Michael Hudson: William Goetzmann’s Money Changes Everything – A Travesty of Financial History Which Bank Lobbyists Will Applaud

Yves here. I received a review copy of Goeetzmann”s book, and I recoiled when I read the blurb. It was such an obvious example of orthodox propaganda that it went straight into the rubbish bin.

But sadly, the book is being touted by the usual suspects, such as the Financial Times, the Wall Street Journal, and the New York Times, as authoritative on the origins of money when it is unadulterated Austrian twattle. So Hudson is to be commended for doing the unpleasant but important task of slogging through the nonsense and debunking it. Please read his post and circulate it widely.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is KILLING THE HOST: How Financial Parasites and Debt Bondage Destroy the Global Economy

Review of William Goetzmann, Money Changes Everything: How Finance Made Civilization Possible (Princeton University Press, 2016)

Debt mounts up faster than the means to pay. Yet there is widespread lack of awareness regarding what this debt dynamic implies. From Mesopotamia in the third millennium BC to the modern world, the way in which society has dealt with the buildup of debt has been the main force transforming political relations.

Financial textbook writers tell happy-face fables that depict loans only as being productive and helping debtors, not as threatening social stability. Government intervention to promote economic growth and solvency by writing down debts and protecting debtors at creditors’ expense is accused of causing an economic crisis (defined as bankers and bondholders not making as much money as they thought they would). Creditor lobbyists are not eager to save indebted consumers, businesses and governments from bankruptcy and foreclosure. The result is a biased body of analysis, which some extremists project back throughout history.

The most recent such travesty is William Goetzmann’s Money Changes Everything, widely praised in the financial press for its celebration of finance through the ages. A Professor of Finance and Management at the Yale School of Management, he credits “monetization of the Athenian economy” – the takeoff of debt – as playing “a central role in the transition to … democracy” (p. 17), and assures his readers that finance is inherently democratic, not oligarchic: “The golden age of Athens owes as much to financial litigation as it does to Socrates” (p. 1). That litigation consisted mainly of creditors foreclosing on the property of debtors.

Goetzmann makes no mention of how Solon freed Athenians from debt bondage with his seisachtheia (“shaking off of burdens”) in 594. Also airbrushed out of history is the subsequent buildup of financial oligarchies throughout the Mediterranean. Cities of the Achaean League called on Rome for military intervention to prevent Sparta’s kings Agis, Cleomenes and Nabis from cancelling debts late in the third century BC.

Violence has often turned public policy in favor of debtors, despite what philosophers and indeed most people believed to be fair, just and stable. Rome’s own Social War opened with the murder of supporters of the pro-debtor Gracchi brothers in 133 BC. By the time Augustus was crowned emperor in 29 BC, the die was cast. Creditor elites ended up stifling prosperity, reducing at least 15 percent (formerly estimated as a quarter) of the Empire’s population to bondage. The Roman legal principle placing creditor rights above the property rights of debtors has been bequeathed to the modern world.

The Bronze Age was not yet ripe for oligarchies to break anywhere near as free of palace control as occurred in classical Greece and Rome. But to Goetzmann the creditor takeover is the essence of progress, despite the economic polarization and Dark Age it brought on for the 99 Percent.

Misrepresenting Why Individuals Ran Into Debt in Ancient Economies

Ignoring the abundant documentation, the author misrepresents why early economies ran up personal debt. He falls into the modernist trap of depicting all debt as resulting from borrowers taking out loans, eager to invest the proceeds profitably. He does not recognize debts as accruing in the form of unpaid taxes or fees. Yet this was the case with most Mesopotamian debts, which is where he starts his narrative. Personal debts subject to royal Clean Slate edicts did not result from money lending, but accrued as obligations owed to the palace and its collectors – for example, to providers of temple or palace services such as boatmen, “ale women” and so forth.[1] These payments were to be made at harvest time. But sometimes the harvests failed, as a result of drought, flooding or war.

Taking it as an article of faith that debt always benefits the “borrower,” Goetzmann does not recognize any need to write down debts under such conditions. His blind spot regarding the problems that arose when crop failure or military hostilities prevented cultivators from paying their debts leads him to single out a royal edict from Rim-Sin of Larsa (1822-1763) that allegedly caused the quite modern-sounding “great crash of 1788.”

The Idea that Clean Slate Edicts Were a “Crash”

Mesopotamian rulers are documented as protecting their citizenry from foreclosing creditors by cancelling debts since at least as early as Enmetena of Lagash c. 2400 BC. By the Old Babylonian epoch (2000-1800 BC) it was customary for nearly every Near Eastern ruler to cancel personal debts upon taking the throne, and again as economic or military conditions required – e.g., if a flood or other natural disaster or military disturbance prevented harvest debts from being paid on a widespread basis. Goetzmann treats this normal practice of protecting debtors from losing their liberty (and hence their ability to serve in the army and provide corvée labor on public building projects) as if it were an isolated example, not the rule – and as if it caused a crisis, not prevented it.

Rim-Sin is reported to have cancelled debts on three occasions.[2] But only agrarian debts for consumption or public fees were subject to such Clean Slate edicts. Like other rulers of his epoch, Rim-Sin evidently recognized that if he permitted usury and debt bondage to persist, much of the population would lose its land and be unable to provide labor services or fight in the army. He needed “warriors from abroad, from the surrounding deserts, who had to be attracted by agreeable conditions.” That may have been the proximate cause of Rim-Sin’s moves to break the influence of powerful creditors “and to favor his soldiers, for example, by means of the loan of fields, upon which taxes were levied when the soldiers were not on active service.”[3] The economy was saved, not the creditors (mainly collectors or officials in the palace bureaucracy).

As for commercial “silver” loans and investments in trade ventures, they were not affected by these royal decrees. And even in this commercial sphere, economies hardly could have worked (nor can they survive today) without leeway to bring debts in line with the ability to pay. In the case of long-distance trade, financial “silent partners” typically consigned goods or lent money to travelling merchants in exchange for receiving double the value of their original advance after five years. But if a ship were lost or its cargo taken by pirates, or if a caravan were robbed, the merchant was not liable to pay. This debt forgiveness under extenuating circumstances remained a common legal feature from the Laws of Hammurabi down through Roman law.

After misrepresenting Rim-Sin’s edict as “eliminating all debt by royal decree,” he speculates: “Perhaps he himself or those close to him had gotten into debt” (pp. 57f.) But Goetzmann’s reading reverses the actual situation. Bronze Age palaces were society’s major creditors, not debtors! The agrarian “barley debts” that Rim-Sin cancelled were not those that he owed, but those that the population owed to his palace.

