The global economy is starting to bottom out from the worst recession and financial crisis since the Great Depression. In the fourth quarter of 2008 and first quarter of 2009 the rate at which most advanced economies were contracting was similar to the gross domestic product free-fall in the early stage of the Depression. Then, late last year, policymakers who had been behind the curve finally started to use most of the weapons in their arsenal.

That effort worked and the free-fall of economic activity eased. There are three open questions now on the outlook. When will the global recession be over? What will be the shape of the economic recovery? Are there risks of a relapse?

On the first question it looks like the global economy will bottom out in the second half of 2009. In many advanced economies (the US, UK, Spain, Italy and other eurozone members) and some emerging market economies (mostly in Europe) the recession will not be formally over before the end of the year, as green shoots are still mixed with weeds. In some other advanced economies (Australia, Germany, France and Japan) and most emerging markets (China, India, Brazil and other parts of Asia and Latin America) the recovery has already started.

On the second issue the debate is between those – most of the economic consensus – who expect a V-shaped recovery with a rapid return to growth and those – like myself – who believe it will be U-shaped, anaemic and below trend for at least a couple of years, after a couple of quarters of rapid growth driven by the restocking of inventories and a recovery of production from near Depression levels.

There are several arguments for a weak U-shaped recovery . Employment is still falling sharply in the US and elsewhere – in advanced economies, unemployment will be above 10 per cent by 2010. This is bad news for demand and bank losses, but also for workers’ skills, a key factor behind long-term labour productivity growth.

Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest.

Third, in countries running current account deficits, consumers need to cut spending and save much more, yet debt-burdened consumers face a wealth shock from falling home prices and stock markets and shrinking incomes and employment.

Fourth, the financial system – despite the policy support – is still severely damaged. Most of the shadow banking system has disappeared, and traditional banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalised.

Fifth, weak profitability – owing to high debts and default risks, low growth and persistent deflationary pressures on corporate margins – will constrain companies’ willingness to produce, hire workers and invest.

Sixth, the releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.

Seventh, the reduction of global imbalances implies that the current account deficits of profligate economies, such as the US, will narrow the surpluses of countries that over-save (China and other emerging markets, Germany and Japan). But if domestic demand does not grow fast enough in surplus countries, this will lead to a weaker recovery in global growth.

There are also now two reasons why there is a rising risk of a double-dip W-shaped recession. For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).

But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.

Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.

In summary, the recovery is likely to be anaemic and below trend in advanced economies and there is a big risk of a double-dip recession.

It was to be expected that our present economic traumas would call into question the state of economics. “Why did no one see the crisis coming?”, Queen Elizabeth reportedly asked one practitioner. A seminar at the British Academy tried to answer and the FT has taken up the discussion.

The Queen’s question is understandable, given the subject’s claims on its own behalf. Ever since modern economics started in the 18th century it has presented itself as a predictive discipline, akin to a natural science. Since the future a year ago included the present slump, it is natural that the failure of the economics profession – with a few exceptions – to foresee the coming collapse should have discredited its scientific pretensions. Economics is revealed to have no more clothes than other social science. One cannot imagine the Queen in, say, nine months’ time, asking a leading political scientist: “Why did no one tell me that Labour was going to win the election?” She would understand that this was not a prediction that any political scientist could make with conviction, however much time he had spent studying present and past opinion polls.

Nevertheless, the Queen’s question was wrong, because it accepted at face value the predictive claim of economics – a feature that has distinguished it from all other social sciences. Karl Popper produced a famous argument against the possibility of prediction in human affairs: one cannot anticipate a new invention because, if one could, one would already have invented it. However, this objection can be overcome if one assumes a stable and repetitive universe in which rational actors make efficient use of the information available to them. In this environment, uncertainty disappears to be replaced by calculable risk. Shocks and mistakes may occur but these will cancel each other out, so that, on average, people get what they expect.

An important implication of this view is that shares are always correctly priced. This is the basis of the so-called efficient market hypothesis that has dominated financial economics. It led bankers into blind faith in their mathematical forecasting models. It led governments and regulators to discount the possibility that financial markets could implode. It led to what Alan Greenspan called (after he had stepped down as chairman of the US Federal Reserve) “the underpricing of risk worldwide”.

It has also led to the discrediting of mainstream macroeconomics. The efficient market hypothesis is simply an application of the recently triumphant New Classical school, which preaches that a decentralised market system is always at full employment. In their obsession with getting government out of economic life, Chicago economists claimed that any consistent set of policies will be learnt and anticipated by a population, and will therefore be ineffective. Since people – apparently including the 10 per cent or so unemployed – are already in their preferred position because of their correct anticipations and instantaneous adjustment to change, “stimulus” policies are bound to fail and even make things worse. Recessions, in this view, are “optimal”.

Most of those unversed in New Classical economics assume that John Maynard Keynes exploded these fallacies 70 years ago. Their re-emergence is not just the result of the failure of Keynesian macroeconomic policy to anticipate or deal with “stagflation” in the 1970s. It reflects a persistent bias in economics towards an idealised account of human behaviour; what Joseph Schumpeter called the “Ricardian Vice” of excessive abstraction. It is only by imagining a mechanical world of interacting robots that economics has gained its status as a hard, predictive science. But how much do its mechanical constructions, with their roots in Newtonian physics, tell us about the springs of human behaviour?

One of the most interesting contributions to the FT.com debate was the argument that, after Keynes, economists should have aligned their discipline with other social sciences concerned with human behaviour. Keynes opened the way to political economy; but economists opted for a regressive research programme, disguised by sophisticated mathematics, that set it apart. The present crisis gives us an opportunity to try again.

