
Debt began life as one strand of reciprocity, socialization, co-dependence. Every friendship came entangled in bonds of mutual indebtedness. When a stranger’s helping hand elicited the response ‘I am in your debt’, this alluded to the intimate connections between solidarity, obligation, gratitude and reciprocity. Paying back a debt could be anything from a benign inner need to a legal obligation that could land someone in permanent bondage.
As with every human emotion, product or relation, debt was depersonalized, commodified and utterly transformed by capitalism and, in the process, shaped the modern world.
Under feudalism, the production of a society’s economic surplus proceeded in three steps: Production → Distribution → Debt. Put simply, in the first instance serfs worked the land and produced harvests (production). Then, the feudal lord sent his sheriff to extract his share, if necessary by force (distribution). Finally, the lord sold any goods that were left over, which allowed him to buy things and, also, issue loans (debt).
But as soon as land and labour were commodified, the great transformation that begat capitalism from feudalism’s belly reversed the sequence. It became, instead, Debt → Distribution → Production. In short, before production could even commence, the entrepreneur had to borrow the money to pay for wages and the cost of machinery and rent. So, debt came first, followed by distributing parts of the future surplus to workers (wages) and landowners (rent). And all that before production even began.
This is how debt-driven production turned profit into an end in itself – for without it, the new capitalist class would end up bankrupt, if not in a debtors’ prison. In this sense, capitalism was powered not so much by coal and steam, but by the debt that gave birth to the profit-drive as society’s main fuel. The result was capitalism. This extracted unprecedented amounts of labour from former peasants and mixed it with newfangled machines to generate, at once, unimaginable riches for the few and unprecedented depravity for the many.
In that process, debt was estranged from the benign realm of mutual obligations between neighbours, and turned into a mighty weapon in the hands of bankers and their political agents. Enormous debt is to capitalism what hell is to Christianity: unpleasant yet indispensable.
Time travellers
Once debt graduated from the end of the value chain to its very beginning, bankers acquired a role they never had before. No longer merely usurers, lubricators of trade or mediators between savers and borrowers, bankers became time travellers who brought back from the future the vigour that energized capitalist production.
Most people believe, erroneously, that bankers take deposits from savers, lend them to borrowers, and make money by paying less interest to savers than they charge borrowers. While this is how banking worked a long time ago, that has not been the case since capitalism’s inception. For at least two centuries, bankers have simply conjured up money from thin air.
When bankers extend a $1 million credit to a capitalist, they merely write these numbers in a cell on a spreadsheet. Can value be created from nothing? No, but it can be snatched from the future. The idea is simple: think of the $1 million loan as follows. It is as if the banker sits in front of the time membrane separating the present from the future, pushes an arm through it to snatch value from some distant point in time, brings it back to the present, lends it to the capitalist who will, hopefully, invest it in the production of commodities whose surplus value will be enough to repay the future and leave a nice little interest for the banker.
Time-travelling bankers and profit-driven capitalists combined to shape industrial, oligopolistic capitalism. From capitalism’s inception in the late 18th century onward, rapid growth went hand in hand with the creation of Big Business and Big Finance. Once it had emerged, Big Finance found a new way of making loads of money: speculating on which shares would do better in the Big Business stock market. And so, they began grabbing value from the future not just in order to deliver it to manufacturers, but so they could place bets on which manufacturer would gain an advantage.
As long as profit and interest burgeoned, the bankers discovered that the more value they snatched from the future the greater their interest and, increasingly, their gambling winnings. Just as laboratory rats, having discovered that pulling a lever results in being given a pellet of food, end up pulling it incessantly, bankers borrowed from the future more and more and more. At some point, naturally, the present could no longer repay the future. And that’s when the almighty Crash hit an unsuspecting world in 1929.
The big gamble
Having learned the lesson, US President Franklin D. Roosevelt’s administration imposed draconian constraints on bankers’ capacity to gamble with money snatched from an uncertain future – aka the New Deal. In 1949, at the Bretton Woods conference, dominated by the US, the world’s biggest creditor country at the time, these restrictions were internationalized.
The result was capitalism’s ‘golden age’ (1944-1971), in which bankers remained shackled and banking was boring (under severe so-called capital controls). But then, once the US had become a deficit economy, Washington decided to blow up the New Deal (and its Bretton Woods international manifestation) so as to fund its hegemony through an audacious recycling mechanism: the forever-increasing US deficits acted as the engine of global aggregate demand (securing orders for the net exporters of Germany, Japan and later China), sucking into America imported manufactures, paying for these with IOUs (also known as US dollars) which, then, foreign capitalists returned to Wall Street bankers and financiers to buy US government debt, shares and real estate.