Abundant historical documentation exists that could have saved Goetzmann from his embarrassing insistence that finance and money itself arose as individualistic arrangements by private-sector creditors with no role for government, and that it always is best to pay all debts, without regard for the social and economic consequences. When Hammurabi lay dying in 1749 BC, his son Samsuiluna wrote a letter saying that he found the land so burdened by debt that he remitted arrears owed by many types of royal tenants. To revive their economic position he “restored order (misharum) in the land,” directing that tablets recording non-commercial debts be broken so as to cancel the agrarian debts that had accumulated since the last such misharum act thirteen years earlier (in Hammurabi’s 30th year, 1762). “In the land, nobody shall move against the ‘house’ of the soldier, the fisher, and other subjects.”[4]

Goetzmann does acknowledge that, “perhaps it was a political move to restore popularity with his subjects.” But more than just popularity was involved. Rim-Sin needed their support for his looming fight with Hammurabi, who soon conquered Larsa in 1763. Goetzmann believes that Rim-Sin’s debt cancellation was a disaster – as if it ended a golden age. Writing that Larsa lost power as if “the crash of 1788” was to blame, he seems not to understand that the victor, Hammurabi, proclaimed four debt cancellations to protect his own citizen army during his reign.

Goetzmann cites as his source the respected assyriologist Marc Van De Mieroop of Columbia University. As it happens, he and I co-edited a well-known colloquium in 2000 on debt cancellations in the ancient Near East (see fn 1). Leading assyriologists and Egyptologists traced over a thousand years of royal Clean Slates cancelling agrarian debts owed to the palace, its collectors and other creditors. David Graeber’s bestseller, Debt: The First 5,000 Years (2011) summarizes this volume’s findings for the popular audience. This research would have saved Goetzmann from imagining that Larsa’s debts were owed by rulers to merchants. His aversion to such findings has the effect of wiping his narrative clean of logic that would show any logic for endorsing regulation or cancellation of debt.

Goetzmann does cite the first historical example of compound interest: the Stele of the Vultures boundary stone erected on the irrigated buffer territory between Lagash and Umma citing the reparations that Umma had accrued to Lagash c. 2440 BC. But he does not note that this debt had grown far too large ever to be paid – and hence became a cause of future war. That is the problem with compound interest (and too large reparations debt demands). The rate of interest outruns the debtor’s capacity to pay.

The starting point of financial theory should be recognition of this tendency of debts to be unpayable – that is, unpayable without a massive property transfer, economic polarization and impoverishment. However, today’s vested financial interests do not want to see a reasoned discussion of the repertory and consequences of policy responses to this problem through the ages. The guiding motto is: “If the eye offends thee, pluck it out.” In order to insist that all debts must be paid, the thousands of years of Bronze Age Mesopotamian examples and those of Graeco-Roman antiquity must be censored, because the policy lesson is that bad debts should be written down or annulled.

Asserting that in the abstract, finance “is not intrinsically good or bad,” Goetzmann is unwilling to draw the seemingly obvious conclusion that what determines whether its effects are good or bad depends on whether debts are cancelled when they grow beyond much of the population to pay. To have kept Mesopotamia’s personal debts on the books (or more accurately, on the clay tablets) would have reduced debtors to bondage and led to loss of the land rights that gave them their status as citizens.

It is not hard to see the modern ay relevance. Keeping bad bank loans on the books in 2008 saved bankers and bondholders from taking a loss, but left austerity in its wake by passing the financial losses onto the economy at large.

The False Assumption That All Loans Are “Productive” and Readily Payable

Goetzmann’s misreading of antiquity (on which he grounds his bombastic big assumptions about the long sweep of financial history) follows from his narrow view of debt only in terms of personal bargains between creditors and borrowers – to share in a supposedly mutual gain. In reality, the tendency was for debtors to lose their liberty and land to foreclosing creditors – who put their usurious gains into more land acquisition instead of investing in means of production to expand economies.[5]

It has been to avoid repeating this impoverishing debt dynamic that the past few centuries have seen more humanitarian treatment of debtors. But the past century’s “Austrian” and kindred individualistic “free market” financial theories have created a junk archaeology that depicts monetary and fiscal reform as being against nature and leading to a crash – such as Goetzmann’s fantasy of “the crash of 1788” – instead of avoiding financial distress by restoring economic balance and equity.

Goetzmann’s Obsolete Theory of Money as a Commodity, Not a Fiscal institution

Georg Friedrich Knapp’s State Theory of Money (1905), defines money as what governments accept in payment of taxes or fees. This theory also is called Chartalism. It is confirmed by the assyriological research noted above: Mesopotamian mercantile debts typically were denominated in silver, while personal debts were denominated in grain, above all to the temples and palaces.[6] Their acceptability to these large institutions led the economy at large to accept its valuation.

To defend his “free market” ideology, Goetzmann ignores the character of money as debt, headed by debts owed to governments for taxes or other payments. It is as if we are talking about barter, with money being just a commodity, given value by “markets” with no apparent linkage to government to denominate and pay tax debts. He repeats the century-old threefold view of money as a means of exchange, a measure of value and store of value.

For starters, according to this view, metal was a handy medium of exchange, presumably to barter. A buyer simply pulled out a coin or broke off a piece of metal to pay for food, wool or whatever product was wanted.

Problems quickly arise with this scenario. Who produced the silver? How was counterfeiting avoided? The Bible and Babylonian “wisdom literature” are rife with condemnations of crooked merchants using false weights and measures – a light weight for lending money or buying commodities, and a heavy weight for measuring out repayment of debts.

To avoid such problems, metallic money had to be public in order to be used as a means of payment. Babylonian contracts typically called for settlement in silver of 5/6 or some similar specified purity. From third millennium Sumer down through Greece to Rome (the Temple of Juno Moneta), temples produced the monetary metals and coins. Their role as minters dovetailed with that of overseeing honest weights and measures to prevent fraud.

Money’s second function cited in modern textbooks (which Goetzmann repeats) is to serve as a unit of account, a common measure of value against which other commodities (and labor) are priced. The paradigmatic historical example would seem to be the parity between a Babylonian shekel-weight of silver and a “liter” of barley, fixed by royal edict in for a thousand years, mainly to determine how debts could be paid. Such money was a price schedule of how a specialized economy could make payments, apparently evolving as part of the accounting system that enabled the large institutions to allocate food and raw materials to their labor force, to evaluate output consigned to (or bought from) traders, keep their administrative accounts and denominate debts owed to them. (Later, when Rome developed coinage, its nominal value was maintained even while adulterating its purity.)

But this debt dimension is missing from Goetzmann’s survey.

Goetzmann’s Failure To Understand That “Finance” Has Something To Do With Debt

Goetzmann’s desire to credit finance for almost everything good and positive in civilization leads him to attribute the origin of writing to finance. This distorts the researches of the archaeologist whom he credits as acting as his informant, Denise Schmandt-Besserat. Her research started half a century ago at Harvard’s Peabody Museum on Neolithic and Early Bronze Age ceramics. It seems that when traders (chieftains or individuals) sent animals, wool or textiles over a distance for trade from about the 9th millennium to the 4th millennium BC, they would indicate each item with a small animal- or geometric-shaped baked clay token, and wrap it in a clay envelope. The recipient of such deliveries would compare what was received with the itemized set of tokens.

In time, Schmandt-Besserat proposed, impressions of these tokens were imprinted on the clay envelope, to indicate the contents. (Many such envelopes have survived). Such tokens were accounting devices. In time, according to the plausible theory, the design of the impression evolved into cuneiform writing.[7]

The vast majority of cuneiform tablets are accounting records, debt notes and temple and palace accounts, e.g., to distribute rations to the temple labor force and track the delivery and allocation of wool, grain and other raw materials. Prices for silver, grain and a few other basic commodities were administered to create an accounting system to co-measure and allocate resources as well as to denominate payments to themselves. But such fiscal accounting practice is not finance. It is an economic and administrative use of writing, but finance involves debt, not just trade or account-keeping. Goetzmann’s narrative suggests that “finance” exists without a debt dimension.

