Kings had the right to tax only if the nobility would go along with it, although they could impose excise taxes on foreign trade. Their creditors therefore helped them organize trade monopolies to pay royal debts, but there still wasn’t enough money to remain solvent.
The large banking houses saw that they were bound to lose the money they lent to kings that lacked the resources to pay. Looking around Europe, they found that there was another model for debtors in small Italian self-governing cities. These were communes such as Florence and Genoa, and the Dutch cities. These communes were run collectively by elected leadership. They empowered these leaders to pledge the wealth of the commune’s members collectively as security to pay the war debts that they needed to take on to defend themselves against the French and other Catholic kings who were trying to conquer them.
Seeing this new kind of arrangement, bankers saw that what they needed to minimize their lending risk was the kind of state that could do a national level what these self-governing Italian and Dutch communes were doing. Holland duly responded by becoming a confederation of such communes, and the Dutch were invited to England to create the kind of parliamentary fiscal state that had the power to do what kings couldn’t do: namely, to pledge the whole national fiscal power to pay the debts that they took on.
This was the origin of the modern fiscal state. It met the terms demanded by the international banking class. Feudalism’s royal domains were not real states but royal fiefdoms. Modern fiscal states have the power to levy national taxes, far beyond the fiscal power of kings to pledge their own property. The modern state was created above all as a fiscal organization to which creditors would be willing to lend the money to defend itself. That is how the northern Protestant states of Europe obtained the money to fight to become independent of Europe’s Catholic monarchies. Their political structures for achieving collective liability for debts evolved into democracies. The result was more than just a new kind of state; a supra-national financial system emerged, standing above nation-states that were obliged to enact pro-creditor fiscal and legal systems in order to obtain the loans that they needed to survive or fight their wars of conquest.
England took the lead in developing banking at the national level, with the great monetary innovation of using government debt as the asset of banks to back commercial lending to expand its economy.
All this means that it was really the financial sector that politicized its economic power to create the kind of state under the pro-creditor rules that we have today. The Bronze Age Near East had kingship able to cancel debts, wage war and prevent an oligarchy from developing. The new national states of Holland, England, northern Europe and all Western states today have fiscal power, but not the political ability to prevent oligarchies from developing. They support a cosmopolitan financial oligarchy whose creditor claims and ideology limit the power of modern states. These new states are strong. When libertarians like Ronald Reagan say that they’re against the state, they want a state strong enough to crush debtors, not strong enough to protect public welfare from creditor claims.
Creditors want states to be strong enough to enforce payment to them; strong enough to put the interest of domestic and foreign creditor alliances above that of the domestic economy’s growth. So you still have the same eternal fight over what will get priority: Will the economy grow and be free, or will creditors have the “right” or power to reduce it to debt dependency?
The academic articles that I’ve written on land tenure, money and the origins of enterprise and charging of interest trace this common denominator of how civilization has dealt with credit and debt. When you look at civilization as the political expression of credit and debt or relationships, then you recognize that this is as important for the history of civilization as sex was for Freud.
PART IV
The Bronze Age Innovation of Money and Interest, and the Resilience of its Economic Order
Robinson: I have all sorts of questions. There are tons of things on the table that are orthogonal to our purposes, but that jumped out at me. You said earlier that the early translations of Mesopotamian texts were quite different. I recently spoke with Joyce Carol Oates, the novelist poet at Princeton, and I remarked to her how some of my favorite poems and poets don’t write in English. I can read a poem from one author in one translation and it’s completely different. In one version I hate it, but in another, it’s one of my favorites. Translation is such an art and is so important for the work you’re doing. This gets us back to these ancient texts, because I think one of the interesting lessons that might come out of what we’re talking about today is what we can learn from the collapse of these Bronze Age civilizations and other civilizations from antiquity to today. Early in our conversation you mentioned Hammurabi in Babylonia and the biblical Jubilee year. For our listeners who don’t know who Hammurabi was or what a Jubilee is, what are they and how did they contribute to the flourishing of these ancient civilizations before their downfall?
Michael: I’ll have a roundabout way of answering your question. As it happens, I began earlier today dealing with some translation problems. One of the most important books on the origins of money and its social effects was written in 1898 by a German anthropologist, Heinrich Schurtz. He wrote The Origins of Money, examining indigenous communities in the German possessions in the South Pacific and Africa.
