Robert Kuttner reviews David Graeber‘s Debt: The First 5,000 Years as a way of saying cancel the debts (and redistribute the land):
Graeber, an American teaching at Goldsmiths, a part of the University of London, begins his book with an anecdote. He is attending a garden party at Westminster Abbey. The guests are international activists and do-gooders, corporate liberals as well as antiglobalization radicals. He falls into a conversation with a lawyer for a foundation and explains his involvement in the campaign to stop the International Monetary Fund from imposing austerity on third-world nations. He mentions the biblical Jubilee, in which Hebrew kings periodically proclaimed debts forgiven.
“‘But,’ she objected, as if this were self-evident, ‘they’d borrowed the money! Surely one has to pay one’s debts.’”
Graeber reminds her that even in standard economic theory, “a lender is supposed to accept a certain degree of risk.” Indeed, the higher the anticipated return, the more likely the danger of default. Yet the premise that “surely one has to pay one’s debts” is so persuasive, Graeber writes, “because it’s not actually an economic statement: it’s a moral statement.” A debt, by definition, is something you owe that must be repaid.
Despite his twenty years as a columnist for Business Week, Kuttner never really addresses the nature of corporate debt and how it might contrast with either personal debt or public debt.
When ordinary people think of debt, they think of personal debt — improvident people borrowing money to buy things they don’t really need, and to buy them now, rather than later.
In business though, debt isn’t a way to conspicuously consume beyond your means; it’s a way of financing your enterprise. The other way is equity, or shares of stock. Historically most outside financing was debt, because owning a share of the business meant becoming part-owner of the business, with all the liability that entailed — and only earning your share of whatever profits the real owner cooked the books to show.
Eventually business law matured to the point where the owners of joint-stock companies faced limited liability, and firms could declare bankruptcy. Kuttner touches on this without emphasizing how different this is from modern personal bankruptcy used to discharge credit-card debt:
My own research explores a pivotal event in the history of debt — the invention of modern bankruptcy, in 1706, by ministers of Queen Anne. Before 1706, bankruptcy simply meant insolvency, and the bankrupt was packed off to debtors’ prison. It dawned on the reformers of the day that this practice was economically irrational. As the legal historian of bankruptcy Bruce Mann wrote, “it beggared debtors without significantly benefiting creditors.” Once behind bars, a debtor had no means of resuming productive economic life, much less satisfying his debts. In this insight was the germ of Chapter 11 of the modern US bankruptcy code, the provision that allows an insolvent corporation to write off old debts and have a fresh start as a going concern.
The British devised the concept of legal discharge from debt not out of a sudden attack of compassion but because the economic crisis of the 1690s had put much of the merchant class in jail. The cause was not improvident or immoral behavior on the part of debtors, but general economic dislocation beyond their control, caused by the confluence of bubonic plague, recent wars with France, and a storm that devastated the merchant fleet in 1703. The future novelist Daniel Defoe was a leading pamphleteer promoting the idea that debtors might settle with creditors at so many pence to the pound and then have their debts legally discharged. Defoe had himself spent some months in debtors’ prison in 1692 and 1693.
But when the law was finally enacted, allowing a magistrate to settle debts with partial repayment, only substantial merchants could qualify for relief. Common debtors still languished in jail, since their penury had scant wider consequences. Yet an important conceptual breakthrough had occurred. Canceling some debts was deemed economically efficient. Legal historians such as Bruce Mann have observed that, for capitalism to proceed, it was necessary to shift the economic thinking and legal policy governing debt from moral questions to instrumental ones.
Modern Chapter 11 bankruptcy is not old-fashioned bankruptcy. That‘s Chapter 7 bankruptcy, where the business ceases operations, and a trustee sells all of its assets and distributes the proceeds to its creditors.
Modern Chapter 11 bankruptcy often wipes out the shareholders — the former “owners” — but allows the company to continue operations, if it is worth more to its new owners — the creditors — as a going concern than as a simple jumble of assets.
Kuttner sees this as a double standard:
The double standard in debt relief that favored large merchants, present at the creation of bankruptcy law in 1706, persists today in many different forms. It gets surprisingly little attention in the debt debates. Despite the tacit assumption that “surely one has to pay one’s debts,” the evasion of repayment is both widespread and selective. Corporate executives routinely walk away from their debts via Chapter 11 of the national bankruptcy law when that seems expedient. Morality scarcely enters the conversation — this is strictly business.
Even more galling is the fact that the executives who drove the company into the ground often keep control by means of a doctrine known as debtor-in- possession. A judge simply permits the company to write off old debts, while creditors collect so many cents on the dollar out of available assets. Every major airline has now been through bankruptcy, and US Airways has gone in and out of Chapter 11 twice. In this process, all creditors are not created equal. Since banks typically have liens on the aircraft, bankers get paid ahead of others. Major losers are employees and retirees, since Chapter 11 allows a corporation to break a labor contact or reduce pension debts. Shareholders also lose, but by the time bankruptcy is declared, the company’s share value has usually dwindled to almost nothing. Much of the private equity industry uses the strategy of acquiring a company, taking it into bankruptcy, thus shedding its debts, and then cashing in on its subsequent profitability. Despite the misleading term private “equity,” tax-deductible private debt is the essence of this industry, which relies heavily on borrowed money to finance its takeovers.
Homeowners, however, are explicitly prohibited from using the bankruptcy code to reduce their outstanding mortgage debt.
Kuttner clearly sees debt along the progressive-liberal oppressor-oppressed axis of Arnold Kling’s three-axis model. Big creditors are oppressors. Small debtors are oppressed. End of story.