The reconstruction of economics needs to start with the universities. First, degrees in the subject should be broadly based. They should take as their motto Keynes’s dictum that “economics is a moral and not a natural science”. They should contain not just the standard courses in elementary microeconomics and macroeconomics but economic and political history, the history of economic thought, moral and political philosophy, and sociology. Though some specialisation would be allowed in the final year, the mathematical component in the weighting of the degree should be sharply reduced. This is a return to the tradition of the Oxford Politics, Philosophy and Economics (PPE) degree and Cambridge Moral Sciences.

Beyond this, the postgraduate study of macroeconomics might with advantage be separated from that of microeconomics. Courses in microeconomics should concern themselves, as at present, with the building and testing of models based on a narrow set of assumptions. Their field of applicability lies in those areas where we have reliable views of the future. Macroeconomics, though, is an essential part of the art of government, and should always be taught in conjunction with subjects bearing on this.

The obvious aim of such a reconstruction is to protect macroeconomics from the encroachment of the methods and habits of the mathematician. Only through some such broadening can we hope to provide a proper education for those whose usefulness to society will lie as much in their philosophical and political literacy as in their mathematical efficiency.

How to resolve this crisis in macroeconomics? The field must be revamped fundamentally. Some of its shortcomings are obvious. Before the financial crisis, most macroeconomists were blinded by the idea that efficient markets would take care of themselves. They did not bother to put financial markets and the banking sector into their models. This is a major flaw.

There is a deeper problem, though, that will be more difficult to resolve. This is the underlying paradigm of macroeconomic models. Mainstream models take the view that economic agents are superbly informed and understand the deep complexities of the world. In the jargon, they have “rational expectations”. Not only that. Since they all understand the same “truth”, they all act in the same way. Thus modelling the behaviour of just one agent (the “representative” consumer and the “representative” producer) is all one has to do to fully describe the intricacies of the world. Rarely has such a ludicrous idea been taken so seriously by so many academics.

We need a new science of macroeconomics. A science that starts from the assumption that individuals have severe cognitive limitations; that they do not understand much about the complexities of the world in which they live. This lack of understanding creates biased beliefs and collective movements of euphoria when agents underestimate risk, followed by collective depression in which perceptions of risk are dramatically increased. These collective movements turn uncorrelated risks into highly correlated ones. What Keynes called “animal spirits” are fundamental forces driving macroeconomic fluctuations.

The basic error of modern macroeconomics is the belief that the economy is simply the sum of microeconomic decisions of rational agents. But the economy is more than that. The interactions of these decisions create collective movements that are not visible at the micro level.

It will remain difficult to model these collective movements. There is much resistance. Too many macroeconomists are attached to their models because they want to live in the comfort of what they understand – the behaviour of rational and superbly informed individuals.

To paraphrase Isaac Newton, macroeconomists can calculate the motions of a lonely rational agent but not the madness of the crowds. Yet if macroeconomics wants to become relevant again, its practitioners will have to start calculating this madness. It is going to be difficult, but that is no excuse not to try.

What follows is a fragment of a much larger project of research on debt and debt money in human history. The first and overwhelming conclusion of this project is that in studying economic history, we tend to systematically ignore the role of violence, the absolutely central role of war and slavery in creating and shaping the basic institutions of what we now call ‘the economy’. What’s more, origins matter. The violence may be invisible, but it remains inscribed in the very logic of our economic common sense, in the apparently self-evident nature of institutions that simply would never and could never exist outside of the monopoly of violence – but also, the systematic threat of violence – maintained by the contemporary state.

Let me start with the institution of slavery, whose role, I think, is key. In most times and places, slavery is seen as a consequence of war. Sometimes most slaves actually are war captives, sometimes they are not, but almost invariably, war is seen as the foundation and justification of the institution. If you surrender in war, what you surrender is your life; your conqueror has the right to kill you, and often will. If he chooses not to, you literally owe your life to him; a debt conceived as absolute, infinite, irredeemable. He can in principle extract anything he wants, and all debts – obligations – you may owe to others (your friends, family, former political allegiances), or that others owe you, are seen as being absolutely negated. Your debt to your owner is all that now exists.

This sort of logic has at least two very interesting consequences, though they might be said to pull in rather contrary directions. First of all, as we all know, it is another typical – perhaps defining – feature of slavery that slaves can be bought or sold. In this case, absolute debt becomes (in another context, that of the market) no longer absolute. In fact, it can be precisely quantified. There is good reason to believe that it was just this operation that made it possible to create something like our contemporary form of money to begin with, since what anthropologists used to refer to as ‘primitive money’, the kind that one finds in stateless societies (Solomon Island feather money, Iroquois wampum), was mostly used to arrange marriages, resolve blood feuds, and fiddle with other sorts of relations between people, rather than to buy and sell commodities. For instance, if slavery is debt, then debt can lead to slavery. A Babylonian peasant might have paid a handy sum in silver to his wife’s parents to officialise the marriage, but he in no sense owned her. He certainly couldn’t buy or sell the mother of his children. But all that would change if he took out a loan. Were he to default, his creditors could first remove his sheep and furniture, then his house, fields and orchards, and finally take his wife, children, and even himself as debt peons until the matter was settled (which, as his resources vanished, of course became increasingly difficult to do). Debt was the hinge that made it possible to imagine money in anything like the modern sense, and therefore, also, to produce what we like to call the market: an arena where anything can be bought and sold, because all objects are (like slaves) disembedded from their former social relations and exist only in relation to money.