He described how what developed there wasn’t money as we know it. It was a form of property, an asset rather than a means of exchange, although of course it had a value, and a high one. And he found that what was called “primitive money” wasn’t the same as the money of Mesopotamia. It took the form of valued objects conferring status, mostly imported rather than produced at home. So the way to get these status objets de vertu in the communities that he studied was by foreign trade – mainly exotic materials, not silver or gold. They could be jewels, shells or any exotic trophy. Or they could be prestige items of dress or furniture that had been owned by a chieftain’s family. But they had no standardized value like “real” money and were not used by the population as a whole for exchange or for paying debts.
Mesopotamia had imported silver alongside the grain that was the main form of monetary payment – and denomination of debts – for the agrarian population. Gold didn’t pay much of a role, but had mainly a prestige value, especially by the nouveau riche outsiders who later conquered the region. Silver was valued as a sign for the moon, associated with gold for the sun, and both were valued as prestige donations to temples. Mesopotamia had to trade for silver in order to trade for raw materials such as the copper and tin that made the bronze that gave its name to the Bronze Age. Stone, hardwood and gems all had to be imported, and were valued in silver.
Silver and gold were of foreign extraction, not only for Babylonia but for most countries down to our own era. India was long described as the Sink of Gold, from antiquity down to modern times. China and Japan wanted silver. Schurtz described the origin of this demand in the indigenous communities that he studied. The editors of his English translation asked me to write the introduction to their translation, which is just now going to press. I got their translation half a year ago. But yesterday they sent me the publisher’s proofs. The introduction that I had written had cited quotations from Schurtz’s book, but now I found that they had changed almost every paragraph of the initial translation that I had quoted.
One word that they changed was “government.” They explained to me that they couldn’t use that word because there wasn’t really a government in indigenous communities in the sense that we use the term today. They wanted to get the anthropological translation right. Their aim was to avoid being anachronistic. It took me four hours to write in the new translations in my new version of the introduction to be typeset.
What Schurtz found was that the influx of primitive money – meaning items of status, highly valued and prestige assets – became a source of the polarization in indigenous communities. But the role of chieftains was something like that of Mesopotamian rulers, and in fact was almost universal. It was to prevent the economy from polarizing. If they let that happen, their communities would have ended up looking like late Rome, with a small proportion of the population holding most wealth in their own hands.
Babylonia and other Bronze Age communities sought to avoid this, as did communities all over the world. But translators have found that like the indigenous communities that Schurtz studied, there were no appropriate modern words to describe what kind of society they had. For many decades, the word “state” was used to describe these realms. But they were not really states in the modern sense of the term. The palace and temple sectors were separate from the economy at large. They now are called “the large institutions,” not the state.
Hammurabi’s laws related mainly to transactions involving the palatial sector, including the temples. The family-based communities on the land remained governed mainly by traditional common law. Personal injury, for instance, was settled by a wergild-type debt as compensation. But some people, such as widows, orphans and the infirm (who were dependent for their welfare on the palace instead of the community on the land) didn’t havefamilies to pay such compensation. So Hammurabi ruled that in such cases, retaliation in kind was appropriate: literally “a tooth for a tooth.” Assyriologists have translated many legal cases involving such personal injury, and in no such cases was such retaliation actually found. Fines were paid instead, as was typical in “primitive” Europe. So what was the “government”? The economy was divided into distinct sectors, not just one uniform sector. But Assyriologists don’t call these “public” and “private,” because these are modernist terms for large institutions and the family-based community at large, the former based largely on foreign trade and producing export handicrafts in exchange mainly for silver money, and the agrarian sector on the land basically domestic with its transactions denominated in units of grain.
The Origin of Money and Interest for Payment to and within Sumer’s Large Institutions
The palatial sector of the Bronze Age Middle East had no interest in taking the whole economy into bondage. Just the opposite: As in indigenous communities, inequality was seen to be a source of disorder. But the wealthy sought to gain status by exploiting debtors and acquiring control of land. That also is what classical oligarchies aimed at, and that has become a distinctive feature of subsequent Western states – we could say Western civilization. A similar dynamic occurred in indigenous communities that had contact with the West in the 19thcentury, just as it happened in classical antiquity and is happening today.
