Book Review: Debt-Updated and Expanded-The First 5000 Years

end-of-dollarIn this sharp review of D. Graeber’s book, ‘Debt-Updated and Expanded: The First 5000 Years’ released in 2014 Tejaswini Chepyala traces the financial crisis of 2008 back to the historical roots of debt to weave an informative and eye-opening essay. 

Have you wondered why a U.S dollar note has the word “debt” imprinted on it? Does this imply that a currency note is simply an IOU, a signed document acknowledging a debt? To answer these questions one needs to have a complete understanding of  how the money market functions.

The common notion about how money is created is that the Federal Reserve prints out all the money and pumps it into the economy through the purchase of  U.S denominated bonds. However, the Fed cannot simply print more money as that would lead to inflation and the whole purpose of  establishing institutions such as the Federal Reserve and the Bank of England as independent authorities is to regulate the money supply and avoid reckless printing of  money. This makes the process of  creating money much more complicated and brings us to the next question: If it is not the Fed who actually creates all the money in an economy, who does?

It is the banks that create money in an economy. Let us illustrate this through an example, Person A deposits $1000 in the bank. As per the Federal Reserve’s regulation, banks are allowed to lend out 90% percent of  their deposits to Person B. Now person B will have $900 in his bank account and the total amount of money available for spending would be $1900. Next, person C will be given $810 in his bank account and the total amount of  money available in the economy would be $2710. This implies that all dollars are loaned into existence by the banks .i.e, by creating loans banks create debt. Therefore, creation of  money is equal to creation of  debt. And if  the loan is paid off  the debt will be paid off  and there will be no money in circulation.

At the Federal Reserve level, money is manufactured out of thin air and exchanged for interest paying government debt. Every year more more credit needs to be loaned out in order to clear the outstanding interest payments on debt of  the previous year. In order to clear the debts of  the previous years more debt needs to be created, i.e, more debt are created every year to finance the debt of previous years. A country carrying a deficit is similar to having a long term loan and this form of  deficit financing leads to creation of  more money. Countries like the United States have been running on deficit over the past 45 out of  50 years, the following figure shows how much of  debt the U.S government owes to different parties and to itself  (Federal accounts).

Debt US

Source: U.S. Treasury, National Priorities Project

This brings us to the statement, that David Graeber, an economic anthropologist, in his book “Debt: The First 5000 years” opposes; “One has to pay one’s debts” . If  one had to pay one’s debts the entire financial system will collapse, because Debt = money. If debt is not created there will be no money created. Therefore, Graeber argues that in order to understand the different roles played by debt in our society one has to simply follow the forms money has taken over centuries. He tries to explain how history of  money instead of history of monetary exchange works as a tool to understand history of  social organisation. What is interesting is how he disproves the conventional economic explanation of how debt emerged.

According to Adam smith, the father of  economics, first came barter, then money and then came credit. However, Graeber opposes this historical order because, according to him, barter economies¹ never existed. Economists simply assumed that human beings used barter before the invention of  coins without any form of  historical reference. In order to disprove this assumption, Graeber first quotes examples of early civilisations and second gives conditions in which barter will work.

First, the early civilisations improvised credit systems because actual money was in shortage. Both the Mesopotamian cuneiforms and the Egyptian hieroglyphics are well documented proofs that the credit systems emerged thousand years before the invention of coinage. In the Sumerian economy, a uniform system of accountancy was used to calculate debts. Even though these debts were calculated in silver they did not have to be repaid in silver. The temple authorities were in control of  the financial system and they fixed the ratio of  silver to barley. Therefore, debts were calculated in silver but were paid in barley. However, the temple authorities accepted payments in form of  goats or furniture also. This was because though silver was used in exchange it was short in supply as most of  it was with the temple and palace authorities. The transactions of  commodities that weren’t controlled by the temple authorities were also made in credit and though few of  the merchants used silver for transactions, majority of  them used credit. Even the day-to-day transactions were not done using silver but rather through credit and those credits were cleared during the harvest time in the form of  barley.

Secondly, within tribal communities there was no need for a barter system. For instance, Person A wants shoes from Person B and in exchange for shoes Person A is ready to offer potatoes. However, Person B wants Rice and not potatoes in exchange for his shoes. This is what economists call “the problem of double coincidence of wants”. Since both the parties belong to the same community, Person B will remember that Person A owes him a favour for the shoes and will ask for a return later. Therefore, barter occurs only between strangers who will probably never meet again and in large societies where there is shortage of  money supply. Barter creates a sense of antagonism between people involved in the exchange because it creates relationships based on self-interest. This contrasts with the tribal community where the relationships are based on trust. Therefore, though the standard monetary history suggests that barter came first, then came money and later came credit systems, Graeber’s anthropological evidence shows that the process was exactly the reverse. He also concludes by saying that barter is simply a by-product of  coinage and that the popular notion on origins of  money is simply “a myth of  barter”.

Furthermore, if  tribal communities established economic relations to maintain trust social relationships and avoided any form of  exchange mechanisms that would antagonise the trust it is clearly implied that debt has two sides to it. While one side gives us the economic understanding of the concept the other gives us a moral understanding. Understanding economic perspective only through an economic lens risks freezing time and will give us only a small perspective on the effect of debt on people. In his book, Graeber gives a new theory of debt that is untouched by the market which he calls the pure conception of  debt. According to him, the trinity that coexists and is at a constant battle with each other construes the moral principles of  economic life. The three principles are: communism, exchange and morality.

First, he states that “communism is the foundation of  all human sociability²,” ,i.e, it is the bed rock of  all human social relations. In his opinion, it works on the principle, “from each according to their abilities, to each according to their needs”. Second, exchange is a principle that occurs between people who are of equal status. Since the status of  both the parties involved is the same, what matters is the value of  commodity in exchange. Lastly, hierarchy is a principle wherein one of  the two parties is superior to the other.