But at the same time the logic of debt as conquest can, as I mentioned, pull another way. Kings, throughout history, tend to be profoundly ambivalent towards allowing the logic of debt to get completely out of hand. This is not because they are hostile to markets. On the contrary, they normally encourage them, for the simple reason that governments find it inconvenient to levy everything they need (silks, chariot wheels, flamingo tongues, lapis lazuli) directly from their subject population; it’s much easier to encourage markets and then buy them. Early markets often followed armies or royal entourages, or formed near palaces or at the fringes of military posts. This actually helps explain the rather puzzling behavior on the part of royal courts: after all, since kings usually controlled the gold and silver mines, what exactly was the point of stamping bits of the stuff with your face on it, dumping it on the civilian population, and then demanding they give it back to you again as taxes? It only makes sense if levying taxes was really a way to force everyone to acquire coins, so as to facilitate the rise of markets, since markets were convenient to have around. However, for our present purposes, the critical question is: how were these taxes justified? Why did subjects owe them, what debt were they discharging when they were paid? Here we return again to right of conquest. (Actually, in the ancient world, free citizens – whether in Mesopotamia, Greece, or Rome – often did not have to pay direct taxes for this very reason, but obviously I’m simplifying here.) If kings claimed to hold the power of life and death over their subjects by right of conquest, then their subjects’ debts were, also, ultimately infinite; and also, at least in that context, their relations to one another, what they owed to one another, was unimportant. All that really existed was their relation to the king. This in turn explains why kings and emperors invariably tried to regulate the powers that masters had over slaves, and creditors over debtors. At the very least they would always insist, if they had the power, that those prisoners who had already had their lives spared could no longer be killed by their masters. In fact, only rulers could have arbitrary power over life and death. One’s ultimate debt was to the state; it was the only one that was truly unlimited, that could make absolute, cosmic, claims.

The reason I stress this is because this logic is still with us. When we speak of a ‘society’ (French society, Jamaican society) we are really speaking of people organised by a single nation state. That is the tacit model, anyway. ‘Societies’ are really states, the logic of states is that of conquest, the logic of conquest is ultimately identical to that of slavery. True, in the hands of state apologists, this becomes transformed into a notion of a more benevolent ‘social debt’. Here there is a little story told, a kind of myth. We are all born with an infinite debt to the society that raised, nurtured, fed and clothed us, to those long dead who invented our language and traditions, to all those who made it possible for us to exist. In ancient times we thought we owed this to the gods (it was repaid in sacrifice, or, sacrifice was really just the payment of interest – ultimately, it was repaid by death). Later the debt was adopted by the state, itself a divine institution, with taxes substituted for sacrifice, and military service for one’s debt of life. Money is simply the concrete form of this social debt, the way that it is managed. Keynesians like this sort of logic. So do various strains of socialist, social democrats, even crypto-fascists like Auguste Comte (the first, as far as I am aware, to actually coin the phrase ‘social debt’). But the logic also runs through much of our common sense: consider for instance, the phrase, ‘to pay one’s debt to society’, or, ‘I felt I owed something to my country’, or, ‘I wanted to give something back.’ Always, in such cases, mutual rights and obligations, mutual commitments – the kind of relations that genuinely free people could make with one another – tend to be subsumed into a conception of ‘society’ where we are all equal only as absolute debtors before the (now invisible) figure of the king, who stands in for your mother, and by extension, humanity.

What I am suggesting, then, is that while the claims of the impersonal market and the claims of ‘society’ are often juxtaposed – and certainly have had a tendency to jockey back and forth in all sorts of practical ways – they are both ultimately founded on a very similar logic of violence. Neither is this a mere matter of historical origins that can be brushed away as inconsequential: neither states nor markets can exist without the constant threat of force.

One might ask, then, what is the alternative?

Towards a History of Virtual Money

Here I can return to my original point: that money did not originally appear in this cold, metal, impersonal form. It originally appears in the form of a measure, an abstraction, but also as a relation (of debt and obligation) between human beings. It is important to note that historically it is commodity money that has always been most directly linked to violence. As one historian put it, ‘bullion is the accessory of war, and not of peaceful trade.’1

The reason is simple. Commodity money, particularly in the form of gold and silver, is distinguished from credit money most of all by one spectacular feature: it can be stolen. Since an ingot of gold or silver is an object without a pedigree, throughout much of history bullion has served the same role as the contemporary drug dealer’s suitcase full of dollar bills, as an object without a history that will be accepted in exchange for other valuables just about anywhere, with no questions asked. As a result, one can see the last 5,000 years of human history as the history of a kind of alternation. Credit systems seem to arise, and to become dominant, in periods of relative social peace, across networks of trust, whether created by states or, in most periods, transnational institutions, whilst precious metals replace them in periods characterised by widespread plunder. Predatory lending systems certainly exist at every period, but they seem to have had the most damaging effects in periods when money was most easily convertible into cash.

So as a starting point to any attempt to discern the great rhythms that define the current historical moment, let me propose the following breakdown of Eurasian history according to the alternation between periods of virtual and metal money:

I. Age of the First Agrarian Empires (3500-800 BCE)

Dominant money form: virtual credit money

Our best information on the origins of money goes back to ancient Mesopotamia, but there seems no particular reason to believe matters were radically different in Pharaonic Egypt, Bronze Age China, or the Indus Valley. The Mesopotamian economy was dominated by large public institutions (Temples and Palaces) whose bureaucratic administrators effectively created money of account by establishing a fixed equivalent between silver and the staple crop, barley. Debts were calculated in silver, but silver was rarely used in transactions. Instead, payments were made in barley or in anything else that happened to be handy and acceptable. Major debts were recorded on cuneiform tablets kept as sureties by both parties to the transaction.

Certainly, markets did exist. Prices of certain commodities that were not produced within Temple or Palace holdings, and thus not subject to administered price schedules, would tend to fluctuate according to the vagaries of supply and demand. But most actual acts of everyday buying and selling, particularly those that were not carried out between absolute strangers, appear to have been made on credit. ‘Ale women’, or local innkeepers, served beer, for example, and often rented rooms; customers ran up a tab; normally, the full sum was dispatched at harvest time. Market vendors presumably acted as they do in small scale markets in Africa, or Central Asia, today, building up lists of trustworthy clients to whom they could extend credit.