It was mainly foreign debt that was impoverishing European economies prior to the 18th century, because the money that was owed to pay it was controlled by international bankers, not by domestic governments. Debt in a currency not produced by the debtors has become a constant in civilization. Mesopotamian rulers solved this problem by making silver debts payable in grain at a fixed and stable rate of exchange. But Roman debts owed to the oligarchy were in hard money beyond the ability of most debtors to produce by themselves. Dependency on foreign credit has created an increasing tendency for economies to polarize if they put the obligation to pay creditors over and above their own domestic need to grow. Today this foreign dependency has made the most powerful governing power a cosmopolitan creditor class ruling over and above states. Indeed, modern “states” were created in the 17th and 18th centuries as vehicles to tax their populations to extract debt service to pay these supra-state creditors, which have absorbed more and more of the West’s economic surplus, especially since World War II led to the U.S.-based dollarized finance-capitalist economy.
The Persian empire conquered the Babylonian empire, but most empires from antiquity until the imperial papacy created during the Crusades were willing to let the residents of the countries they conquered follow whatever religion they wanted, live their own ways and continue their own practices as long as they paid tribute and taxes. Even the Mongolian and Ottoman Empires were tolerant. What they cared about was tribute. So when the Persians conquered Babylonia and then Israel, they took the wealthiest families back to Babylon as hostages but left the rest of the people on the land of Judea for their local leaders to administer.
The Babylonian Jews became assimilated. We have their letters, wills and marriage contracts, written down by Babylonian scribes, still with many practices that were at the root of the Middle Eastern takeoff where all of the elements of enterprise and public administration developed.
Mesopotamia and Egypt had rich agricultural land along the Euphrates and Nile, deposited over many millennia by rivers with rich silt that made wonderful soil. But this soil didn’t have metal, because it was soil all the way down. It didn’t have rocks or stone to build walls. Most construction was made out of mud bricks to make walls, temples and homes.
In order to survive, Mesopotamia had to get the elements that made bronze, the alloy that gave the Bronze Age its name, as I have mentioned. They had to develop foreign trade and that required an organization of enterprise, which was centered in the palatial sector and consigned to merchants. All the basic practices of enterprise – accounting, money, weights and measures (you can’t have exchange without standardized weights and measures), interest rates and profit-sharing agreements were developed. All production and trade was organized on credit. A Sumerian or Babylonian palace, or perhaps wealthy families connected with it, could consign textiles such as clothes, rugs or other weavings to entrepreneurial merchants who would go north or as far west as Afghanistan and Pakistan to trade textiles for silver and other raw materials. In five years they would have to repay double the value of the original advance by their consigners. That five-years doubling time works out to 20% decimalized annual interest, one-fifth a year.
Any rate of interest implies a doubling time. We have the textbook exercises that Babylonians used to teach scribes. They asked how long it takes for a debt to double at a rate of one shekel per month. (60 shekels made a mina-weight.) The answer was five years. How long to quadruple? (Ten years.) How much to multiply 64 times? (30 years) I wish that American universities teaching economics would ask this question. Modern interest rates are much lower (except for personal credit cards), but the exponential growth principle is the same. If you take out a 30-year mortgage to buy a home and pay a 7 percent annual interest, what does the bank end up getting? In only 10 years at 7 percent interest, the lender will receive as much as the seller of the home received. And all the bank needed to do was to create the credit to finance the property transfer. In 20 years the bank’s interest return has doubled, and in 30 years it has quadrupled.
So you see how rapidly the increase in debt service accumulates. But economies don’t grow that fast. The Babylonians recognized this universal fact. In addition to teaching the scribes to calculate how fast a debt grows at a rate of one shekel per month, they had exercises to calculate how fast a herd of cattle grows.
A herd of cattle grows very much like modern economies grow, in an S-curve that tapers off. When the first Assyriologists began to translate these exercises, they thought that this couldn’t be a mathematical exercise. It must be a report on how a specific herd was growing. But already the Sumerians had quadratic equations, and its scribes needed to learn more mathematics than a typical high school student learns in America today. They forecast astronomical relations and made many sorts of calculations. They knew that you had the S-curve of herds growing, and they knew about the exponential growth of debt. The striking difference was how much faster the debts grew than their indebted rural economy.
