I start my meditation with a true story that will serve as a parable. On his 21st birthday, the nature writer Francis Thompson was presented by his father with a bill for all the expenses of his upbringing including the costs of his birth and delivery. Francis paid the bill, but he never spoke to his father again. This story is recounted in David Graeber’s Debt: The First Five Thousand Years, an excellent account of the history of money. Yet Graber titled his book “debt”; did he just get it wrong, or did he uncover the essential nature of money?

We are immediately repelled by this story, yet at the same time, we have to concede a strange kind of justice to it. There is no doubt that the father was correct to point out to his son the obligation that he had, but in quantifying that obligation, he converted it into a debt, for that is the difference between an obligation and a debt: an obligation becomes a debt when you can put a number on it. “I owe you one” is an obligation; “I owe somebody $10” is a debt. Obligations bind people together even after they have been “paid.” But debts bind us only for as long as the debt exists. The relationship dies on payment of the debt. We might say that obligations bind us together, while debts drive us apart. By quantifying the obligation, Thompson’s father offered him the opportunity to dissolve it, to discharge it, and in doing so to end their relationship; his son took the offer and was no longer his son.

The economists tell us a neat story about the development of money. The primitive world, they tell us, begins in barter, develops in money, and matures in credit systems. The problem however, is that the historians and the anthropologists have been telling the economists, and telling them for over 100 years, that they can find no record of this development; in fact, the actual history seems to be just the opposite: first comes credit, then money, and finally barter systems. Widespread barter systems only come about after the collapse of monetary systems, and even then money is still used as a unit of account, as a way of equating dissimilar items.

Economic life begins in the family and the village, and in these structures, there is no accounting for debt. Rather, there are long chains of mutual obligations. In general, people do not barter goods; these are gift economies where each person’s surplus freely circulates throughout the village and the family as gifts. The fisherman, when he wants a pair of shoes, does not, as in the economists’ myth, search out a cobbler who wants some fish. Rather, he freely gives away his surplus fish, an act which gains him honor in the village; he is a man who can contribute to the village, and therefore worthy of honor. Perhaps some woman will notice that he is wearing tatty moccasins, which is not appropriate for a man of honor. She will undertake to make him some moccasins and thereby gain honor for herself. In village life, “honor” is the coin of the realm, and the economic system aims at circulating goods in such a way as to bind the members of the village together in a long chain of mutual obligations.

Barter does not work for two reasons. The first is that natural goods mature in due season. This means that for most of the year, the farmer has nothing to trade with the hunter save his promise to pay when the crop comes in. The second is that even simple production takes place in many steps and stages and over a period of time. Until the work is complete, there are no tradable goods, only a work-in-progress. This cannot be financed by barter, but only by a promise to pay when the work is completed and the product is sold.

Some barter does take place, but only with outsiders, with strangers. With visiting tribes or wandering strangers, there will often be an exchange of gifts that is indistinguishable from barter. The reason for this is obvious: since they will not meet again, or will meet only at odd intervals, the exchange must be immediate, and if honor is to be maintained, the gifts must be of equal value.

Money could not purchase anything because there was nothing to buy; there were no markets. Again, this was not because villagers are ignorant of markets, but rather because they made deliberate efforts to prevent the formation of markets, to bind the village together in long chains of mutual obligations. But such efforts are impossible with the growth of the village into the town and the city. When most of the people you meet are strangers rather than friends, the whole idea of the gift economy becomes impossible. Still, the idea of the obligation never disappears because society can never be anything more than a long chain of mutual obligations.

And herein lies the real power of money: it coordinates the actions of millions of strangers. Our lives are critically dependent on the actions of others; thousands of people contribute daily to our well-being, and all but a tiny fraction of them are strangers to us. How shall we acknowledge our debt to them, and they to us, except by the medium of money? Money then, is not so much a medium of exchange as a record of the obligations we have to each other, a series of debits and credits. A dollar in our pocket is at once the symbol of the labor we have performed for others, and an acknowledgment of the debt they have to us. Our dollar is a visible credit, a claim on that portion of all the goods and services that are being offered for sale. It is a token of exchange only by being the symbol of the debt.