The habit of money at interest also originates in Sumer – it remained unknown, for example, in Egypt. Interest rates, fixed at 20 percent, remained stable for 2,000 years. (This was not a sign of government control of the market: at this stage, institutions like this were what made markets possible.) This, however, led to some serious social problems. In years with bad harvests especially, peasants would start becoming hopelessly indebted to the rich, and would have to surrender their farms and, ultimately, family members, in debt bondage. Gradually, this condition seems to have come to a social crisis – not so much leading to popular uprisings, but to common people abandoning the cities and settled territory entirely and becoming semi-nomadic ‘bandits’ and raiders. It soon became traditional for each new ruler to wipe the slate clean, cancel all debts, and declare a general amnesty or ‘freedom’, so that all bonded labourers could return to their families. (It is significant here that the first word for ‘freedom’ known in any human language, the Sumerian amarga, literally means ‘return to mother’.) Biblical prophets instituted a similar custom, the Jubilee, whereby after seven years all debts were similarly cancelled. This is the direct ancestor of the New Testament notion of ‘redemption’. As economist Michael Hudson has pointed out, it seems one of the misfortunes of world history that the institution of lending money at interest disseminated out of Mesopotamia without, for the most part, being accompanied by its original checks and balances.

II. Axial Age (800 BCE – 600 CE)

Dominant money form: coinage and metal bullion

This was the age that saw the emergence of coinage, as well as the birth, in China, India and the Middle East, of all major world religions.2 From the Warring States period in China, to fragmentation in India, and to the carnage and mass enslavement that accompanied the expansion (and later, dissolution) of the Roman Empire, it was a period of spectacular creativity throughout most of the world, but of almost equally spectacular violence.

Coinage, which allowed for the actual use of gold and silver as a medium of exchange, also made possible the creation of markets in the now more familiar, impersonal sense of the term. Precious metals were also far more appropriate for an age of generalised warfare, for the obvious reason that they could be stolen. Coinage, certainly, was not invented to facilitate trade (the Phoenicians, consummate traders of the ancient world, were among the last to adopt it). It appears to have been first invented to pay soldiers, probably first of all by rulers of Lydia in Asia Minor to pay their Greek mercenaries. Carthage, another great trading nation, only started minting coins very late, and then explicitly to pay its foreign soldiers.

Throughout antiquity one can continue to speak of what Geoffrey Ingham has dubbed the ‘military-coinage complex’. He may have been better to call it a ‘military-coinage-slavery complex’, since the diffusion of new military technologies (Greek hoplites, Roman legions) was always closely tied to the capture and marketing of slaves. The other major source of slaves was debt: now that states no longer periodically wiped the slates clean, those not lucky enough to be citizens of the major military city-states – who were generally protected from predatory lenders – were fair game. The credit systems of the Near East did not crumble under commercial competition; they were destroyed by Alexander’s armies – armies that required half a ton of silver bullion per day in wages. The mines where the bullion was produced were generally worked by slaves. Military campaigns in turn ensured an endless flow of new slaves. Imperial tax systems, as noted, were largely designed to force their subjects to create markets, so that soldiers (and also, of course, government officials) would be able to use that bullion to buy anything they wanted. The kind of impersonal markets that once tended to spring up between societies, or at the fringes of military operations, now began to permeate society as a whole.

However tawdry their origins, the creation of new media of exchange – coinage appeared almost simultaneously in Greece, India, and China – appears to have had profound intellectual effects. Some have even gone so far as to argue that Greek philosophy was itself made possible by conceptual innovations introduced by coinage. The most remarkable pattern, though, is the emergence, in almost the exact times and places where one also sees the early spread of coinage, of what were to become modern world religions: prophetic Judaism, Christianity, Buddhism, Jainism, Confucianism, Taoism, and eventually, Islam. While the precise links are yet to be fully explored, in certain ways, these religions appear to have arisen in direct reaction to the logic of the market. To put the matter somewhat crudely: if one relegates a certain social space simply to the selfish acquisition of material things, it is almost inevitable that soon someone else will come to set aside another domain in which to preach that, from the perspective of ultimate values, material things are unimportant, and selfishness – or even the self – illusory.

III. The Middle Ages (600 CE – 1500 CE)3

The return to virtual credit money

If the Axial Age saw the emergence of complementary ideals of commodity markets and universal world religions, the Middle Ages were the period in which those two institutions began to merge. Religions began to take over the market systems. Everything from international trade to the organisation of local fairs increasingly came to be carried out through social networks defined and regulated by religious authorities. This enabled, in turn, the return throughout Eurasia of various forms of virtual credit money.

In Europe, where all this took place under the aegis of Christendom, coinage was only sporadically, and unevenly, available. Prices after 800 AD were calculated largely in terms of an old Carolingian currency that no longer existed (it was actually referred to at the time as ‘imaginary money’), but ordinary day-to-day buying and selling was carried out mainly through other means. One common expedient, for example, was the use of tally-sticks, notched pieces of wood that were broken in two as records of debt, with half being kept by the creditor, half by the debtor. Such tally-sticks were still in common use in much of England well into the 16th century. Larger transactions were handled through bills of exchange, with the great commercial fairs serving as their clearing houses. The Church, meanwhile, provided a legal framework, enforcing strict controls on the lending of money at interest and prohibitions on debt bondage.

The real nerve centre of the Medieval world economy, though, was the Indian Ocean, which along with the Central Asia caravan routes connected the great civilisations of India, China, and the Middle East. Here, trade was conducted through the framework of Islam, which not only provided a legal structure highly conducive to mercantile activities (while absolutely forbidding the lending of money at interest), but allowed for peaceful relations between merchants over a remarkably large part of the globe, allowing the creation of a variety of sophisticated credit instruments. Actually, Western Europe was, as in so many things, a relative late-comer in this regard: most of the financial innovations that reached Italy and France in the 11th and 12th centuries had been in common use in Egypt or Iraq since the 8th or 9th centuries. The word ‘cheque’, for example, derives from the Arab sakk, and appeared in English only around 1220 AD.