From that alone, they knew it was obvious that the debts couldn’t be paid. If you don’t cancel them, you’re going to have a domestic oligarchy growing. Now, every introductory Economics 101 course should have that model. The mathematical models the Sumerians had were superior to any economic model that the National Bureau of Economic Research has today or any economic central bank has because they don’t want to admit and acknowledge this simple mathematical reality of compound interest.
The Eternal War of Creditors Against Debtors
It’s been said that the devil’s great victory is convincing the world that he doesn’t exist. Ideological lobbyists for the banking and creditor class try to convince the world that debt doesn’t matter because “we owe it to ourselves.” But who are the “we,” and who are the “ourselves”? The “we” are the indebted and tax-paying 99 Percent. We don’t really owe the debt to ourselves, but to the One Percent, the financial sector and its allied rentier classes (real estate, insurance and other monopolies). Yet economic models typically ignore debt because assets equal liabilities. (But whose liabilities, and whose assets?) Once you look at the distribution of wealth and see its polarization – who owes what to whom – and once you trace the growth of debt relative to the slower expansion of the economy’s income and actual product – you see this growth of debt is an unsustainable Ponzi scheme. Yet that is not being taught as the core of today’s economic curriculum.
How do you keep a Ponzi scheme going? Well, if the banks keep lending more and more credit to buy real estate, the borrowers use this money to bid against rival borrowers to buy homes or commercial office buildings whose price is built up on expanding credit, that is, debt. These higher-priced, debt-ridden homes and office buildings are then pledged to banks for new buyers to take on yet more debt. That inflates real estate prices, but leaves new generations of buyers more indebted yet with less and less equity ownership of their property.
If you’re looking at an economy’s trajectory, the most important prices are not the consumer prices that are tracked by the official Consumer Price Index, but asset prices for debt-financed real estate, stocks and bonds. And that’s what banks lend against. Only a small portion of bank credit is for the purchase of goods and services via credit-card debt, automobile loans and other consumer debt. The vast majority of the credit that banks create is not used to inflate consumer prices, but asset prices – housing prices, and stock and bond prices.
The Obama junk-mortgage bank bailout in 2009 and the Quantitative Easing to flood the markets with credit to bring down interest rates created the largest bond market rally in history, enriching and empowering the financial class that owns most bonds, stocks and real estate. The top 10 percent of the population, and especially the One Percent, have seen bank-financed debt-leveraged asset prices “create wealth” for themselves at the top of the economic pyramid, but wealth for the bottom 50 percent has hardly changed, while the bottom 20 percent have been driven further and further into debt just to make ends meet.
This widening polarization between the indebted majority of the population and the creditor minority what economics should be all about. It was what David Ricardo warned about with his value and rent theory, showing that rising rentier income would absorb the entire economic surplus, leaving no room for industrial profits to be made. He was writing about land rent crowding out all other income, but his warnings apply to all forms of economic rent, above all to financial rentier income.
We’re dealing with two kinds of price trajectories: consumer prices paid by wage earners forced to work harder and harder to make ends meet, and asset prices increasing wealth for the rentier class “in their sleep.” The wealthy elite is becoming hereditary. They don’t care about what they pay at the grocery store. They care about what the stock and bond prices are doing, along with the market price of their real estate. For them, it’s all about wealth.
PART V
Does Ancient Economic History Provide a Model to Avoid the Tyranny of Debt?
Robinson: Toward the lesson that I’d like to get to, how useful in today’s world are Jubilee Years and the policy of debt forgiveness you argue might be a guide? I think that we ought to contrast the Bronze Age experience and implementation of Jubilee Years with what happened in Greece and Rome.
Michael: What made Western civilization different at the outset was that the Mediterranean lands didn’t have kings. You said before that there was a collapse of the Mycenaeans. It wasn’t really a collapse. There was really bad weather around 1200 BC. There was a drought that set whole populations in motion. They couldn’t survive where they were. The same thing happened in India about 600 years earlier. The largest Bronze Age civilization, the Indus civilization, dried up. That’s when Indo-European speakers came in via Persia. Archaeologists describe them as having picked up the local Indus practices, including yoga and the caste system.
