Why do we repay debts?
The Bank of England recently put out a report stating that the way in which many people think that money and banking works is simply wrong and that these falsehoods are often perpetuated by economics textbooks. They presented the frankly startling position that money which we are lent by banks simply does not exist.
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When we get a loan from the bank they are not handing over other people’s deposits, rather the money is created along with the loan. It is often assumed that when a bank loans out money what they are handing out is the deposits of other people but as Ryland Thomas (one of the authors of the report and part of the Bank of England’s Monetary Analysis Directorate) states in a video (see below):
“Loans create deposits not the other way round”
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While this is not necessarily news to many people the fact that the Bank of England find it necessary to debunk this myth suggests it is quite widespread. The outcome of this insight has been for some to suggest, quite justifiably, that the money does not really exist. If the loan was created merely through tapping a keyboard then the debt under which people are held does not really exist either.
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If the debt is not real why do we repay it? Today debt is not primarily an economic phenomenon so much as it is a political one the consequences of which are determined by structures of meaning not economic facts. If a loan is not real, at least not in the same way that one lends a a bike, and is made up out of nowhere surely it can be destroyed or deleted just as easily as it was made. With the case of a physical loan of an object it is quite clear that the loan cannot just be deleted as there is a physical object which exists in the world. A loan does not exist on the same level of reality. We know that loans can be simply written off as this happens all the time.
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What has been created when a loan is taken out is a set of social relations which hold people in legally prescribed relationships with one another. Of course social relations are important, really existing phenomena, but they are also malleable. The entirely mythical character of debt highlights the way in which financial systems work today. Those in power make the truth they want. For indebted individuals the loan is real, solid and must be repaid, for the creditor it can be sold off in the secondary debt market for a profit.
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Of course all money is to some extent a social construction but the fictionalisation of money in its current fashion is fairly new. For Marx value was “congealed labour” and a product has a particular value on the market because it contains the labour of the people who produced it. The financialized capitalism of today has seemingly broken this relationship between labour and money, as Franco Berardi suggested, we have seen the “emancipation of money …from the industrial production of things” (Berardi, 2012: 139). The consequence of this separation between value and material things is that the “meaning” of money is not tied to a material reality. In previous eras of capitalism profit was generated from the extraction of “surplus value” from labour; paying the workers less than the value which they produced. In the overdeveloped nations today, however, profit now takes two main forms; rent for services and interest for capital. We have, then, economies built on consumption funded by debt and rent (Douzinas, 2013: 26).
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If we are in a situation in which value and profit bear no direct relation to material production and the phantoms of debt and rent are at the centre of the economy then what is holding it all together?
Promises.
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The meaning of the debt in which so many people are held has been created by powerful actors to work in their own favour. Much of the debt which people are in will never be paid back and the creditors never intend to recoup. They are quite happy to sell it off as junk debt. If this debt bore any relation to “real” value creditors would not be able to afford to simply write of the debt. So why not change the meaning of this debt? Change the meaning of the promise.
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In our debt economies money is defined by language and social relations which are unique phenomena in their ability to be shifted through a change in ways of thinking. We create meaning every day, new words are born all the time. Costas Douzinas suggests that we must disavow ourselves of the notion that economics is anything like an exact science. Different economic policies are often based on the same data but different outcomes are expected. Economics is, rather, an argument won by force (Douzinas, 2013: 21).
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The debt we have is not fixed in other people’s assets (such as their houses) like it was for George Bailey in It’s a Wonderful Life, rather it is in social relations which structure the conditions which encourage us into debt and dictate how we should live while we pay it back.
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Berardi, F. (2012) The Uprising: On Poetry and Finance. Los Angeles: semiotext(e).
Douzinas, C. (2013) Philosophy and Resistance in the Crisis. Cambridge: Polity.
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