This basically public institutional setting for writing, accounting, money and archaic interest rates is precisely what the anti-government and pro-creditor Austrian and Chicago Schools of “free market” financial relations oppose. Their censorial view defends the privatization of money as a “market creation,” and hence today’s bank monopoly on credit creation as opposed to government creation of money (They claim that this would be hyperinflationary and lead economies on the road to Zimbabwe – as if bank credit has not fueled a vast asset-price inflation bubble that burst in the 2008 crash.) And as noted above, they also insist that all debts must be paid, even at the cost of impoverishing the economy – as the world has seen most recently in Greece.

Some years ago, a German assyriologist told me why so many members of that discipline choose to publish in German or French instead of in English. The reason is that so many Americans (and also Englishmen) take documentation out of context to force into “crazy” theories. To protect itself from such intervention, the assyriological discipline is isolated from other academic departments. An unfortunate byproduct is that cuneiform studies are rapidly shrinking throughout Europe.

No doubt a contributing factor is that the practices of Bronze Age Mesopotamia and its neighbors controvert the most basic assumptions of today’s free market orthodoxy, above all its denigration of public enterprise and opposition to government money creation (leaving this as a private bank monopoly), and its refusal to acknowledge logic justifying debt writedowns. Goetzmann has used the exclusion of early economic history from the academic curriculum, and hence from popular discussion, as an opportunity to substitute unrealistic pro-creditor assumptions for the reality that he seems to find too abhorrent to inform his readers about.

[1] See Cornelia Wunsch, “Debt, Interest, Pledge and Forfeiture in the Neo-Babylonian and Early Achaemenid Period: The Evidence from Private Archives,” in Michael Hudson and Marc Van De Mieroop, eds., Debt and Economic Renewal in the Ancient Near East (CDL Press 2002), pp. 221-255.

[2] F. R. Kraus, Königliche Verfügungen in altbabylonischer Zeit (Leiden, 1984). On Rim‑Sin’s measures see Charpin, Archives familiales et propriete privee in Babylonie ancienne Geneva‑Paris 1980), pp. 273f. and 133f. and W. G. Lambert, Babylonian Wisdom Literature (Oxford, 1960; 2nd ed. 1967), pp. 54f.

[3] W. F. Leemans, The Old Babylonian Merchant: His Business and Social Position (Leiden, 1950), p. 122.

[4] Translations of this letter (TCL 17 76) in Leo Oppenheim. Ancient Mesopotamia (1965), p. 157, and Letters from Mesopotamia (1967), and F. R. Kraus, Königliche Verfügungen (1984), p. 67.

[5] “Entrepreneurs: From the Near Eastern Takeoff to the Roman Collapse,” in David S. Landes, Joel Mokyr, and William J. Baumol, eds., The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times (Princeton: Princeton University Press, 2010):8-39.

[6] I trace the background in “The Cartalist/Monetarist Debate in Historical Perspective,” in Edward Nell and Stephanie Bell eds., The State, The Market and The Euro (Edward Elgar, 2003):39-76; “The Archaeology of Money in Light of Mesopotamian Records,” in L. Randall Wray (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell Innes (Edward Elgar, 2004); and “The Development of Money-of-Account in Sumer’s Temples,” in Michael Hudson and Cornelia Wunsch, ed., Creating Economic Order: Record-Keeping, Standardization and the Development of Accounting in the Ancient Near East (CDL Press, Bethesda, 2004):303-329.

[7] Denise Schmandt-Besserat, Before Writing (2 vols., University of Texas Press, 1992), and How Writing Came About (University of Texas Press, 1996).

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  1. Jim A.

    It is interesting when people of a “the free-market is the source of all that is right and good,” mindset look at ancient and medieval history. They discount the centrality of the state in the economy, thinking that this HAS to be a modern mistake. That in olden times people were closer to some sort of ‘state of nature,” where people bartered with each other without the intervention of the state. During the RE bubble I was having an online argument when I pointed out that there really isn’t any kind of ownership of real estate in the absence of a state. Ownership is the legal right of possession, essentially the ability to use the resources of the state to enforce your rights. Without the state, you can only possess that which you can prevent others from stealing from you.

    1. jsn

      This is more than just another free marketeer confusing causalities and consequences, it’s part of the ongoing NeoCon program of creating “scholarly”, foot notable bullshit to dam up the wash of anthropology and history that will eventually wash them away.

      1. Left in Wisconsin

        I don’t know anything (hardly) about the world before the times of which Adam Smith, Marx and Polanyi write, but the notion that there could somehow be something that approximates a “free market” of debtors and creditors without state involvement (impossible at any time but at least under “citizen democracy” one can understand the naive appeal) is so outlandish that I have a hard time getting my arms around the notion that this book is not satire.

        1. jsn

          David Graeber’s “Debt, the First 5000 Years” is a great read on the history and anthropology of money. But for free at Warren Mosler’s site you can read the book review amazingly written a hundred years before the book: http://moslereconomics.com/mandatory-readings/what-is-money/

          I loved Graeber’s tome, but having read Mitchell-Innes (the Mosler link) very little was a surprise.

  2. rc

    Thanks to Mr. Hudson and NC for this review. The NYT review almost makes one hurl given the role of the author and AIG’s credit derivatives.

    Ironically, the central banks are coming closer to Mr. Hudson’s view of the world. With Bernanke’s reported mention the use of zero interest perpetual bonds to Abe and Kuroda to use to finance state spending and transfers. Everyone in the US should be familiar with this concept because the have zero interest perpetual bonds in their wallets–$1 Federal Reserve Notes.

    Debt based money from fractional reserve banking is a system used to enslave the world. It enables inflation/deflation dynamics that the powerful use to take control of wealth producing assets in the economy. It is a nuclear weapon aimed at the general citizenry. The profits from this debt enterprise buys politicians and captures regulators. In military terms, it is the oligarch’s center of gravity.

    Defeat this system and you have a chance of taking your country back from the Roman dictatorship we have today with political, sports and entertainment spectacles and perpetual state of undeclared wars.

    1. Enquiring Mind

      Hudson is a gem in the world of economics, and always informative to read.
      Re zero interest perpetual bonds, one could say that they will become a type of consol-ation prize.

      1. sgt_doom

        I sincerely believe that Prof. Hudson is the most brilliant economist in the Western Hemisphere (too ignorant to speak for the entire planet), with Michael Perelman in a similar category.

        And Steve Keen, Samir Amin and Dean Baker not too, too far behind, but not quite in the same category.

    2. paulmeli

      “Debt based money from fractional reserve banking:…”

      Fractional reserve banking is like a unicorn. It doesn’t exist. It never has.

      Loans create deposits. Every central bank in the world that matters has gone on record that this is how money is created in the banking system.