A collapse usually involves something wrong happening as a result of the way a society is structured, bringing it down. Views of a collapse often are shaped to provide a lesson for today, to warn against what we may be doing wrong or in a self-destructive way. But climate change and drought are something external to this. The 13th century BC was a thriving cosmopolitan period with active trade and growth. The Mycenaeans and Bronze Age Middle Easterners didn’t have self-destructive social organizations, but were maintaining their resilience. But the Greek-speaking Mycenaean society came to an end. The population plunged when the crops failed, palace rule ended, and its local managers kept control of the land in their own names – something like Russia’s post-Soviet privatizations under Boris Yeltsin.
Archaeologists call this period after 1200 BC in Greece and the Near East a Dark Age, with populations on the move seeking to survive. The next few centuries were dark in the sense that writing disappeared. The syllabic Linear B writing of Mycenaean Greek went out of use, because it had been used mainly for palatial administration that no longer existed.
Around the 8th century BC alphabetic writing was developed, and was used for much broader purposes than centralized palatial administration. Phoenicians and Syrian traders began to revive commerce and contacts westward to Greece and to Italy, where population growth had begun to recover. And just as Mesopotamian merchants had done, these traders established temples in the lands where they were trading, sort of a local chamber of commerce as a public association to organize their trading and settle disputes.
Trade often was kept offshore, where it was independent of the rules of local communities. In Mesopotamian tradition much trade was conducted in the quay areas along the river outside city walls. In the cities you would have the rule of local law, outside the walls it was all “free” enterprise beyond the reach of local rule by mutual consent. Trade with the Indus civilization via the island of Bahrain (called Dilmun from 2500 to 300 BC) was an extension of this idea. In Italy, a major trade island was offshore on the island of Ischia. For Greek trade, island trading centers were established.
The Middle Eastern merchants introduced the practice of charging interest to the West. Local Greek and Italian chieftains adopted it in their transactions with the rest of society. But the West had no palace rulers to cancel debts, so the dynamics of interest-bearing debt ended up leading to an aristocracy owning the land and holding the population in debt. That problem was only solved by the tyrants that we discussed earlier, who overthrew the predator aristocratic families, cancelled the debts and redistributed the land that had been monopolized.
The Syrian and Phoenician merchants also introduced Middle Eastern weights and measures as a necessary element of charging interest. But the arithmetic fractions and denomination were different in the West, and varied widely. Those of Mesopotamia (minas for weight and gur-bushels for volume) were based on 60ths because that system had been developed in the temples to distribute food to their dependent labor force of war widows and orphans on a monthly basis. The administrative year was divided into 30-day months, so each day two 60ths of the monthly ration (a “bushel”) would be consumed – two cups a day. Next month, another bushel would be given.
Interest charges were based initially on ease of calculation: one shekel per mina per month in Mesopotamia’s sexagesimal system of fractional divisions. Greece had a different system. It had been in the orbit of Crete and Egypt, which used the decimal system based on 10. So their rate would be 1 percent per month (12 percent for a year), or sometimes 10 percent. Rome used a fractional measuring system based on a year’s normal division into 12 months. So Roman weights measured 12 ounces in a pound. Its interest rate was set at an annual 1/12 (8 1/3 percent). This comparison shows that interest rates were not set by the rate of profit or productivity as modern theory assumes, but simply to make it easier to calculate in the local system of fractional accounting.
The free-enterprise origin myth of interest rates being set by “market forces” of profit, physical productivity or consumer need has no room for the idea of government-organized weights and measures. Their “profit-based” explanation of interest rates assumed that Mesopotamia’s high rate, the decimalized 20 percent per year, reflected how risky commerce must have been in the Bronze Age. Greece supposedly was more stable, so it had a lower interest rate of 10 or 12 percent. Then Rome, despite its vicious oligarchy (which oligarch-friendly economists call stability) had the relatively low interest rate of 8.33 percent. There is no clue in this “market-based” view that the interest rate had no basis in risk or the debtor’s ability to pay, but simply reflected the ease of mathematical calculation.