In this context, Wall Street bankers found themselves daily handling billions of dollars flying into New York from Europe and East Asia, and they invented new ways to profit. Today, we refer to these new practices as financialization. This is a new form of debt stolen from the future in order to place outsized bets. For instance, on top of spending $1 million on, say, a bundle of Microsoft shares, Jack, a Lehman’s trader, would spend another $100,000 for a contract provided by, say Jill at Goldman Sachs, requiring her to sell him, in a year’s time, another such bundle of Microsoft shares for the same total price he paid today ($1 million).
In their language, Jack would buy from Jill an option to buy more Microsoft shares in a year’s time at today’s price. If Microsoft’s shares were to rise by, say, 40 per cent, Jack would receive two gains: the $400,000 gain from the appreciation of the Microsoft shares plus another $400,000 from the option to buy a second tranche of Microsoft shares at last year’s lower price. Jack’s total net gain would then come to $700,000.
At that point, Jack had a brilliant idea: Why buy shares at all? Why not buy only options? If he were to spend his $1.1 million only on options to buy Microsoft shares next year at today’s share price, and the share price were to increase by 40 per cent, his net gain would be a stunning $3.3 million.
And so the Jacks and the Jills of Big Finance borrowed, as if there was no tomorrow, to buy each other’s options, or derivatives. By 2007, on a planet whose total income was around $70 trillion, the debt that had been created by Big Finance to fund its gambling habit had reached $750 trillion.
Unsurprisingly, this House of Cards came tumbling down. And after it did, in April 2009, Big Finance’s political agents (the G7 leaders) put their central bank printing presses to work, generating $35 trillion which they used to refloat Big Finance while, simultaneously, imposing harsh austerity on our societies. With austerity keeping the demand for products down and the printed $35 trillion sloshing around in the circuits of finance, capitalists went on an investment strike. Why, after all, invest in products that the many cannot buy? Instead, they concentrated on more speculation in the burgeoning stock exchanges.
And so the West arrived at its sad present moment. After 15 years of no real investment into things humanity desperately needs, the debts of Big Finance have been socialized. The debts of the little people have been allowed to drown them. The result is societies full of discontent, and it seems only the neo-fascists know how to harvest this for their misanthropic purposes.
More still, our industries are crumbling in the face of missed opportunity. Investment in a green transition might have helped us avoid passing the point of no return on the perilous path to climate catastrophe. Even now, when all this should be painfully obvious to anyone who cares to take the pulse of humanity and nature, we let Big Finance and the fossil fuel industry dictate our shrinking future.
Cloud cuckoo land
With all this in mind, the fact that we are still discussing whether debt is a sin or whether it can be put to work in humanity’s interests depresses me no end.
Debt was never the problem. The problem was a capitalist process which, unavoidably, turned debt into the bankers’ tool for enriching themselves at the cost of the future. A process which, as I argue in a recent book, has led capital to mutate into a new form, ‘cloud capital’, that has sidelined markets and profit and replaced capitalism with a new mode of production, which I call technofeudalism.1
Debt was never the problem. The problem was a capitalist process which turned debt into the bankers’ tool for enriching themselves at the cost of the future
Can debt be salvaged, even at this stage, from the clasps of Big Finance, to help humanity invest in public goods? Of course. As the late David Graeber taught us during his excellent speeches at Occupy Wall Street, everything could be different. But, lest we fall for easy (and thus unfeasible) solutions, it will take radical change to turn debt into an instrument for investing in things.
For real investment to become possible again, we must end the reign of so-called investment banks. Despite their name, they investment in precious little of tangible value – not skills, equipment, solar panels or hospitals, for instance.
Investment bankers conjure up complicated trades involving debt and shares. Large pension funds can purchase these using the accumulated power of employee contributions. This draws all sorts of speculators into the market. At the end of the day, a handful of super-funds and private equity giants end up owning almost everything.
So, what should we do? End the mutual reinforcement mechanism between debt and stock market speculation. How? Given the crushing power of financial markets and cloud capital over our polities, the old-fashioned, social democratic regulatory moves resemble water pistols in the face of gigantic forest fires. Today, in the age of Big Finance and technofeudalism, we need two radical but uncomplicated interventions.
First, amend corporate law to legislate, across the board, a system of one employee, one share, one vote. Since shares will, suddenly, resemble college library cards (ie a non-tradeable right to vote in shareholders’ meetings as long as you are employed by the company), stock markets will wither, along with the wage-profit distinction and the opportunity of the moneyed to speculate on shares. Secondly, get the central bank to issue a free digital bank account (or ‘wallet’) to every resident. Immediately, the bankers forfeit their capacity to blackmail us to deposit our money with them.
How will the newly democratized firms get financed? Through plain vanilla bonds, or loans, provided by savers who are no longer in the clasps of Big Finance and who can use the central bank’s digital payment system directly to lend to companies of their choice. With these two moves, the stranglehold of Big Finance and our technofeudal lords is broken and debt can become a technologically advanced society’s instrument for investing into a sustainable future.
- Yanis Varoufakis, Technofeudalism: What Killed Capitalism, The Bodley Head, London, 2023.