    3. Russell

      We pay Hollywood. In Rome the appointed elites were to pay out of pocket to prove their deserving status. (I’ll look it up)

  3. Michael Hudson

    One typo on p. 2 (I’m an awful proofreader).
    Should read:
    Violence has often turned public policy in favor of creditors,
    (not debtors)

    1. diptherio

      I have a question about the three-fold purpose of money…specifically about two of them: medium of exchange and store of value. Specifically, isn’t it the case that as a practical matter, we do use money for these two purposes, regardless of how that currency originated? I’ve read and understood a lot of the monetary history that people like you and Graeber have put forth, but it still seems like there is a good bit of descriptive validity in describing money as a medium and a store. Is there something I’m missing that makes that an incorrect way to conceptualize the uses to which we put our currency? My current analysis holds that money really only works well as a medium of exchange (the amount of which needs to be constantly increasing) and that trying to also use it as a store of value causes problems due to the paradox of thrift. Admittedly, I’m having to unbrainwash myself from a formal econ education, so I may be completely off base…any light you can shed is much appreciated.

      1. OpenThePodBayDoorsHAL

        Money stores labor.
        “Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.”
        Abe Lincoln, 1861

        Good quality money retains the “value” or “quantity” of labor it stores over time.
        For example “Furrea Kippu” in Japan is money denominated in time (one hour of caring for an elderly person). You earn them when you’re young (taking care of an elderly person) and spend them when you’re old. That task, and the length of an hour, change very little over time.

        The minimum wage in 1965 was five silver quarters ($1.25). The silver value of those five silver quarters today is $17.50. We don’t have a “minimum wage” problem, we have a “declining quality of money” problem.

        1. Procopius

          Since currency was invented we have had a “declining quality of money” problem. It hasn’t really been a problem. The face value of coins has always been greater than the market value of the metal in them. The difference is called “seignorage,” and is one way princes paid for their goodies. Since the invention of coinage, supposedly in Lydia about 700 BC, the ratio “precious” metal to “base” metal in coins has always fallen, until some “reformer” creates a new monetary system. I’ve always believed the cause of inflation has been the fluctuating amount of coinage in circulation, not the metallic content. All monetary systems have been “fiat” money. Gold, silver, electrum, copper, bronze, iron, do not have intrinsic value.

      2. jsn

        The store of value notion is a hard money concept. To the extent that a monetary system is managed to support this ambition, the system will suppress demand by encouraging the paradox of thrift among other things, as you suggest. The creditor prejudice Hudson is challenging is centered on this ambition.

        To my mind, money should depreciate just like any other capital good and inflation at a reasonable rate does the job. “Value” as a description of a possible attribute of money is a social construct, money has no intrinsic value even if its gold: the gold may have some use value, but its monetary value is independent of that. Because it is a social construct, attempts to manage it are necessarily coercive. The last forty years monetary policy has coerced most Americans to shovel money to the rich, for instance. Money as a store of value, hard money, may be the only worse monetary policy than the one we’ve had: the singular advantage of a commodity money like gold is that it holds some value as loot when the issuing government collapses or is overthrown.

        Graeber meticulously skirts this in his book because, as any good anarchist would, he is trying to salvage the positive in money, which is useful, without the need for a state.

        At least thats how it looks to me.

        1. OpenThePodBayDoorsHAL

          Very thought-provoking. But if money is not a capital good, but rather a way of storing labor and efficiently exchanging it across time and distance, then why should we be OK with it depreciating? If the state creates a money, is it not always wishing to store an incentive for the holder to do some form of work, to plant a field or build a widget?
          And I wonder if the “singular advantage of a commodity money” is not also the most important overarching and final advantage of any money: the advantage to somehow preserve your stored value as debt money systems come and go. The average birth-to-death lifespan of debt money systems throughout history has been 43 years, which is well within the confines of one lifespan.

          1. jsn

            Real value exists in the real economy, mostly in the complex constellation or relationships that makes labor productive. To try and preserve that as a stored value will compromise the living relationships: this is what economists call hysterisis where bad policy causes the disintegration of real productive relationships. You can have valuable labor or valuable money, but you cant have both.

            I bit more reductive than my actual beliefs, but it captures the spirit. All things in moderation.

            1. templar555510

              It’s interesting that the words we use to describe the operation of money – cashflow, liquidity etc. all refer to easy movement which suggests that money does not have any reality unless it represents an exchange of one sort or another. An analogy might be with a musical score; it is just a series of marks on a page. What makes the ‘ music ‘ is the interpretation by the player.

          2. James Kroeger

            But if money is…a way of storing labor and efficiently exchanging it across time and distance, then why should we be OK with it depreciating?

            Well, perhaps one should be OK with money gradually depreciating if the only alternative is to make the whole of society poorer, in real terms.

            How could managers of the money supply act to ensure that the currency continues to appreciate in value for those who want to hold as a ‘store of value’ for an indefinite period of time? By feeding a deflationary spiral.

            The method would be to gradually reduce the amount of money in circulation by continually reducing the amount of lending that occurs. Prices would be forced down relentlessly since those extra ‘inflation dollars’ wouldn’t be around to drive them up.

            But in terms of the real economy, real wealth creation and real wealth consumption are optimized only when every able-bodied and able-minded soul is occupied in activities that produce something of value. I.e., 100% full employment.

            It is the only way for all the participants in an economy to experience an optimum of real wealth production/consumption. Since all jobs are dependent upon spending (or else they cease to exist), the only way we can all become ‘rich’ (as rich as it is possible for people—at every income level—to become, in real terms) is by ensuring that enough spending is occurring in the aggregate to make that happen.

            Experience has taught us that increasing AD enough to eliminate unemployment would likely cause a certain amount of price inflation, and that would almost certainly depreciate the purchasing power of money, but in real terms, everyone would be as rich as our current level of technology is able to make us.

            Surely that is one very good reason why individuals who have been able to accumulate a lot of money/assets ought to be OK with the phenomenon of money gradually losing some of its purchasing power over time. In real terms, would they actually be losing anything?

            1. David Green

              But the wealthy are not OK with money losing its purchasing power as a result of full employment and the growth/redistribution that goes along with that. Piketty has taught that through monetary rather than fiscal policy, and low inflation, they will accept a smaller pie as long as they maintain and increase their share in that pie, along with the political power that goes along with that.

              1. James Kroeger

                Well yes that is certainly true, but one hopes that this norm is merely the consequence of widespread ignorance, an unfortunate circumstance that could ultimately be corrected with an adequate educational effort.

                What the wealthy have long failed to realize is that reductions in the top marginal rates that all rich people pay does nothing to improve their rankings within the distribution of all incomes—which would give them a real increase in their purchasing power—but only generates a round of robust price inflation that actually benefits none of them, in real terms.

                At the same time, they do not realize that it would directly improve the standard of living that the wealthy enjoy if the whole of that reserve army of labor out there put to work in activities that general real public wealth. Not only the improvements in infrastructure they would see, but also the reductions in crime, police protection requirements, etc.

                They’ve been misled by specious arguments into supporting economic policies that do not actually improve their standard of living (no matter how many inflation dollars they are given). With some enlightenment, that could change.

                Theoretically, that is…

              2. Harry

                No but this is unrelated to the value keeping property of money. The wealthy don’t keep much of their wealth in money. Only the poor do that. No the wealthy prefer labour markets soft cos it keeps labour cheap.