The case of China is even more complicated: the Middle Ages there began with the rapid spread of Buddhism, which, while it was in no position to enact laws or regulate commerce, did quickly move against local usurers by its invention of the pawn shop – the first pawn shops being based in Buddhist temples as a way of offering poor farmers an alternative to the local usurer. Before long, though, the state reasserted itself, as the state always tends to do in China. But as it did so, it not only regulated interest rates and attempted to abolish debt peonage, it moved away from bullion entirely by inventing paper money. All this was accompanied by the development, again, of a variety of complex financial instruments.

All this is not to say that this period did not see its share of carnage and plunder (particularly during the great nomadic invasions) or that coinage was not, in many times and places, an important medium of exchange. Still, what really characterises the period appears to be a movement in the other direction. Most of the Medieval period saw money largely delinked from coercive institutions. Money changers, one might say, were invited back into the temples, where they could be monitored. The result was a flowering of institutions premised on a much higher degree of social trust.

IV. Age of European Empires (1500-1971)

The return of precious metals

With the advent of the great European empires – Iberian, then North Atlantic – the world saw both a reversion to mass enslavement, plunder, and wars of destruction, and the consequent rapid return of gold and silver bullion as the main form of currency. Historical investigation will probably end up demonstrating that the origins of these transformations were more complicated than we ordinarily assume. Some of this was beginning to happen even before the conquest of the New World. One of the main factors of the movement back to bullion, for example, was the emergence of popular movements during the early Ming dynasty, in the 15th and 16th centuries, that ultimately forced the government to abandon not only paper money but any attempt to impose its own currency. This led to the reversion of the vast Chinese market to an uncoined silver standard. Since taxes were also gradually commuted into silver, it soon became the more or less official Chinese policy to try to bring as much silver into the country as possible, so as to keep taxes low and prevent new outbreaks of social unrest. The sudden enormous demand for silver had effects across the globe. Most of the precious metals looted by the conquistadors and later extracted by the Spanish from the mines of Mexico and Potosi (at almost unimaginable cost in human lives) ended up in China. These global scale connections that eventually developed across the Atlantic, Pacific, and Indian Oceans have of course been documented in great detail. The crucial point is that the delinking of money from religious institutions, and its relinking with coercive ones (especially the state), was here accompanied by an ideological reversion to ‘metallism’.4

Credit, in this context, was on the whole an affair of states that were themselves run largely by deficit financing, a form of credit which was, in turn, invented to finance increasingly expensive wars. Internationally the British Empire was steadfast in maintaining the gold standard through the 19th and early 20th centuries, and great political battles were fought in the United States over whether the gold or silver standard should prevail.

This was also, obviously, the period of the rise of capitalism, the industrial revolution, representative democracy, and so on. What I am trying to do here is not to deny their importance, but to provide a framework for seeing such familiar events in a less familiar context. It makes it easier, for instance, to detect the ties between war, capitalism, and slavery. The institution of wage labour, for instance, has historically emerged from within that of slavery (the earliest wage contracts we know of, from Greece to the Malay city states, were actually slave rentals), and it has also tended, historically, to be intimately tied to various forms of debt peonage – as indeed it remains today. The fact that we have cast such institutions in a language of freedom does not mean that what we now think of as economic freedom does not ultimately rest on a logic that has for most of human history been considered the very essence of slavery.

V. Current Era (1971 onwards)

The empire of debt

The current era might be said to have been initiated on 15 August 1971, when US President Richard Nixon officially suspended the convertibility of the dollar into gold and effectively created the current floating currency regimes. We have returned, at any rate, to an age of virtual money, in which consumer purchases in wealthy countries rarely involve even paper money, and national economies are driven largely by consumer debt. It’s in this context that we can talk about the ‘financialisation’ of capital, whereby speculation in currencies and financial instruments becomes a domain unto itself, detached from any immediate relation with production or even commerce. This is of course the sector that has entered into crisis today.

What can we say for certain about this new era? So far, very, very little. Thirty or forty years is nothing in terms of the scale we have been dealing with. Clearly, this period has only just begun. Still, the foregoing analysis, however crude, does allow us to begin to make some informed suggestions.

Historically, as we have seen, ages of virtual, credit money have also involved creating some sort of overarching institutions – Mesopotamian sacred kingship, Mosaic jubilees, Sharia or Canon Law – that place some sort of controls on the potentially catastrophic social consequences of debt. Almost invariably, they involve institutions (usually not strictly coincident to the state, usually larger) to protect debtors. So far the movement this time has been the other way around: starting with the ’80s we have begun to see the creation of the first effective planetary administrative system, operating through the IMF, World Bank, corporations and other financial institutions, largely in order to protect the interests of creditors. However, this apparatus was very quickly thrown into crisis, first by the very rapid development of global social movements (the alter-globalisation movement), which effectively destroyed the moral authority of institutions like the IMF and left many of them very close to bankrupt, and now bsy the current banking crisis and global economic collapse. While the new age of virtual money has only just begun and the long term consequences are as yet entirely unclear, we can already say one or two things. The first is that a movement towards virtual money is not in itself, necessarily, an insidious effect of capitalism. In fact, it might well mean exactly the opposite. For much of human history, systems of virtual money were designed and regulated to ensure that nothing like capitalism could ever emerge to begin with – at least not as it appears in its present form, with most of the world’s population placed in a condition that would in many other periods of history be considered tantamount to slavery. The second point is to underline the absolutely crucial role of violence in defining the very terms by which we imagine both ‘society’ and ‘markets’ – in fact, many of our most elementary ideas of freedom. A world less entirely pervaded by violence would rapidly begin to develop other institutions. Finally, thinking about debt outside the twin intellectual straitjackets of state and market opens up exciting possibilities. For instance, we can ask: in a society in which that foundation of violence had finally been yanked away, what exactly would free men and women owe each other? What sort of promises and commitments should they make to each other?