And the history of money bears this out. Money existed as a unit of account for debts for nearly two millennia before it existed as coins and currency. As early as 3500 BC, Babylon developed as a sophisticated society with great cities, and all without the use of money, or at least without the use of currency. Currency would not begin until about 700 B.C. in Greece. In the great temples and palaces of the Babylonians (which served as the banks) we find extensive commercial records preserved in cuneiform tablets. This unit of account was the gur, the measure of barley that constituted the monthly ration, or it was the Shekel, a weight of silver whose value was arbitrarily set to the gur. Domestic debts were computed in gur, while foreign trade was conducted in silver that the temples advanced to the merchants. Debts were paid in real goods, which might be silver or barley or any other worthwhile product.

The use of money introduced something completely new into economic life, namely the invention of interest. Interest most likely began as a way of participating in the profits of the merchants. The Temple advanced silver to the merchants, and received interest as a convenient way of participating in profits. No arguments arose about how much profit was made and what the Temple’s share ought to be; the Temple’s share was fixed in advance. But what likely began as commercial loans, quickly spread to domestic loans; that which proved beneficial for Shekel debts proved disastrous for the barley debts. Farming is a hazardous occupation, and crop failures are inevitable. Debts piled up, and large parts of the population sank into debt peonage and slavery, destabilizing both the economy and the social order. In order to remedy this, the kings would, from time to time, declare a debt amnesty, canceling all the barley debts (but not the Shekel debts) and freeing the slaves. It is noteworthy that the first written use of the word “Freedom” occurs in one of these amnesty proclamations. The cuneiform symbols for “freedom” actually mean “return to mother,” signifying the return of the slave to his family. The famous Rosetta Stone is also a record of one of these amnesties. It became the custom that every king would begin his reign with a debt amnesty, and these amnesties became the “Jubilee” of the Hebrews when they returned from the Babylonian captivity. Ironically, the Jubilee was more favorable to lenders than the older Sabbath codes in Deuteronomy, which mandated a debt amnesty every seven years.

Usury was the bane of the Mesopotamian kingdoms, but in the amnesties they recognized the communal nature of society; while maintaining a strict commercial order, they recognized that debts could not multiply without it being the end of all social order. Usury was also the great social evil of the Roman Empire, as more and more farms disappeared into the great Latifundia, the estates of the aristocrats who were able to seize the land of the citizens who were off fighting Rome’s extensive wars. Daniel Graber notes that the Roman solution was not to declare amnesties, but to throw money at the problem. The wealth of the provinces poured into Rome to create a vast welfare state that demoralized the people while leaving the power of the aristocrats intact.

Rome and Greece were money societies where usury reigned, and the poor became, increasingly, the slaves of the rich. But neither slaves nor state dependents made good soldiers, and the armies became not so much a group of citizens defending their homes, as a group of professionals engaging in a trade. It took vast amounts of coinage to support these armies, and vast amounts of taxes or plunder to support the army; Alexander’s army of 120,000 men required half a ton of silver each day for their pay. Money and militarism went together. Basically, the government issued coins to pay their debts, and then demanded them back in the form of taxes. This set up a circulation of coinage which, as a by-product, set up the kinds of markets that we have today.

With the collapse of the Roman Empire in the West, society reverted to credit systems. There was coinage to be sure, but its value was not fixed, nor its metallic content nor purity. Kings would routinely “cry down” the value of their currency in order to dissolve their debts. This was actually a form of taxation in an era that did not have much in the way of taxes, and worked rather well so long as it was not abused. But much of commerce was carried on simply as credits and debits, often recorded in the form of tally sticks. A tally stick was a bit of hazel wood upon which a debt was recorded in the form of notches; the stick was then split in half. The creditor’s half was called the “stock,” which made him the stockholder, and the debtor’s half was called the stub. The stock would circulate as money, and as long as the stub remained it was impossible to change the debt.