        2. Alejandro

          I agree with most your comments.

          I can’t speak for Graeber or anyone else, but I don’t think it’s so much a questioning of ‘the need for a state’ as much as questioning the legitimacy in the use of state power, i.e., “consent of the governed” as opposed to the “divine right of kings” and more recently the “earned merit” of “meritocrats”.

      3. H. Alexander Ivey

        Okay, you asked, I’ll tell ya. But remember, I’m not a trained economist, I only bark at them on TV.

        First, you need to go back to the beginning. Before there was ‘money’, that is, a piece of paper or a coin or an ingot or a shell. There was only credit. If you were a farmer and you wanted a beer, you went to the taven (or temple) and ran a tab. At the end of the harvest then, you would go to the taven (or temple) and settle up your tab by ‘paying’ with wheat (your harvest). If you didn’t pay up – bad harvest, bad war in your neighborhood, whatever, the ‘state’ would force you to give something to the tavern – your labour, your land, etc. So the tavern or temple guys would end up ‘owning’ you. But if you didn’t like being owned, that would cause social problems so a wise ruler would, and did, declare a debt jubilee – your tab has been ripped up by royal decree, yeah! The bar/temple guys, not so happy – but they still own the bar/temple…

        Now this went on for centuries, and, with more and more people, and more and more ways for people to ‘work’, not just grow wheat on the farm, it got to be tricky keeping track of the credit – who is this guy and will he pay his tab at harvest, and do I even want to run a tab? So the idea of having a physical form of credit occurred to some bright lights. So ‘money’ – paper, coin, ingot, shells, came into being. Note: credit did not cease, there just became two forms of it – the original form of your signature on a chique and now a coin, say.

        Most important point here – there is ALWAYS a government enforcer around here. No government? Then your tab would be as valid as ‘he said, she said’ arguing. Okay for kids, but adult societies don’t (and can’t) work that way.

        Okay, still here? Wow, hat tip to you. So where does this medium of exchange and store of value come in? They are, at best, secondary considerations of what money (credit, credit, credit!) is. At worse, they are totally wrong ways of thinking about money. (I feel answer #2 is the more accurate, most of the time, one). The medium of exchange leads one to think of money as some funny kind of barter. It is NOT!. Barter exists between two (2) entities only – you and me. Money exists (credit included) between three (3) entities – you, me, and the bank (as empowered by the state). The bank (state) acts to enforce the rules of the farmer getting a beer today in exchange for wheat to the tavern/temple at the harvest. I gather, outside of times of extreme social breakdown, all societies work on the money/credit way of adults exchanging their work for other’s things. Store of value is not so much ‘wrong’ as more as not a good way of putting it. Better is ‘an numeric expression of what the exchange rate is between a beer today and wheat at harvest time’. Many economists labour under the delusion that money is a store of value. It is not, if you mean that a dollar (money) is worth something outside of itself. Well, it is worth something – a dollar, damn it! Its definitional value from the issuing state (government)! One dollar bill is worth only 1/5 of a five dollar bill, etc. Ok, yes, the state/government can no,t and does not, say, “Here’s a dollar kid, It will buy you one beer at the tavern.” The government issues dollars and says, “Kid, you are a man now, You must pay taxes. And we, the government, will only take dollars for your tax. So pay up.” And everyone sees that the government means business – you try to pay your tax with wheat and the US Treasury boys say, “No no Nanette.” So everyone under that government rule feels good about using dollars as a way of setting the price of things – labour included. Again, note: money (dollars) are not a store of value, they are a way of expressing the price!

        Last thing: price is only half of the aspect of ‘value’, h/t Marx. The other half is the use or utility value of the thing being purchased with money. Just look at the Visa commercials – the shoes were $50, the dress was $100, the meal was $200, but the look on his face (when he saw her dining with her new date) was priceless. The shoes, dress, & meal values are expressed in dollars (numeric amounts of exchange value), the use value to the woman was not expressible as an amount – priceless). And see how clever Visa marketing boys were for expressing the true relationship between money (credit) and user values? h/t to them too.

  4. Tony Wikrent

    I was very startled and dismayed that William Goetzmann could write such a book. His Army Exploration in the American West, 1803-1863 (Yale University Press, 1959) is a magnificent account of the dozens of Army expeditions that occurred after the more famous Lewis and Clark Corps of Discovery expedition, including the Pacific Railroad surveys of the 1850s, which were absolutely crucial to the overland migration to the west coast. But the present William Goetzmann is William N. Goetzmann, while the author of the excellent history of the government role in exploring the West is William H. Goetzmann, who died in September 2000. I don’t know if there is any relation. I sure hope not.

    1. Massinissa

      This is probably too late to mention this, but IIll respond anyway.

      N. Goetzman is H. Goetzmans father according to Wikipedia.

      The good news is N Goetzman has a Wikipedia page while his son does not (Yet. With these positive reviews, its only a matter of time…)

  5. Chauncey Gardiner

    The stark realities of the global private sector debt overhang, with its compound interest and predatory aspects, and the related negative effects on society and the economic welfare of the vast majority of people, will eventually displace such ideological efforts to maintain the status quo IMO. Contrasting the French Revolution and various historical rebellions with the structured, formalized and peaceful debt forgiveness policies of ancient times that Michael Hudson mentioned, the form that debt repudiation or forgiveness has taken throughout human history has clearly varied a great deal. It appears to depend in large part on the nature and wisdom of those who control the powers of the state. I am not optimistic given their actions and inaction since the financial collapse in 2008.

    1. OpenThePodBayDoorsHAL

      Excellent comment, of course Versailles and Germany come to mind. Hudson’s point that “debt rises until it is unpayable” seems pretty much irrefutable if you read enough history (a fly in the MMT ointment). The “wisdom of the State” these days seems to be that war, civil or nuclear or both, is the only available option, they’ve mostly postponed it at the moment through various central bank conjuring tricks, and they postpone it further by saddling our kids and grandkids with more and more debt. The unnatural acts and gyrations as CBs try to ignite inflation, as though that is some kind of acceptable mechanism. How instructive it is to see how CB received wisdom has moved 180 degrees, it’s not that long ago when Fed chairmen like McChesney-Martin and Arthur Burns took it as an absolute article of faith that inflation was the worst possible outcome, to be avoided at all costs, for the abundantly obvious reasons. Compare that to the clown car groupthink we have today, from Bernanke to Yellen to Kuroda to Draghi to Carney, all bent on destroying the currencies they are supposedly there to protect.

  6. Chris

    I also love to read every article of Michael Hudson! Just now i am reading Killing the Host. I am from the German speaking part of the world, were progressive economists like Hudson and Steve Keen are quite unknown yet. But recently i discovered a guy called Ernst Wolff.. what he is saying and writing about the FIRE sector and the IMF is very much in line with Michael Hudsons work. He also wrote a book about the IMF.

  7. Betina

    Maybe neoclassical economists got too nervous about David Graeber’s book and felt they needed a response

    1. jsn

      I think Hudson is closer to the Neoclassicals than the author of this book who is core Neoliberal. The Neoclassicals were adamant against rent seeking and financial manipulations in general. While they didn’t understand the nature and origin of money, they were pretty clear on preventing its abuses and about what the social consequences of monetary abuses were. Maybe you meant Neoliberal.