Let us hope that everyone will someday be in a position to start asking such questions. At times like this, you never know.

David Graeber <d.graeber AT gold.ac.uk> undertook his original research in the relations between former nobles and former slaves in a rural community in Madagascar; it was about magic as a tool of politics, about the nature of power, character, and the meaning of history. He has recently completed a research project on social movements dedicated to principles of direct democracy and has written widely on the relation between anthropology and anarchism. He is currently working on a project about the history of debt

Footnotes

1 Geoffrey W. Gardiner, ‘The Primacy of Trade Debts in the Development of Money’, in Randall Wray (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Cheltenham: Elgar, 2004, p.134.

2 The phrase the ‘Axial Age’ was originally coined by Karl Jaspers to describe the relatively brief period between 800 BCE – 200 BCE in which, he believed, just about all the main philosophical traditions we are familiar with today arose simultaneously in China, India, and the Eastern Mediterranean. Here, I am using it in Lewis Mumford’s more expansive use of the term as the period that saw the birth of all existing world religions, stretching roughly from the time of Zoroaster to that of Mohammed.

3 I am here relegating most of what is generally referred to as the ‘Dark Ages’ in Europe into the earlier period, characterised by predatory militarism and the consequent importance of bullion: the Viking raids, and the famous extraction of danegeld from England in the 800s, might be seen as one the last manifestations of an age where predatory militarism went hand and hand with hoards of gold and silver bullion.

4 The myth of barter and commodity theories of money was of course developed in this period.

Originally publish at Metamute.

By Ralph Atkins in Frankfurt, June 30 2009 11:03

Eurozone annual inflation has turned negative for the first time, complicating the job of the European Central Bank as draws a line under emergency measures to tackle continental Europe’s recession.

Consumer prices in the 16-country eurozone were 0.1 per cent lower in June than the same month a year before, according to Eurostat, the European Union’s statistical office.

It was the first time eurozone annual inflation had fallen below zero since comparable records began in 1991. Inflationary pressures in continental Europe are now lower than at anytime since at least the early 1950s, according to calculations by some economists.

The fall in prices reflected sharply lower energy costs but also the effects of the worst post-war economic downturn. The US had already reported year-on-year falls in consumer prices.

News that inflation had turned negative – and was massively undershooting the ECB’s target of an annual rate “below but close” to 2 per cent – came as the ECB prepares for Thursday’s interest rate setting meeting in Luxembourg.

Since last October, the ECB has slashed its main policy rate by 325 basis points to 1 per cent, and pledged to meet in full banks’ demands for liquidity – which resulted in it last week pumping €442bn in one-year loans in the banking system.

But the ECB’s governing council is not expected to cut official borrowing costs further at this week’s meeting and analysts expect the main policy rate to remain at 1 per cent for many months – possibly well into next year or even beyond.

The ECB believes the impact of its measures have still to feed through into the economy. But it faces a difficult balancing act. Even though the inflation outlook justified further action, the central bank feared “that more aggressive easing now could risk financial stability and or a too sharp acceleration of inflation over the longer-term,” said Nick Kounis, European Economist at Fortis Bank.

Jean-Claude Trichet, ECB president, is likely to stress on Thursday that negative inflation will be only a temporary with a return to positive annual rates expected later this year. But ECB forecasts show inflation remaining well below 2 per cent in 2010 and the worry for ECB policymakers is that months of below-zero inflation rates will stoke fears of full-blown deflation – generalised and persistent falls in prices that wreak significant economic damage.

Meanwhile, credit figures released by the ECB just ahead of the inflation news highlighted how the liquidity it has pumped into the banking system have not yet stopped credit flows to the economy from being thrown into reverse. Businesses repaid a net €5bn in loans in May, slowing the annual rate of growth in such loans to just 4.4 per cent. Even more dramatically, the annual rate of growth of borrowing by households turned negative, with loans down 0.2 per cent on the year.

The ECB has been stepping up its appeals recently for banks to pass on the extra liquidity they have been lent, but it could be some months before any extra lending to businesses and households shows up in official data.

Last updated: June 23 2009 00:44

Growing pessimism about the prospects for a global economic recovery sent stock and commodity prices tumbling on Monday while new data showed that leading US corporate executives were cashing out of their share holdings at a rapid pace.

US government bond yields followed equity prices lower, confounding analysts who had expected that Treasury rates would rise this week as the federal government auctioned off a record $104bn of debt.

Analysts said the market mood was captured by a World Bank report that said the global economy would contract 2.9 per cent this year, compared with a previous estimate of a 1.7 per cent fall. A White House spokesman said later in the day that the US unemployment rate was likely to rise to 10 per cent in the next couple of months.

The downbeat commentary reinforced the view that investors should be more worried about the impact of economic weakness on corporate profits than the possibility of higher inflation and interest rates.

“We have had a great run in equities, emerging market currencies, credit and other risky assets, now people are struggling to justify lofty valuations,” said Alan Ruskin, strategist at RBS Securities. He added: “The ‘green shoots’ argument for the economy was very tentative to start with.”

Executives in charge of the largest US companies sent a signal of their concerns by selling far more shares than they bought this month, according to data based on Securities and Exchange Commission filings.

Share sales by so-called company insiders are outstripping purchases so far this month by more than 22 times. TrimTabs, the investment research company, said insiders of S&P 500 listed companies have unloaded $2.6bn in shares in June, compared with $120m in purchases.

“The smartest players in the US stock market – the top insiders who run public companies – are not betting their own money on an economic recovery,” said Charles Biderman, chief executive of TrimTabs.

The S&P 500 index fell 3.06 per cent to 893.04 – its first close below 900 this month. Analysts noted that the index closed below its 50-day and 200-day moving averages. “This is evidence that the rally since March has been a correction and not necessarily the start of a meaningful multi-year rally,” said Jack Ablin, chief investment officer at Harris Private Bank.