Scenario I

Person A is a shopkeeper at a village he has lived in since childhood. Since he knows most of  the people in the community, he has no choice but to provide most of  the commodities in his shop as gifts. People of  the community remember his favours and will return them in some form or the other. This will lead to the creation of  a debt (owing the shopkeeper a favour) that will ensure an establishment of  a long term relationship.

Scenario II

In this case, the shopkeeper set up his store in a new town. He does not know anyone there and therefore all the transactions were direct exchange. Exchange creates a dual situation of  equality and separation. While debt establishes a relationship between two individuals exchanges ends the relationship between two individuals. It brings down all human relationships to one single transaction.

Scenario III

In this scenario, the shopkeeper belong to a lower class community and therefore, when an upper class member comes to purchase a commodity he has to provide it for free or as a gift. Hierarchy is intrinsically tied to identity and social status. Relationships are unequal and work by a logic of  social precedent rather than reciprocity.

In Graeber’s opinion, communism forms the grounds for capitalism and there still exists “the communism of  everyday life” with a scaffolding of  market exchange and hierarchies erected on top of  it. Communism creates collective indebtedness and therefore forms a perfect base for any forms of  economic relations to be established. It is almost impossible for Communism to turn into exchange, unless the community expands and it becomes difficult to construe the idea of  who belong to the society. The worst that could happen is when exchange becomes hierarchy, wherein one party (both parties were equal before) starts to dominate the other. Most importantly, all monetary relations are mediated by credit relations rather than through actual circulation of  money.


This brings us to the two kind of  economies introduced by Graeber, one is the commercial economy (where all the transactions and exchange happens) while the other is the social or human economy (where relationships are established within a community through credit and debt). He cites examples of  various communities wherein females are often used as a means of  establishing relationships. The concepts of  blood debts, flesh debts, debt pawns and most importantly debt peonage emerged. The ruthless side of  debt comes to is shown through the emergence of  debt peonage, wherein the debtor and the debtors’ family members were treated like slaves and made at to work at the creditor’s house when failed to pay the money owed. Their next generations had to also work at the creditor’s houses till the debt was repaid.

He uses the word debt pawns to refer to a person’s female family members who were taken away in case of  failure to pay back the debts. Woman were particularly used as commodities in various communities as they could reproduce more pawns. Furthermore, he talks about the role religion plays in our idea of  debt. In many religions, debt is often linked the ideas of  “sin” and “guilt”. Religious institutions, such as the monasteries in China, acted as medium through which poor sections of  the society could borrow loans at low interests rate. The system of  monasteries in the medieval age of  China worked as efficiently as current age banks. They consisted what was called as, inexhaustible treasuries by selling the idea that the rich owed money to God and the poor and they need to provide as many funds as they can in order to eradicate all your sins. This system assured that there was constant supply of  money available to maintain the monasteries as well as provide some for the poor. Using the concept of  “owing life to god”, these religious institutions managed to extract money from the people.

Christians too used the same concept to lure the rich to provide money to the poor. The common perception was that the debtors were the poor and the creditors were the rich and Jesus belonging to the debtors (among the poor), the rich had to provide to the poor. But how much debt would you owe to God? This cannot be quantifiable. Therefore, people will continue to give money to the religious institutions. By quoting how communities misuse debt to overpower and destroy communities explains the enigma attached to the idea of  debt. They justify the negative annotations attached to the idea of  debt.

Another conventional economic notion that David Graeber strongly opposed in the book was regarding the relation between state and the market. He stands against the conventional notion that state and market oppose each other. In his opinion, markets have been the handmaidens of  the state, since states need markets to raise money for the armies. The medieval China is the perfect example to support this argument. Unlike India, China accepted the great Axel Age religions. By this age, the country had a strong bureaucratic system that could not be easily broken down and after the Axil Age both the empire and religion colluded. The sheer size of  the empire allowed the state to turn anything into money, insisting that taxes be paid in that form. There was a strong centralised state that encourage markets and  monitored money circulation. They were pro-market but anti-capitalist. They had strict administration rules for the merchants like those for soldiers. They were an anti- capitalist market state. However, Middle age Islam stands as an exception to this argument. Graeber quotes the near West to be a model of  a successful capitalist market wherein government intervention is minimal. This implies that the State’s central aims could easily determine the working of  the market (with exceptions  like in the case of  Islam). For instance, United States ran the highest deficit recorded in history in order to funds its military expeditions during the Vietnam war.

Now, coming to the current situation, in United States the banks in order to create more money in the market have recklessly lent out loans at high risk and created unrecoverable debts (bad debts). The Greece debt crisis was an outcome of this very phenomenon when the Wall Street crashed. The massive public debt could not be cleared despite the bail out. So it is worth reconsidering, when we talk about debt crises, who are we referring to as creditors and debtors? As illustrated previously, the annotation attached to debt was of sin or guilt. However, quite the opposite seems to be the case today. The most powerful economy of  the world, United States of  America, itself  runs on debt financing. Therefore, what has changed is the perspectives of  creditors and debtors. Debtors are no more the sinful ones who need to repay what they own, since the most powerful country in the world is also the world’s the biggest debtor.

Tejaswini Chepyala is a student Jindal School of Liberal Arts and Humanities, OP Jindal Global University, Haryana.


¹Graeber, D. (2014). Debt-Updated and Expanded: The First 5,000 Years. Melville House.

²Graeber, D. (2014). Debt-Updated and Expanded: The First 5,000 Years. Melville House.

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