      1. Betina

        Yeah, you’re right. It is neoliberals that actively seek to maintain the current state of things.

  8. Punxsutawney

    So “Financial textbook writers tell happy-face fables that depict loans only as being productive and helping debtors, not as threatening social stability.”

    So I think I’ll borrow a bunch of $ and invest them in the stock market. I mean “What could go wrong?”

    As I recall, buying stocks on margin contributed to the crash in 1929.

    Thanks for the review Michael Hudson. New Economic Perspectives is a great source of info.

  9. Teejay

    Debts that can’t be paid won’t ; they’ll either be written down or written off. So how will that work for T bill holders? Won’t compound interest catch up with our Treasury Dept?

    1. jsn

      Treasury can’t run out of what it makes: money. Even Greenspan admitted that.

      The residual value of T bills after the debt collapse will be a reflection on the wisdom of how the private debt was written down: the Treasuries are money equivalent and if the economy is well managed post bust, will hold their value. If its poorly managed and productive capacity is wiped out or bad debts are again bailed out, it will inflate. The post 2008 bailouts have created a huge inflation of assets without igniting monetary inflation because the mountains of money the Fed created were all stuffed into hoards on balance sheets to sustain the fiction that financial “investments” still had some value.

      1. OpenThePodBayDoorsHAL

        A T-bill is a piece of paper that is an obligation by the issuer to return principal at a later date, and based on time preference, pay a return.
        I make two bets: first that the issuer will remain solvent until such time as the obligation is repaid, second that the money the obligation is denominated in will retain enough value at the time of redemption for me to exchange it for a meaningful quantity of a good or service.
        If either fails then I made a bad bet, of course a state issuer can issue unlimited new quantities of the obligation, but then the second factor kicks in, if no one believes the obligation will be exchangeable at redemption time for a meaningful quantity of goods or services then they become worthless pieces of paper. And with NIRP there is a built-in reduction in the principal amount that accelerates this race between face value and declining purchasing power at redemption.
        The state can tip the scale somewhat by requiring citizens to pay taxes solely in their scrip, but people don’t just pay taxes, they also eventually need to buy food, pay rent, etc.

        1. jsn

          The interest is all that sets the Tbill apart from cash and all you say corresponds to my understanding of how modern finance works, which isn’t a particularly deep because I’ve never had enough money to play with. But whether you call it scrip or Tbills its all govt issued money, ours’ issues the latter primarily to maintain what minimal positive interest rate we have.

          I think I agree with all your scenarios about the risk of purchasing bonds as a store of wealth, but policy that preserves the purchasing power of money starves people so tends to get abandoned when the pitchforks come out. There weren’t enough Greeks to scare Merkle, but when its Germans, she’ll let the money inflate.

          1. bob

            tbill’s are also “insured”. $1,000,000 in a bank account is only insured for $200k.

            1,000,000 in tbills are completely covered, no bank risk. Treasuries are assumed to be insured, completely.

            Risk free “money”.

            1. OpenThePodBayDoorsHAL

              Except for the risk that you cannot exchange them for any meaningful quantity of goods and services at redemption. That’s a biggie.
              And your premise that “money that preserves purchasing power starves people” is not supported by the facts. The periods of the fastest rises in living standards have for the most part been under relatively “sound” money policies. The chart of US national incomes is instructive, with its hockey stick at 1971 when money was untethered. Preserving purchasing power should be the primary function of money, not propping up unpayable debts.

              1. jsn

                During those periods there was steady modest inflation: interest rates were held above the inflation rate. The economy was being deliberately managed to do this as was required by the “dual mandate”, low inflation and full employment.

                Two things happened around 71, one was Nixon abandoning the commodity peg, the other was the beginning of NeoLiberalism in which the value of money became more important than the value of labor.

                It was around then that Friedman and Greenspan invented NAIRU and inverted the meaning of anti-trust laws: since then the dollar has been strong and labor weak. US labor is beginning to starve. That’s what Trump and Sanders are about, the search for a negative or positive solution to the starvation of labor.

                1. David Green

                  When combined with wages that increase greater than the rate of inflation, this means that workers are rewarded with a portion of productivity gains. But that’s been over since the 80s.

                1. OpenThePodBayDoorsHAL

                  The full quote from A. Lincoln is worth including:
                  “Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. Capital has its rights, which are as worthy of protection as any other rights. Nor is it denied that there is, and probably always will be, a relation between labor and capital producing mutual benefits. The error is in assuming that the whole labor of community exists within that relation. A few men own capital, and that few avoid labor themselves, and with their capital hire or buy another few to labor for them. A large majority belong to neither class–neither work for others nor have others working for them. In most of the Southern States a majority of the whole people of all colors are neither slaves nor masters, while in the Northern a large majority are neither hirers nor hired. Men, with their families–wives, sons, and daughters–work for themselves on their farms, in their houses, and in their shops, taking the whole product to themselves, and asking no favors of capital on the one hand nor of hired laborers or slaves on the other. It is not forgotten that a considerable number of persons mingle their own labor with capital; that is, they labor with their own hands and also buy or hire others to labor for them; but this is only a mixed and not a distinct class. No principle stated is disturbed by the existence of this mixed class.

                  Again, as has already been said, there is not of necessity any such thing as the free hired laborer being fixed to that condition for life. Many independent men everywhere in these States a few years back in their lives were hired laborers. The prudent, penniless beginner in the world labors for wages awhile, saves a surplus with which to buy tools or land for himself, then labors on his own account another while, and at length hires another new beginner to help him. This is the just and generous and prosperous system which opens the way to all, gives hope to all, and consequent energy and progress and improvement of condition to all. No men living are more worthy to be trusted than those who toil up from poverty; none less inclined to take or touch aught which they have not honestly earned. Let them beware of surrendering a political power which they already possess, and which if surrendered will surely be used to close the door of advancement against such as they and to fix new disabilities and burdens upon them till all of liberty shall be lost.”

                  1. bob

                    Hey, genius-

                    How does the guy with no capital get it? What does the guy with all the capital have to gain from selling anything? Or paying anyone, anything?

                    Answer these questions, in the real world, and you may begin to see you’re completely misrepresenting Lincoln while sucking up to capital.

                    1. OpenThePodBayDoorsHAL

                      He picks up a shovel, digs a hole, and plants a seed in it, as Lincoln says. Getting it handed to him by some guy who conjured it from thin air means he gets exactly that in the end: thin air. Unless you’re arguing that Mesopotamia, Egypt, Rome, Byzantium, Venice, Holy Roman Empire, 1792 France, 1795 US, 1928 and 1991 UK, 1925 Germany, 1950 E. Germany, 1969-74 US, and the abundant worldwide experience post-2008 were all just aberrations.

              2. bob

                You’re not responding to the point made, you’re making a speech which has little to do with anything beyond fantasy land reactionary politcs..

    2. Procopius

      It’s an accounting convention that T-Bills are shown on government books as a liability. In fact, since they are payable in “lawful money,” the means of payment can be made on the spot. It’s not as if the government has to send somebody to dig it out of the ground any more.