When I first submitted my explanation to the Journal of Economic and Social History of the Orient, its editors questioned whether it really could be so simple. It took them six years to agree to publish my article in 2000. My discoveries as an outsider have now been accepted by Assyriologists. But they are ignored outside of that field.
This experience helps explain why I was able to get assent from the Assyriologists and other prehistorians who were part of my 20-year Harvard colloquia. Assyriologists had refused ever since the 1920s to deal with economists or non-Assyriologists because there was so much ideological preconception about how civilization began. Everybody wanted to project their own ideology onto the past. Vatican writers translating Sumerian documents called it a temple state. Austrians ignored the organizational role of palaces and temples altogether. Socialists thought in terms of “divine kingship.” Across the economic and political spectrum everybody had their own academically sectarian idea of how the ancient Near East had evolved.
Some crazy economists have even insisted that there were Bronze Age Keynesian who built the Egyptian pyramids in order to spend money into the economy and create consumer demand. The general mentality is to think of what the modern writer would do or advise if they were able to get into a time machine and travel back five thousand years or so and tell the Sumerian and Babylonian rulers how best to run their economies.
I was an outsider to Assyriology, but also to mainstream economics. I knew that I didn’t know how archaic societies were organized. But I knew that what was important for me to find out was how different societies treated money and debt relations. I was looking for the laws of financial motion, the dynamics that you and I have been talking about.
The Assyriologists were willing to work with me and become part of my research because I simply asked what they could tell me about the documentation from their period on debt, land tenure, accounting and its weights and measures, and money, including the interest rates on contracts and in royal inscriptions. How did the earliest documented societies organize the building of their pyramids, palaces and city walls?
I was able to raise funding to cover their expenses for our meetings from New York to St. Petersburg in Russia, London and Germany. It turned out that an enormous progress had been made since the explosion of cuneiform research in the 1920s and even the preceding generation. But there had been little focus on financial topics. These did not appear in the indexes of books, but were mentioned only in passim. The main problem had been that the way that the ancient Near East handled debt and administered its overall economy was so different from modern preconceptions ranging from individualistic free enterprise and markets to strong centralized government.
The greatest resistance to the discoveries resulting from my research came from the ideological prejudice against the idea that Bronze Age rulers needed to prevent the emergence of financial oligarchies. All history from the ancient Middle East through classical Greece and Rome is offensive to the modern economic and political ideology that students are taught and Hollywood romanticizes at the movies. The university curriculum avoids dealing with the actual evolution of civilization’s economic practices up to about 1700 AD. It’s left to armchair fantasizing. The discipline of anthropology upon which much of this theorizing is based deals mainly with modern surviving indigenous groups that have not created modern civilization and its pro-creditor market-oriented values.
There are not enough scholars to teach this non-modern history in any case. It would take an enormous load-up time to create such a curriculum. As I told you, I began to form the Harvard group in 1984, but it took ten years, until 1994, for me to familiarize myself sufficiently by reading the relevant literature so that I could talk to Assyriologists without appearing silly. It’s as if I had to start afresh and get a new PhD in ancient Near Eastern history. But historians don’t have much to say about economic dynamics, and economists have almost nothing relevant to say about history.
I now can see how the financial dynamics of today’s polarizing world economy go back to archaic times. What Bronze Age rulers realized that modern society does not is that if you don’t cancel the debts, much of the population will fall into debt peonage – bondage to a creditor oligarchy ending up with the land and money. Control over labor no longer is achieved by leading it into the servile debt-bondage of classical antiquity or binding it to the land as occurred when Roman land tenure collapsed into serfdom. You can live wherever you want, and unlike serfdom you can generally work wherever you want. But wherever you live and whomever you work for, you will find yourself obliged to go into debt. Each generation will be compelled to use more of its income over and above basic subsistence survival to pay creditors and the absentee landlords and monopolists that they finance and protect to turn their land rents and monopoly rents into interest payments. That’s essentially what bondage is. It’s what debt peonage is. That antithesis between financial dynamics and liberty is the common denominator that has been a constant for the last five thousand years.
If you review the history of civilization in terms of this common denominator, you see the evolution in the way that society has resolved the fundamental question of what should be its primary concern: Does it sanctify paying creditor claims on debtors even if this polarizes and impoverishes the economy, or does it write down creditor claims to enable the economy to grow and avoid polarization and corrosion of the quality of life? That choice defines the dynamic of civilization.