The yield on the 10-year Treasury fell 10 basis points to 3.68 per cent. Crude oil prices fell $2.62, or 3.77 per cent, to $66.93 a barrel.

Earlier, the FTSE Eurofirst 300 index slid 2.6 per cent while London’s FTSE 100 index fell 2.3 per cent. Emerging market equities also fell sharply, with Russia leading the retreat.

June 16 (Bloomberg) — The leaders of Brazil, Russia, India and China agreed to push for more clout in global financial institutions at an “historic” first summit, without announcing a common policy on how to flex their $2.8 trillion in reserves.

The heads of the so-called BRIC states called for emerging economies to have a “greater voice and representation in international financial institutions” and for a “more diversified” global monetary system. The comments were made in a joint statement released to reporters after the meeting today.

Before the meeting in the Ural Mountains city of Yekaterinburg, Arkady Dvorkovich, Russian President Dmitry Medvedev’s top economic adviser, said the four leaders would discuss measures to promote regional currencies, including by investing part of their reserves in each other’s bonds, to lessen dependence on the dollar. The statement didn’t mention this possibility.

The BRIC summit, which Medvedev hailed as an “historic event,” comes after Brazil, China and Russia announced plans to shift some foreign reserves into International Monetary Fund bonds, driving Treasuries and the dollar lower. Investors watched the meeting for clues as to how the countries, which are among the biggest holders of U.S. Treasuries, will manage their reserves.

“This is not something for the immediate future, but rather a direction of movement,” Stanislav Ponomarenko, a fixed-income analyst at ING Groep NV in Moscow, said of Dvorkovich’s comments on BRIC bonds.

BRIC Bonds

“I don’t think more than a few percent of reserves could be reinvested into BRIC bonds,” Ponomarenko said. “What we’re seeing is a continuation of discussions to find an alternative to the dollar, yet nobody is going fundamentally to alter anything yet.”

The next BRIC summit will be held in Brazil in 2010, according to the statement issued by Medvedev, Chinese President Hu Jintao, Indian Prime Minister Manmohan Singh and Brazilian President Luiz Inacio Lula da Silva.

Medvedev said the leaders had agreed to continue talks on reforming the global financial system. “We have instructed our finance ministers, our central bank chairmen and other interested structures to meet and prepare proposals to this end,” he told reporters after the summit.

Among such proposals, the leaders’ joint statement mentioned that the “heads and senior leadership” of international financial institutions “should be appointed through an open, transparent, and merit-based selection process.”

Supranational Currency

Medvedev hosted back-to-back summits of developing economies today as he seeks to carve out a bigger role for developing nations in the global financial system.

At a summit of the Shanghai Cooperation Organization, which includes China and the four former Soviet republics of Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, the Russian leader reiterated his intention to push for the creation of a “supranational currency” to challenge the dollar. He called on other Shanghai group members to use each other’s currencies for trade.

“There can be no successful global currency system if the financial instruments that are used are denominated in only one currency,” Medvedev said. “Today this is the case and the currency is the dollar.”

Chinese Pledge

Hu pledged $10 billion to help the Shanghai group’s Central Asian members weather the global recession, joining Russia in seeking greater influence in the region through aid. Medvedev in February said Russia would contribute $7.5 billion to a regional fund created by the Eurasian Economic Community, which also includes Belarus, Kazakhstan, Kyrgyzstan and Tajikistan.

Today’s meetings “show a very strong desire of developing countries to play a bigger role in world finance, especially given the growing insecurity related to the current crisis,” said Masha Lipman, a political analyst at the Carnegie Center in Moscow, in an interview with Bloomberg Television today.

By Ralph Atkins in Frankfurt, Joshua Chaffin in Brussels,and Robert Anderson in Stockholm, June 11 2009 03:00

The European Central Bank has acted to head off a financial crisis in the Baltics, providing Sweden’s central bank with a €3bn loan in a confidence-boosting move amid growing fears over Latvia’s economy.

The ECB move signalled the central bank’s willingness to shore up official European help for countries such as Latvia, whose prime minister, Valdis Dombrovskis, voiced optimism that the country would soon receive another tranche of multi-national aid. The ECB’s loan to the Riksbank – a rare instance of aid for a country outside the eurozone – will be used to augment the Swedish central bank’s foreign reserves, increasing its capacity to help Sweden’s private-sector banks, which dominate the Baltic region’s financial sector.

Since the global financial crisis erupted, the ECB has been wary about extending help beyond the borders of the eurozone. Yesterday’s move suggested it was prepared to do that. Jean-Claude Trichet, ECB president, has been careful not to rule out stepping up help to the Baltic region, although such a move could prove controversial within the bank.

The €3bn being lent to the Riksbank is part of a previously undisclosed “swap” agreement, which was struck in December 2007 and allows the Swedish central bank to borrow up to €10bn in exchange for Swedish kronor for up to three months.

Last week, Mr Trichet revealed that it had an agreement allowing the Latvian central bank to obtain liquidity from the ECB, but only against euro-denominated collateral.

The ECB will worry about the financial risks and potential costs involved in stepping up to help for the Baltic countries, as well as the dangers of setting a precedent that might prove awkward in a future crisis in eastern Europe or elsewhere.

The Latvian lat has stabilised this week, boosting sentiment towards other eastern European currencies, after Riga said it had found another 500m lats in budget savings. This has raised hopes the International Monetary Fund will soon approve the next €1.4bn tranche of aid under Latvia’s stabilisation plan.

“This gives us certainty about the next tranche,” said Kristins Strazds, head of trading at SEB bank in Riga. “This should end the devaluation rumours in the short term.” However, Joaquin Almunia, European economic affairs commissioner, stressed in Brussels the need for Latvia to sustain its budget cuts over the long term.

Mr Almunia was speaking after a meeting with Mr Dombrovskis, who expressed confidence that Latvia’s parliament would next week approve the emergency budget cuts. Riga was now turning its attention to medium-term initiatives that would lower the deficit below 3 per cent of gross domestic product, Mr Dombrovskis said.