      1. Adam Eran

        FYI, currency is also on the Fed’s books as a liability. We have debt-based money.

  10. sd

    There’s been much discussion about eliminating physical cash. Is this in effect a move towards the privatization of money?

    1. jsn

      It is a way for the issuing government to impose total financial control on everyone that uses its currency. In the case of the US, where the govt is effectively owned by the banks, it would be giving the banks a great deal control of their customers money and knowledge about their customers private lives: digital money has lots of meta-data that then becomes available to whoever controls the electronic ledger. If power could be wrested from the banks, that control would revert to the govt., which depending on who it is composed of may or may not have the public’s interest at heart.

    2. Scott

      Money is already private. The Fed is a private company, and as someone noted above in the comments, private banks actually create money when they approve loans.

      Most of the analysis I’ve seen about eliminating physical money consistently points to it being a necessary precursor to instituting negative interest rates at banks. The $100 dollars in my savings account with 0% is still $100 bucks next year, and safer than if it were stuffed in a jar at my house. But, if my $100 savings is only $97 next year, I’ll take my chances with the jar, unless there is no way for me to do that. Hence, eliminate cash.

      Graeber’s book is great. Well worth reading.

      1. Yves Smith Post author

        The Fed is most assuredly NOT private. I suggest you read The Power and Independence of the Fed, which despite being more Fed friendly in some respects than I like, has a terrific analysis of the Fed’s legal structure and authorization.

        It is regularly and erroneously stated that banks “own” the Fed. False false false. The Board of Governors is all Federal employees, and the BoG approves the Presidents of the regional Feds. Presumably the BoG can fire them too. Banks own non-voting preferred stock in their regional Fed. It does not convey any governance rights. They do not hire the president of any regional Fed, nor do they have any say in his pay or give him a performance review. The regional Fed boards are strictly advisory.

        Congress just gave a big cut to the dividends that most banks get from their required purchases of shares in the Federal Reserve System. Please name any private company where not only can Congress order a dividend cut, but also discriminate among holders of the same class of security. You will come up blank.

        1. James Kroeger

          The Fed is most assuredly NOT private.

          The always interesting question of whether or not the FED is a private-sector entity or a public sector entity.

          Of course, the fact that the FED’s assets are entirely owned by privately-owned commercial banks does suggest that the FED is indeed a private-sector entity. Not only does the federal government not own the FED’s assets, neither does it contribute to any of its funding.

          But then there is the ‘control’ of the Central Bank that the federal government exerts through its appointments of the members of the Board of Governors and by various strictures set by Congress. But just how decisive is this control of the nation’s privately-owned (literally true) CB?

          Yes, the nation’s chief executive does have the power to appoint the members of the CB’s governing board, which gives it a significant amount of control over what might otherwise be considered a private sector entity. But then, isn’t it also true that any and all privately-owned businesses must operate within the strictures that are set up by Congress?

          It’s the freedom they have within those strictures that often becomes a matter of concern.

          Why was the CB set up in such a way, one that provides the federal government with only a limited amount of control over monetary policy? To supposedly prevent the horrifying prospect of democratically elected officials using the CB to enrich themselves or to produce short-term political benefits for themselves.

          But what it also does is give representatives of the private banking industry effective control over the money supply in a manner that protects and advances their own interests.

          Does this arrangement not ultimately protect us from one bad possibility by putting our fate in the hands of another bad possibility?

  11. craazyman

    This is indeed a very good review, but I’m not sure how widely it can be circulated.

    Erudite discussions of Emelena of Lagash and Umma in 2400 BC are not necessarily of interest (no pun intended) to lots and lots of people. Probably most people would think this has something to do with Uma Thurman from the 1990s and Hollywood. Lagash sounds like a place in a science fiction novel. This may have been a movie by Ed Wood starring Uma Thurman and some actress named Emelena.

    The other thing is, the book’s author seems to view the idea of money through a very contemporary structure of the idea consciousness. Self-expression, self-actualization and what I think Nietsche called “individuation” are very modern ideas deeply bound up with the concept of money and debt. Yet these notions also contain in a form of dialectic a reciprocal obligation of not “going too wild and destroying the moral order by wanton chaos.” The archaic group mind asserts itself through a process of the atavistic return of the repressed and stand guard as it were on the borders of the culture. Unpaid personal debts from that perspective are unpaid obligations by a self enjoying actualization to the group collective. The force of reprobation comes from the idea that liberty has been taken in a form of self expression but the reciprocal obligation to group order has not been fulfilled.

    The ancient culture I would theorize had no such idea of individuation and liberty of identity. And so cancelling group debts was far less difficult from the standpoint of the group consciousness. Looking back on these times from a modern perspective I think is quite a distortion of the essential structural energies of the phenomenon. There really is an unseen and unacknowledged phenomenon here at the heart of the issue and that’s the animating energy of the collective consciousness — so different then than now — and that difference make so much difference in analyzing the phenomenon of money and debt.

    1. Reify99

      I suspect that consciousness of debt peony has felt the same over the eons to the debtors.
      The metaphor holds whether paying in grain, silver or representational bytes.

      What’s different are the tools of obfuscation which act as a screen to hide the
      coziness of the creditors and their protégées in government. The creditors are outside the palace now.

      You wisely painted with a broad brush and did not take the author on in detail.
      He is steeped in this stuff, was talking about the history of money back to the
      Sumerians in the 80’s, and would politely wipe the floor with you.

      The reason this history is important it keeps consciousness of other models and ways
      Of dealing with debt alive. The obfuscation industry rewrites history to eradicate competitive views.

      1. craazyman

        The Sumerians went back to at least the 1960s. I was alive in the 80s and I think Uma Thurman was just getting going.

        but at least somebody read my comment! that always amazes me, when somebody does. maybe it will seep in over time and breath like wine. It’s an unfamiliar taste, for sure, but not impossible to grasp if somebody really thinks about it. If they can, that is.

        Since I’m honest, I’ll admit I have not read the book and I may find it very valuable and informative about lots of money-related history, so nobody get mad or anything about my insights into collective consciousness. I’ve noticed that people get mad about what they read on the internet! It’s weird. hahahaha

        that was yeoman’s work Lambert, digging it out. my donations are paying off! ;-)

        1. Reify99

          Sorry. I get kind of excited when discussing the Revenge of the Bean Counters. And I didn’t notice it was you or I could have kept my tongue in my cheek.

          1. craazyman

            no worries. I don’t ever get mad about what I read on the internet.

            and I’m not always right either. maybe that Maryland bear pic was really a bear, but I’m still skeptical.

            this sounds like a good book to read if somebody isn’t too lazy to actually read the whole thing. there’s no such thing as bad PR and when stuff gets flamed you think “Wow maybe I should read it and see if it’s really that bad”.

  12. William Beyer

    The perfect antidote-du-jour, or du-forever, to this book may be Christine Desan’s “Making Money” which is just out. James Kwak thinks it’s the best book about money, ever. I’m only starting to read it, but looks promising.

  13. Anonymous

    Many years ago, I was Will Goetzmann’s student. I found him to be an outstanding teacher, and a very good person to boot. I was sad that Columbia lost him to Yale.

  14. Sound of the Suburbs

    Debt is dangerous.