Tally sticks circulated in England for 500 years. It is worth noting that when the Bank of England was founded, in 1694, one quarter of its capital was in the form of tally sticks. But the bankers wished to monopolize the creation of money, and immediately set out on a long campaign to get the tally sticks outlawed. And they got their wish when the Liberal party came to power in 1832. One of their first acts was to fulfill the agenda of the Bank of England. All of the tally sticks were gathered together and burned in a stove in the House of Lords. However, the fire got out of hand and burned down the Houses of Parliament. When we view Turner’s magnificent paintings of this event, we should keep in mind what it was all about.

Medieval merchants and local markets would also produce tokens or vouchers for their goods. Thus, for example, a baker would issue his own “money” which could be redeemed for his bread, while the butcher or the cobbler would do the same for their meat and shoes. These tokens would circulate as money on market day, and at the end of the day the merchants would settle accounts between them. Note that the baker would not issue more tokens than the bread he could bake nor the cobbler for the shoes he could make; the supply of this market money was always more or less equal to the goods the money could buy.

The banks triumphed in the end, even if it meant that they had to burn down the symbols of democratic order to do so. But a bank is not like a baker; a baker can issue credits only for the bread he can bake; a banker can issue credits in infinite amounts. We have in our mind a picture of the banks as lending out the deposits they receive, as serving as mere financial intermediaries. But this is not the case. A banker will never lend out the money you deposit; this he holds as reserves against losses, and for day-to-day cash transactions. No, the “money” he lends out is simply credits he creates by pressing a few buttons on the computer or by making a few entries in a ledger. The borrower may write checks against these credits, and at the end of the day the bankers settle up the checks between each other; no cash is involved. Now, this would not be a problem if the money was always lent for productive purposes. But insofar as the money is lent for speculation, then the money supply expands faster than the goods and services it is supposed to represent.

New money is injected into the economy, but unlike the baker’s money, that money matches no new goods. The claims on the existing stocks of goods and services are multiplied, but those stocks are not. The power of a small group of citizens is multiplied by the monopoly granted by the government. Compare the situation of the farmer and the banker: the farmer may increase his wealth only by work, the hard work of growing corn; the banker may increase his wealth, or at least his assets, by pressing a few buttons on the computer.

Herein lies the great secret of our money system: before you signed the mortgage to buy your home, or the note to buy your car, or the credit slip to buy a hamburger at McDonald’s, the money to buy the home, the car, or the burger did not exist; it comes into existence in the very act of borrowing it. Henry Ford once said, “If people understood how money was created, there would be a revolution before breakfast.” But Mr. Ford was wrong; there will be no revolution because people will simply not believe that money can be created so easily. But alas, that is indeed the way the system works.

Here we may return to our original parable, the sad tale of how indissoluble obligations were turned into temporary debts; of how the ties that bind are easily dissolved by putting a number on them. We cannot help but be a society of strangers, yet underneath this, we cannot be a society at all unless we recognize our mutual obligations to one another. It is possible that our rude ancestors had it right all along: that obligations are more important than debts, and that amnesties are the key to economic and social order. Surely this question faces us now with a force that cannot be ignored. We are truly in each other’s debt, but it is a debt that extends beyond the mere payment of the sum of money. Money is a useful, even a marvelous tool, but like a fire it can either warm or destroy us. In his latest encyclical, Pope Benedict XVI saw in the root of all financial dealings, a “principle of gratuitousness,” a principle that binds society together in a way that exceeds mere money debts. Money itself is merely the credit we extend to each other, and that “credit” has as its root credo, “I believe.” For along with faith in God we need faith in each other; credo in unum Deo cannot be replaced with credo in unum dollar.