Since 1971, when the U.S. abandoned the gold standard, and the world has been moving to a system of virtual credit money, we have been entering a new period of history. But it’s not entirely unprecedented.
In fact, contrary to popular belief, credit has been the predominant form of money in world history.
This is counterintuitive, but not unforeseeable. After all, money itself has nothing to do with an “exchange of value”, which could easily be done by barter.
The remarkable thing was that they were able to maintain these credit systems despite the lack of any reliable state authorities willing or able to enforce contracts. How did they do it? Two ways: but both involved insisting that there were values that were more important than mere money.
The first was the cult of personal honor. . . . the second factor: the existence of some sort of overarching institutions, larger than states, usually religious in nature, that ensured that credit systems didn’t fly completely out of hand.
It’s hard to visualize the mechanics of the system the author is referring to. However, he suggests a way it can go wrong:
In this new phase of credit money that we’ve entered since 1971, we did exactly the opposite. Instead of setting up great overarching institutions designed to protect debtors, we created institutions like the S&P or IMF, essentially, designed instead to protect creditors.
Basically, it seems that people with property constantly sell on credit in order to derive “rent” from people without property. Eventually, though, they have to scrap the books and start over, since the system is fundamentally unfair.
I have long nursed a similar idea that salary income (like most other forms of compensation for labor) is not an “exchange of value” but rather an extension of credit by society. The “loan officers” are the people who sign off on one’s time card, budget line, paycheck, etc. The reason there can be no exchange of value is because the value of labor is too difficult to specify.
For the highest-paid people, their labor cannot be quantified at all, and they are paid for showing up, as it were. They are paid for their personality, their image, or their social role, not for what they accomplish. Their debts to society are routinely forgiven.
Some people have a low credit rating with society. They therefore get very little, and even what they have gets taken away.
The masses of the poor would become indebted to the rich, they would lose their flocks and fields, begin selling family members into peonage and slavery, leading either to mass flight, uprisings, or a society so polarized that the majority were effectively (sometimes literally) reduced to slaves.
Here is the main point of the article, which I am continuing to ponder:
In periods where economic transactions were conducted largely through cash, there are many parts of the world where this actually began happen. Periods dominated by credit money, where everyone recognized that money was just a promise, a social arrangement, almost invariably involve some kind of mechanism to protect debtors. . . . Christian and Islamic bans on usury and debt peonage, far from being impediments to trade, were actually what made most trade possible, since they ensured ordinary people were not entirely impoverished, and had the means to purchase the merchants’ wares, and because those religious systems became the foundation for networks of honor and trust.
I’m not sure exactly what it means, but it rings true.