That dynamic is driving today’s Global Majority and the BRICS to move away from the Western “garden,” as EU head Josep Borrell has called it. For him and much of the West, the “jungle” is the drive for independence and multipolarity away from neoliberalism, and away from Global South’s debt and trade dependency that is preventing them from achieving prosperity for their own people. Israeli President Netanyahu gave a speech to the U.S. Congress yesterday (July 25, 2024) and stated the issue in one sentence: “This is not a clash of civilizations. It’s a clash between barbarism and civilization,” That sounds remarkably similar to what Rosa Luxemburg said a century ago, except that she juxtaposed barbarism to socialism. The question is, which side of today’s global fracture represents the barbarians and which side represents the future course of civilization?
The remarkable thing is that there are strong advocates and vested interests for each side. Even the barbarians claim to be the civilization of the future, and are willing to fight to the death to defend their cause and its vested interests.
Debt and the Destiny of Civilization
Robinson: That is fascinating. I think everybody today has the idea that civilization is moving inexorably forward, just because we see the progress of physics and math, technology and medicine. There’s an illusion that in every field of endeavor we are moving forward. But you’re telling me that it seems like there are special-interest groups sponsoring an unwillingness to look critically at the past. In the case of economics, there were crucial understandings thousands of years ago that people are neglecting today and that is hindering forward progress.
Michael: Here’s the problem. It’s not simply one of moving forward, but one of civilizational transformation into something else, a metamorphosis. I made my reputation in the 1970s as a futurist working with Herman Kahn at the Hudson Institute for four years, and then with Alvin Toffler, the Futurist Institute and others. I no longer called myself an economist, because an economist would tell countries that if they want to become richer, they have to lower their wages and living standards to become more competitive. That means being poor. That certainly wasn’t the future that I wanted to see.
It was pretty easy for me to forecast interest rates and foreign exchange rates. I went around the world doing that. But what turned out to be much more difficult was trying to understand why antiquity and Western civilization followed the course that it did. That was much more difficult than being a futurist, because archaic societies and antiquity were so different from today, with different social values. The West’s polarization into creditor oligarchies was hard for me to understand, because I could not imagine how different the late Stone Age was, the Bronze Age and even classical antiquity. Their social and political systems were so fundamentally different, not just moving forward but transforming, largely as a result of the financial tensions that increased between private wealth and society’s administrative traditional governing values and authority.
And yet despite this transformation there was a common denominator, the choice between letting a financial oligarchy emerge or having a governing power strong enough to prevent that, such as the Near Eastern “divine kingship” or the so-called Greek tyrants who cancelled the personal debts and redistributed the land to lead the Greek takeoff, or modern socialist governments. It’s as if this transformation evolved from one species or genus of an economic system to another.
The mainstream Western view thinks of the past as being like today’s world, depicting us as the heirs of Greece and Rome. If that really remains our genetic political and social heritage, the West will retain the same dynamic that led to Rome’s decline and fall. What happened was that Greece and Rome – that is, Western civilization – took the Near Eastern financial innovations out of context, without having rulers empowered to cancel personal debts, and prevent oligarchies from taking over the land and monopolizing it to bring on the Dark Age.
Most people think the Greeks and Romans were democracies. But they only had short moves toward some transitory democratic voting forms. When Aristotle led a study of the various Greek constitutions, he said that they all called themselves democracies but were really oligarchies. The rhetoric and euphemistic vocabulary they used has changed fundamentally. You have to look at this transformative process. Today’s challenge is not simply to move forward along our present trajectory, but to realize a need for self-transformation into a new trajectory of social and economic evolution.
The alternative is self-destruction. What kind of world are we going to create? This is not a future that can be predicted with certainty. Will the West let itself be polarized and end up like the Roman Empire did? Or will Europe realize that it has made a mistake and rejoin the rest of Eurasia? And will Asia indeed free itself from the Western-sponsored neoliberalism that has deindustrialized the NATO world? Will the BRICS and Global majority progress with socialism, or regress with the West’s libertarian free-market characteristics?
Should the Government Start by Forgiving Student Loan Debt?