Earlier, Mr Dombrovskis told the Financial Times that the situation was beginning to stabilise. “It’s important … that people know that we will continue to receive this international loan package.”

Demanding a capital stake in a troubled company may seem like an odd thing to do at the height of the worst recession since the second world war, but for German workers it is fast becoming a powerful rallying cry. The idea of Mitarbeiterbeteiligung – employee participation in either the capital or the profits of their company – is catching on among trade unions and politicians. The move shows that amid the ravages of a brutal downturn, labor representatives, who have traditionally prioritized wage negotiations, are prepared to explore unfamiliar territory.

“Companies are saying to workers: ‘You must put up with this or that.’ Well, we’re saying, ‘OK, maybe we’ll go along with that, but only if we get something in return’ – from employment guarantees right up to a stake in the company,” says Berthold Huber, head of IG Metall, Germany’s biggest trade union.

Compared with other European countries, German employees have until now shown little enthusiasm for taking a stake in companies. A report published this year by the European Federation of Employee Share Ownership found only 1.7 per cent of the equity of large German companies was held by their workers, compared with a European average of 2.6 per cent and 4.5 per cent in France.

Yet the economic downturn is increasing the popularity of the idea in Germany. Businesses suffering from falling demand and a shortage of liquidity have been under pressure to cut their personnel costs. In this context, employees have little choice but to agree to concessions. However, they are starting to demand assurances that they will be rewarded after the crisis is over and the company returns to profitability.

Politicians also see the advantages of these arrangements and legislation was passed earlier this year to promote employee co-ownership. “Since the crisis began, the idea of giving workers a [capital] stake has become more attractive,” Olaf Scholz, labor minister said in Westdeutsche Allgemeine Zeitung. “Until now, workers have held too few of the shares in their companies.”

Leading the way is the cars sector whose weakened condition is forcing management and workers to embrace new ideas.

Daimler last month set up a working group to examine whether an employee profit bonus should be converted into a capital stake in the company to help reduce costs.

The talks follow the announcement of a €2bn (£1.8bn) cost savings programme that will cut the hours and pay of 60,000 workers by 8.75 per cent this year in exchange for job guarantees.

“We are the only shareholders who have a long-term interest in the company, in contrast to those [shareholders] who only want to make a quick profit,” Erich Klemm, head of Daimler’s works council, told a trade union conference.

Opel’s works council has mooted a similar plan in the battle to help rescue the troubled European arm of General Motors. In its bid for Opel, Magna, the Canadian auto parts maker appeared to take this message to heart – promising workers 10 per cent of the new company.

Meanwhile, workers may be given a stake in Schaeffler, the indebted car parts and industrial conglomerate, as part of an unprecedented deal with labor representatives to preserve jobs and cut €250m in costs.

Small and medium-sized companies are also beginning to recognise the benefits of the scheme, says Heinrich Beyer, director of the Arbeitsgemeinschaft Partnerschaft in der Wirtschaft (AGP), a sort of lobby group for companies with employee ownership arrangements.

“Workers have nothing to lose. With a profit share or capital stake they at least have a stake in the future,” he says. That’s the way many companies are thinking at the moment – and the unions too.”

However, IG Metall, which has 2.3m members in the German engineering sector, also retains considerable skepticism about the ability of employee ownership to help companies and their workers. “Opel will not be saved by just giving workers a stake – [the rescue package] will be of a far greater dimension”, Jörg Köther, a union spokesman, warns. “Employees who take a stake in their company . . . not only have to worry about [losing] their job but also bear an additional financial risk.”

Critics say trade unions have been unwilling to see their power diluted by employees becoming protocapitalists – German workers already influence big corporate decisions through their representation on supervisory boards.

Little surprise, then, that a study by the Institute for Employment Research (IAB) found that in 2005 only about 10 per cent of German companies had profit-sharing schemes, while a paltry 2 per cent enabled workers to put capital into the business.

These figures, taken at a time when the economy was stronger, corporate profits were soaring but wages stagnating – revealed a bleak picture of a German workforce that was failing to enjoy the fruits of its labor.

When Chancellor Angela Merkel’s coalition government came to power in 2005, ministers promised to do something about this. The government finally agreed a batch of new employee incentives last year (see box).

Goldbeck, a mid-sized inter-national commercial construction group based in Bielefeld, western Germany, is a model for how these incentives could work.

The family-owned business allows workers to purchase a “silent” capital stake up to the value of €1,055 each year.

The annual interest pay-out on this capital varies according to the profitability of the company but has averaged 12 per cent since the scheme was founded 25 years ago.

Although workers are not purchasing a say in how the company is run, they are motivated to work harder and there is better communication between staff and management, explains Thomas Domeyer, a Goldbeck financial officer.

“Employees have the feeling that they are partners in the firm and that at least a small piece of the company belongs to them,” he says. “As long as the company has good results, it’s very lucrative for them.”

However, Mr Domeyer acknowledges that the investment is not risk-free: “If the company became insolvent the money would be gone.

New German legislation designed to encourage employee co-ownership came into force on April 1. The tax-free limit on employee stake purchases was raised from €135 (£118) to €360 and a program of state top-up contributions was expanded.

An alternative model, backed by the Social Democratic party, gives employees the option of buying a stake in a so-called “Germany-fund”. The risk to workers is thereby reduced because the fund manages shares in several companies.

Companies hoping to take advantage of the improved tax breaks must also tread carefully because the legislation prohibits the simple substitution of a pay increase with a capital stake. Any capital participation must be in addition to agreed pay deals. However, Olaf Scholz, labor minister, said this week that exceptions to this rule might be necessary because of the economic crisis.

EUROZONE INFLATION FALLS TO ZERO

By Ralph Atkins in Frankfurt,  May 29, 2009