Before delving into economic equity, however, we need to understand the two key roles of money in ancient societies. A good place to start in understanding money is the book, Debt: The First 5,000 Years, written by, mind you, not an economist but a brilliant anthropologist, David Graeber. Another recommended reading is Credit and State Theories of Money by Randall Wray. Money, as we should be aware by now, is mostly credit, so a study of debt is effectively a study of money.
There are actually two roles that money has played over the ages. One is the use of money as an end in itself. This was the custom of materialistic societies, accumulating wealth in the form of money, or rather credit. Money in these societies was used to generate more money. The other type of societies used money to facilitate economic exchange. Money in itself didn't serve any other purpose. Of course, the first group would also use money for economic exchange, only that money also carried the important function of wealth or capital accumulation.
In the first case, the societies knew the means of restoring economic equity to enable them to return to normalcy. With the second case, the societies who restricted money's role to economic exchange however did not suffer from economic inequity. So they were never bedevilled by any economic imbalance though their lives might not be as economically prosperous as those of the first case. Once we grasp this key concept, identifying the solution to an end-of-cycle crisis is straightforward. The only problem is whether the leaders have the guts to implement it.
Let's see how ancient societies accumulated wealth. Wealth can be only stored on a widespread scale if credit money is predominant. Even now, although paper money has no intrinsic value, no one would think of keeping large sums physically with them. The risk of being robbed or being subjected to the ravages of misfortune makes it too perilous to keep it in its physical form. Similarly, storing wealth as precious metals exposes yourself to the same kind of risk. Other forms of storage, such as land makes it hard to liquidate in time of need. So ancient societies ingeniously invented credit but this presupposed a strong state to ensure that both parties to the debt agreement upheld their part of the bargain. With credit, there's no limit to how much wealth you can accumulate.
The earliest civilisation that's known to employ credit is Mesopotamia. Credit was recorded using clay tablets sealed in clay envelopes. The envelopes would be broken on repayment. The envelopes could be used as money for settlement of economic exchange as the tablets were engraved with payments to the bearer. Mesopotamia also had gold but it was kept in the safest place, its temples. The temple priests issued loans on the strength of the temple gold, this being the earliest form of banking. Through this means, the gold didn't have to physically circulate.
The debts bore interest. Debt payday was harvest time. Should the harvest fail, the debts could not be paid. The state handled this debt crisis by annulling the debts during the spring New Year festival or whenever a new ruler was sworn in. Debtors' cultivation rights were also restored and those held as debt pledges released. The state could do this as it held absolute power; the notion of democracy was non-existent. In our modern civilisation, the government would defer, instead of solving, this crisis by lowering the interest rates or backstopping not the borrowers, but the creditors, through the socialising of debts. This would work for a time. Eventually the debts would catch up on the borrowers or in the latter case on the government as the government would eventually be paralysed by the sheer volume of debts.
How about the second type of societies where debts were not prevalent? The best elucidation, cited in Graeber's book, that superbly encapsulates in one paragraph the role of money in these societies originates from Al-Ghazali (1058-1111 AD), an Islamic sage:
Dirhams and dinars are not created for any particular purpose; they are useless by themselves; they are like stones. They are created to circulate from hand to hand, to govern and to facilitate transactions. They are symbols to know the value and grade of goods.These societies did not practise usury. Although the Islamic societies during the Middle Ages are not considered ancient, one ancient society, Ancient Egypt before the Iron Age also did not impose interest on loans. It did not have to carry out debt annulment but just before its Late Period (732-30 BC), evidence of debt cancellation exists suggestive of credit accumulation and interest imposition.
Perplexingly, there are Muslim organisations now, disdainful of interest, but attempting to resurrect the gold dinar in order to store wealth in a non-depreciating currency. They fail to grasp that Al-Ghazali himself would have disapproved of their ill-thought-out project since monetary wealth accumulation would necessitate interest charging. And such accumulation would inevitably result in debt crises, something that the Islamic societies of the Middle Ages did not have to suffer. If you need to store wealth, do it in precious metals instead of currency.
Although societies that did not impose interest could avoid debt crises, they suffered from a serious weakness. Capital accumulation was weak. This was glaringly exposed in the Islamic caliphates after the Middle Ages. As long as they could raise vast quantities of gold and silver from expropriation of temples and palaces or from extraction from Central Asian mines, the Islamic caliphates could afford to employ troops to maintain or expand their territories.
However as the states in the West began to rise on the back of technological innovation, the Islamic empires began to decline. Technological innovation entails capital investment and it is here that the West with its strong credit accumulation trumped the Islamic states. In the West, credit or capital was available to anyone that could repay it with interest while in the Islamic world, only the governments had access to it.
It is not that the Islamic traders did not use credit in their trades. But credit in Islamic commerce was based on trust and therefore not easily available to those not within close circles. Their credit did not bear interest but was based on profit sharing. As a result, all parties to the arrangement must trust each other. Otherwise one party with knowledge of the business would cheat on the others.
All these contrasting features between the West and the Muslims were on full display in the Battle of Lepanto on 7 October, 1571. It was a naval battle off the western coast of Greece, between the fleet of the Ottoman empire and that of the Holy League which was made up of Venice, Spain and the Papal states. It was also notable as being the last naval battle in which galleys, powered by oared rowers, were used.
The Ottomans had more fighting men and galleys but the Holy League held the technological advantage. The League had more big guns, 1,815 against 750, and were of much better quality than those of the Ottomans. Their guns fired to the sides of the Ottoman ships, blasting and sinking them. The League also brought in a new type of huge vessel, the galleas, a forerunner of the galleon. It used both sails and oars, so it could carry more cannons, almost fifty. The Ottomans on the other hand relied mainly on galleys. And they were still stuck to the old-fashioned way of using the beaks of their galleys to ram and sink enemy ships. The guns that they had, fired high volleys and did not cause major damage to the League's ships.
The Christian soldiers were similarly better equipped. They wore steel breastplates and armed themselves with harquebuses while the Muslims, relied generally on recurved bows, their firearms being limited. It was a one-sided battle with the Muslim fleet almost annihilated. The outcome was decided by the lopsided number and quality of firearms. The root cause however was the easy availability of capital that had enabled the West to pursue innovations in firearms and shipbuilding.
The Ottomans' dearth of capital was demonstrated by the huge treasures of their admirals that were plundered by the Christians on board the Ottoman galleys. Ali Pasha, the commanding admiral of Ottoman fleet alone had 150,000 gold coins. Such hoarding of wealth implies that capital was not widely available for investment in the Ottoman empire and that the threat of seizure or confiscation was always looming.
As we go back to the current debt crisis, it's obvious that the solution lies in debt annulment. We know that won't be the case with the creditors now holding the upper hand. The only other alternative is inflation, a temporary dose of hyperinflation would surreptitiously wipe out the debts (see "Mugabe to the rescue"). But with politicians and policymakers idiotically enamoured of low inflation, not realising that it actually benefits creditors at the expense of debtors, that option is effectively shut out.
More interestingly, how would the future turn out for the role of money? Obviously, after the fifth Kondratieff Wave, estimated to end by 2080, technology advancement would have slowed down. Nation-states would fracture to smaller communities based on trust. Capital accumulation would no longer be an advantage as much as a disadvantage with more recurring debt crises. The only role for money of course is to facilitate trade exchange. For this we can rule out wealth accumulation and interest-bearing credit. Money as we now know it won't be the same, ever.