Back when I was in college, I had a roommate named Gary who I still see every once in a blue moon. Gary is a very smart guy who always had a finger on the pulse of popular culture, perhaps more than most. For some reason, I always remember one of the things he said during freshman year, long before my mind had turned from dreams of being an engineer (like most boys, I had erector set and Gilbert Chem lab fixation) to being an economist. He came out with the comment that “deficit spending is what made this country great”. That doesn’t sound like such a noteworthy comment if it had been made during the Reagan era when debt became so mainstream, but in 1971 it stood out and with hindsight almost seems prescient.
The history of debt is very much the history of mankind. Debt actually existed before money did. The conventional storyline that barter led to money and money led to credit, is backwards. Scholarly studies have shown that credit systems appear before coinage almost everywhere we look. The Mesopotamians were the first creditors as long ago as 3500 BC. The earliest written records in human history, Sumerian clay tablets, are accounting documents. Debt, interest, and credit predate the wheel, the alphabet, and government, as we know it. Sumerian temples stored grain and silver, lent to farmers and merchants, and charged interest. The word for “interest” in Sumerian (mash) also meant the offspring of livestock. Debt was conceived as something that naturally multiplied and was part of the growth cycle of life. When debts couldn’t be paid, debtors surrendered family members as labor. This was so destabilizing that Mesopotamian kings periodically issued “clean slate” decrees (andurarum), canceling agrarian debts wholesale to prevent social collapse. The Biblical concept of Jubilee descends directly from this practice. The first financial crisis came during the Babylonian period, when debt concentration was recognized as an existential political threat. Hammurabi’s Code (1754 BC) regulated debt, capped interest, and limited debt bondage, thereby becoming the world’s first consumer protection law. Ancient Greece is where debt first became explicitly political in the Western tradition. The spread of coinage accelerated debt markets but also speculation. Greek city-states borrowed to finance wars, becoming the first sovereign bond markets. But debt was always controvertial. Aristotle condemned lending at interest as “unnatural”. This argument would echo through Western civilization for 2,000 years. Roman history is littered with debt issues. Much of the conflict between Patricians and Plebeians was a debt conflict, with wealthy Romans lending to smallholders, then seizing land on default. Rome funded wars through taxation and booty, but also through publicani (tax-farming companies), which were private contractors who advanced taxes to the state and collected them back with profit. The world’s first publicly traded corporations.
The ancient Silk Road and Islamic world had to grapple with debt all the time. The Islamic world developed “hawala”, a trust-based debt transfer system allowing merchants to move value across continents without physically transporting coin. A debt owed in Baghdad could be settled in Cairo. This was more sophisticated than anything in medieval Europe. The Quran’s prohibition on riba (interest) forced Muslim scholars to develop creative debt instruments like profit-sharing (mudaraba), cost-plus financing (murabaha), all of which preserved the economic function of credit while technically avoiding interest. In medieval Europe, religion was central to the issue of debt. The Church condemned lending at interest as usury, citing Aristotle, Deuteronomy, and Aristotle’s “unnatural” money-breeding argument. Usurers could be excommunicated, denied burial in consecrated ground, and their wills invalidated. Since Jews were already excluded from Christian society, the usury prohibition didn’t apply to them in Christian eyes (though Jewish law also prohibited charging interest to fellow Jews). This created the iconic and tragic role of Jewish moneylender, immortalized by Shakespeare as Shylock in The Merchant of Venice. But debt could not be avoided…In practice, the prohibition was endlessly circumvented through “gifts,” penalties for late payment, partnership structures, and eventually the census (a debt instrument disguised as an annuity). The Church itself became a massive creditor through these vehicles. The Knights Templar ran the medieval world’s most sophisticated banking network using letters of credit to allow Crusaders to travel without carrying gold. Deposit in Paris, withdraw in Jerusalem. Philip IV of France destroyed the order in 1307 partly to escape his debts to them.
The Italian Renaissance saw the birth of modern finance with everything from bills of exchange to double-entry bookkeeping. Northern Italian city-states like Florence, Venice, and Genoa created the first real government bond market where citizens were forced to lend to the state, receiving interest-bearing certificates that could be traded. This was the ancestor of the Treasury market. The Financial Revolution began in Britain and this is where the American history of debt begins. The creation of The Bank of England in 1694 was the scene of the original sin. American debt began before the nation itself. Colonial merchants operated on credit from British suppliers, and colonial governments issued paper currency, often backed by little more than future tax revenues. The first American debt crisis came before the Revolution, as tobacco planters like Washington and Jefferson were chronically indebted to London creditors, a grievance that quietly fueled independence sentiment. Alexander Hamilton’s masterstroke as the first Treasury Secretary was assuming all state debts from the Revolution (roughly $75 million), and consolidating them into federal obligations. This was radical and created the first U.S. bond market, established federal creditworthiness, and was Hamilton’s deliberate strategy to bind moneyed interests to the new government’s survival. Jefferson and Madison hated it. The deal that passed it included moving the capital to the Potomac, one of history’s great debt-for-real-estate swaps.
Fast forward to the Reagan era and the Debt Revolution of the 1980s. Reagan’s tax cuts and defense spending created structural deficits. National debt tripled during his presidency, from ~$1T to ~$2.9T. Ideologically, this period marked the triumph of “deficits don’t matter” supply-side thinking on the right, displacing the old Republican fiscal conservatism. On Wall Street, Michael Milken’s junk bond revolution and the LBO wave redefined corporate debt as a strategic weapon rather than a necessary evil. But it was all driven by dreams of using debt for growth and prosperity, as ill-conceived as it might have been. We have now moved into a very different zone with regard to debt. The combination of government debt ($39 trillion), consumer debt ($19 trillion) and non-financial corporate debt ($14 trillion) has put us into very new debt territory as a nation. The through-line is a gradual moral and structural transformation: debt began as a necessary evil to be retired quickly, became an accepted tool of growth, then became the fundamental operating system of the American economy — individual, corporate, and governmental. The unresolved question of our era is whether decades of debt accumulation at near-zero rates has simply been deferred reckoning, or whether America’s unique position as issuer of the world’s reserve currency grants permanent exception to the rules that govern everyone else. Our recent lessons from the Trump/Xi China Summit would imply that counting on continuation of our reserve currency status might be a bit optimistic.
I just read something that suggested that we have made a shift from using debt as an ingredient for growth to a necessary ingredient for survival. If debt is what helped make this country great, it might also be what helps take this country to the sort of greatness only a MAGA person can appreciate…