    If there was more awareness of how bankers destroy economies thorough debt inflated asset bubbles there might be more effort to rein them in.

    The mainstream, neoclassical economists make simplistic assumptions about money and debt and are unable to see debt inflated asset bubbles.

    Passing off 2008 as a one off “Black Swan” event has brushed this under the carpet but more economies have blown up since and more will in the future.

    2008 was particularly bad as it was a debt inflated housing bubble leveraged up with derivatives.

    James Rickards in Currency Wars gives some figures for the loss magnification of complex financial instruments/derivatives in 2008.

    Losses from sub-prime – less than $300 billion
    With derivative amplification – over $6 trillion

    1929 was also a debt inflated asset bubble where margin lending into the US stock market caused it to reach ridiculous highs.

    Irving Fisher looked at the debt inflated asset bubble after the 1929 crash when ideas that markets reached stable equilibriums were beyond a joke.

    Fisher developed a theory of economic crises called debt-deflation, which attributed the crises to the bursting of a credit bubble.

    Hyman Minsky came up with “financial instability hypothesis” in 1974 and Steve Keen carries on with this work today.

    Of course it as totally at odds with stable equilibriums and has to be ignored by neoclassical economics.

    “Minsky Moments”

    1929 – US (margin lending into US stocks)
    1989 – Japan, UK (real estate)
    1999 – US (margin lending into US stocks)
    2008 – US (real estate bubble leveraged up with derivatives for global contagion)
    2010 – Ireland (real estate)
    2012 – Spain (real estate)
    Coming soon – Australia, Canada, Holland, Sweden, Hong Kong (real estate)

    China is saturated in debt too, perhaps that will implode and many commentators seem to think so.

    Steve Keen saw the debt bubble inflating in 2005, Ben Bernanke could see no problems ahead in 2007 (neoclassical economist).

    1. Sound of the Suburbs

      Neoclassical economists:

      Alan “I see no bubbles” Greenspan
      Ben “I see no bubbles” Bernanke

      2008 – “How did that happen?”

      “Doh!” Homer Simpson

    2. Yves Smith Post author

      I disagree with you on 1999. Please go look at what a Minsky process is. You have “Ponzi units” that are borrowing to make payments on outstanding debt.

      1999 was much more like the Dutch tulip bulb mania. Even though margin borrowing was high by recent standards, it was a very small %,IIRC <3%, of total stock market capitalization. Margin loans are quickly closed out if the borrower can't meet margin calls. So stock market bubbles with strict limits on margin (the post Great Crash regime) does not pose a systemic risk because it does not represent a risk to the banking system.

      1. Sound of the Suburbs

        I have done some more research since you mentioned 1999 before.

        Restrictions on margin lending probably did stop irrational investors going too crazy.

        There was a lot of margin lending into the dot.com boom, you can see on graphs of margin lending, 1999 was a big peak.

        You didn’t really get what Richard Koo calls a balance sheet recession after though as the margin lending was concentrated with people that could afford to pay off the debt.

        Alan Greenspan also lowered interest rates after, he was worried, this helped to stoke a new bubble in housing. The new debt created for mortgages helped stave off any contraction of the money supply.

        Richard Koo has had plenty of experience working with Japan after its manic real estate bubble.

        Japan did make quite a few mistakes, usually after the Western experts told Japan not to take on any more Government debt. When they listened the situation rapidly deteriorated and they had to start again from a worse position.

        The debt inflated asset bubble has various levels of severity but will always guarantee a collapse of the asset price of the asset class involved,

        When it has really taken a grip and the good times have got everyone loaded up with debt and nearly all asset classes have been inflated this is when whole economies get destroyed.

        As Japan found, monetary stimulus doesn’t work, no matter how low interest rates go no one wants to take on more debt, with everyone trying to repay debt the money supply shrinks making things worse.

        As the private sector won’t take on anymore debt, the Government needs to borrow for fiscal stimulus to maintain the money supply.

        Richard Koo has some great videos on YouTube explaining what he learnt from the Japanese experience and they had a long learning curve in which to learn one hell of a lot.

        Housing bubbles are probably the best way to have really bad debt inflated asset bubbles.

        The amounts borrowed are large, almost everyone gets involved and the repayment drag on money supply is really long with 25/30 year mortgages.

        It’s today’s favourite.

        Japan though about unwinding QE and used short term debt, the FED didn’t.

        1. Sound of the Suburbs

          Minsky was looking at 1929 only.

          He didn’t have all our current examples of debt inflated asset bubbles to look at.

        2. Yves Smith Post author

          In 1929 you could margin stocks up to 90%. More important, you had trust of trusts of trust, which created much higher de facto leverage levels. 1929 was completely different than 1999.

  15. Sound of the Suburbs

    Hopefully my comment about debt inflated asset bubbles will appear above.

    Understanding money itself is the key to understanding the debt inflated asset bubble.

    Money and debt are opposite sides of the same coin.

    Money is created by loans and destroyed by repayments of those loans.

    When the debt inflated bubble is inflating, lots of new debt is coming into existence and the money supply increases and feeds into the general economy. It feels like there is lots of money about because there is.

    When the debt inflated bubble has burst, no one is taking on new debt and everyone is making repayments, the money supply shrinks and is sucked out of the general economy. It feels like there isn’t much money about because there isn’t.

    Ben and Alan take note.

    1. Sound of the Suburbs

      Missed an important line.

      Money and debt are opposite sides of the same coin.

      If there is no debt there is no money.

      Money is created by loans and destroyed by repayments of those loans.

  16. Procpius

    “Rim-Sin needed their support for his looming fight with Hammurabi, who soon conquered Larsa in 1763. ” From 1788 BC to 1763 BC is 25 years. From our perspective that may seem “soon,” but at the time that’s a full generation. Kids who were not born when the crash occurred were serving in the army when Hammurabi conquered. Of course it’s absurd to think the crash was significant in Rim-Sin’s loss.

  17. phichibe

    Prompted by one of the earlier comments, I went and read the NY Times review of this book. It’s simply day and night from this review. As it happens, a few years back I went on a reading binge through Mesopotamian history and know that Hudson is correct in his citations (I read the Oppenheim book, for example).

    I would like to say that I’m at a total loss as to how the Times could have asked one Felix Martin, partner of 1167 Capital to write a review of this book, but sadly I know the answer from having read the Grey Lady for the last 35 years and witnessed the decline of its business coverage into Andrew Ross Sorkin clackery for Wall Street. Floyd Norris is gone, Gretchen Morgenstern is probably going, and all we’ll have is a junior league version of the Wall Street Journal.

    Thanks Yves for posting this excellent review. Thanks to INET as well.



  18. Adam Eran

    This story is not so ancient. Not only is debt peonage a current topic, it resonates with conflicts of even the recent past. Geoffrey Race’s War Comes to Long An describes how the promise of continuing a French colony’s debt peonage motivated the Vietnamese to defeat the Americans, despite their superior weapons and firepower. The U.S. attempted to prop up the French rentiers and their clients. Ho Chi Minh wiped out those debts…. Of course the persistence of the bankers has brought Vietnam stealthily back into the capitalist fold (now even Communists are corrupt!)…

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