Robinson: Earlier in the conversation you referenced some countries. You said it was incumbent on them not only to raise the living standards of their citizens but also to reduce or eliminate the external costs of living, such as education. And since student debt is such a hot topic today—though I think this was more of a hot topic a year or two ago – but is this one of these things that you think ought to be eliminated? And do you see a path for how that might happen going forward?
Michael: You’ve pointed to exactly the problem. Once you privatize public infrastructure or the supply of basic needs, you vastly increase the cost of living. In the 19th century, Britain’s Conservative Prime Minister Benjamin Disraeli proclaimed that health, public health, was the essence of his party’s reforms. It was the Conservatives that wanted that policy. And in the United States it was Simon Patten, the first economics professor at the first business school, the Wharton School, who described public infrastructure as a distinct factor of production. The landlord’s ownership claim for rent is not a factor of production but an extractive rentier claim. And unlike labor’s wages or industrial capital, public infrastructure investment and the provision of essential social services is not aimed at making a profit. The role of public infrastructure and social welfare is like that of the Erie Canal and other American infrastructure. The aim is to lower the cost of living and doing business.
So if we can have the public infrastructure providing basic needs – healthcare, education, communications and transportation services, if we can have the post office, water and sewer systems as public functions provided freely or at subsidized prices, the economy can function at a much lower cost than if these services are privatized, monopolized as opportunities for rent extraction and duly financialized. The government’s business isn’t to make a profit. It is supposed to provide basic needs as a economic right.
Patten described the aim of public infrastructure as being to lower the economy’s overall cost of living and doing business so that industrialists would not have to pay their employees high enough wages to, for example, enable them to afford to pay for their own education – at $50,000 a year today – or their own healthcare at 18 percent of GDP. They would have subsidized transportation instead of letting it be monopolized and financialized as occurred in Britain under Margaret Thatcher and the Labour Party’s Tony Blair and Gordon Brown.
Privatizing these hitherto public services has led them to be run for profit (largely by making monopoly rents), and even more, for capital gains for their stocks and for management fees. All this pushes up the cost of living and doing business. Avoiding this fate has been the great advantage of socialist economies. Everybody back in the 19th century considered called this public infrastructure to be socialism, not only the Marxists. You had Christian socialists, you had Henry George’s libertarian socialists, you had all sorts of socialists. What they had in common was that they saw the future of industrial capitalism to be an increasingly public economy with active public investment subsidizing the ability of the nation’s industrialists and labor to compete with that of other countries by lowering the cost overhead.
The aim of privatization and finance capital is to make money by raising the cost of living by extracting economic rent. That raises the cost of doing business, by extracting economic rent. So if you have an economy of privatized healthcare, education, water and other basic needs with operators charging as much as an unregulated market can bear (euphemizing this as “the magic of the marketplace”), how can the Americans or Western Europeans that have become neoliberal expect to compete with countries that are calling themselves socialist and reinventing the policy wheel by rediscovering on pragmatic lines exactly what American and German industrial capitalists did in the 19th century.
Robinson: On this note Michael, I think I said at the beginning of our conversation that this is our third round on the show. It’s been a pleasure to do this one in person, and I hope that at some point there will be a fourth down the line in person. Thank you again. It’s been great.
Michael: It’s very good. As you see, I thought we’d go on three times as long. I’ve hardly a third way through my margarita.
OUTLINE
00:00 Introduction
03:08 Michael’s Interest in Debt
12:14 Debt Cancellations in the Ancient World
16:51 Can Society Survive Forgiving Everyone’s Debts?
21:30 The Brilliance of Bronze Age Economics
32:04 The Eternal War of Creditors Against Debtors
41:11 From the papacy’s reversal of Christian opposition to usury to the Modern Fiscal State organized to serve high finance
55:50 The Origin of Money as public policy, protecting liberty from/not privatized creditor control
01:07:17 How Ancient Economists avoided succumbing to a debt overhead
01:11:39 The Collapse of Babylon compared to that of Rome and subsequent West
01:22:30 Debt and the End of Civilization
01:24:58 Are Ancient Economics a model for the Future to avoid the tyranny of debt?
01:30:33 Should the Government start by Forgiving Studen