The Federal Reserve can be seen as the government’s instrument for creating surplus freedom. When its ability to distribute freedom bottlenecks at wary banks, a network of consumer credit can circumvent them. Modern credit is simulated freedom: The onetime symbol of interdependence has transformed into a way of gambling on a person's risk profile. Perversely, the more tolerance the system has for risk-taking, the greater its ability to invent more freedom.
The generative nature of risk tolerance creates a paradox for the modern bank, which must both gamble on the future and provide a storage place for wealth more secure than a mattress or a cookie jar. The idea of a bank predates the earliest forms of currency, with the collective stores of grains kept in Mesopotamian temples. The priests who had oversight of these stores soon evolved into brokers of sorts, negotiating with merchants and using the stores to back other sorts of exchanges, made with crude IOUs. If the debtor was trustworthy enough, the icon itself — typically a clay tablet split in half — could be passed around the market, with the final holder theoretically able to take it back to the debtor and expect repayment.
By fixing some daily element of human relations into a tradable thing banks made it plausible to imagine one day being freed from those relationships. The central storehouse became both a crude symbol of security — grain insured by gods and masonry — and its general currency an icon of hope for people who might someday free themselves from the dead weight of their neighbors. Paul Bohannan documented this transformative effect in his 1959 paper “The Impact of Money on an African Subsistence Economy” after studying the Tiv people in Nigeria. “The introduction of general purpose money and the concomitant spread of the market has divorced debt from kinship and status and has created the notion of debt in the subsistence sphere divorced from the activities of kinsmen and neighbors … Money is one of the shatteringly simplifying ideas of all time, and like any other new and compelling idea, it creates its own revolution.”
As banking evolved alongside money, it allowed democratic-seeming states to peg the beautiful ideals of equality and liberty to capital investment and inflation games. The Rothschild family, the heroes of modern banking, exemplify how banking, combined with the liberalizing movements of 19th century Europe, seemed to make dreams come true. The family’s finance conglomerate sprung from the inhuman cage of Frankfurt's Judengasse, the result of a local merchant's rise from coins and textile to government bills and loans to land barons. The Rothschilds also became patrons of arts and science, driving enlightenment along with interest rates, supporting works by Chopin, Rossini, and Balzac. There are more than 153 species and subspecies of insects named in their honor, along with 18 mammals and 58 varieties of birds. There is even an island in Antarctica named for their support of its exploration.
Mayer Amschel Rothschild was born at a time when Jews were prohibited from owning land outside of the overcrowded confinement of the Judengasse, where more than 3,000 people were crammed together on a street a quarter of a mile long and 12 feet wide. It was an era where grafittied posters depicting Jews bleeding the corpses of babies were common. Jews had to apply for a special pass to leave the city borders and had to pay double the toll of non-Jews when entering the city. Mayer Amschel was 12 when his parents died. He was sent to Hanover to apprentice as a coin and medal trader, and when he returned to Frankfurt as a young man, he set up a local operation with his brother Kalman, in part financed by the 2,400-gulden dowry from his marriage to a local court agent's daughter in 1770.
Mayer Amschel's business benefitted greatly from his association with the court, and he was able to expand his stock to include antiques and curiosities along with his coins and medals. He began circulating a catalog. By 1792, he was one of the wealthiest people in the Judengasse, with a net income of more than 100,000 gulden. In the early 1790s he began working directly with the Austrian government to supply their army with cash and grains during their occupation of the Rhine-Maine region.
"Three things would give an investor an edge of his rival," Niall Ferguson wrote in his history of the family, The House of Rothschild: Money's Prophets 1798-1848, "closeness to the centre of political life, the source of news; the speed with which he could receive news of events in states far and near; and the ability to manipulate the transmission of that news to other investors." This formula is the unambiguous heart of all successful banking: privileged access and manipulation. The Rothschilds’ close relationship with state powers led to the family's transformation from merchants to transnational bankers, developing "a salaried network of agents in other key financial markets, whose job it was not only to trade on their behalf but also to keep them supplied with the latest financial and political news." After the Battle of Waterloo, the Rothschild's privileged information network surpassed even the British government's. Meyer Amschel’s son Nathan received word of Wellington's victory a day before anyone else, prompting him to short-sell French war bills in anticipation of their coming devaluation, essentially defrauding investors.
The modern bank, which has derived from the Rothschild tradition, is not a place of aggregate safety. Its store of surplus money, of surplus freedom, has become a catalyst meant to dissolve the bonds between people, and to create a new structure in which one hand does not realize it’s holding another.
My first credit card arrived in the mail when I was 19. I was a sophomore at a state university in California. My parents paid the $3,000 yearly tuition for me, and I worked 20 hours a week in a research library to cover rent ($400 a month), food ($80 a month), and alcohol (whatever loose change was left over). I did not want a credit card. I didn't really want to believe credit existed. I thought it was an overgrown joke that a few too many people had taken seriously, like anal fisting or professional sports. When I opened the envelope and saw the gray plastic rectangle inside, a MasterCard from MBNA, I thought it must have been the result of a database error.
I couldn't imagine using the thing. It felt like a form of legal shoplifting, a free pass to a kind of liberty I hadn’t actually earned. Surely any serious cashier would look at the card and throw me out of their store for trying to buy something with it. I had believed my dad when said money was freedom, but I saw that credit could be liberating too. It frees those yoked with the belief that money is produced through honest work, offering a sample of another reality: that money is given not earned. Credit gives the ordinary person the experience of suddenly having money from nothing, of having one's portfolio magically double overnight. Those with a high enough credit score can enter the kingdom and accept citizenship in a new nation-state, whose borders are not geographic but psychological.
I stood at this border but couldn't yet think of a reason to cross it. It was scary to realize I could abandon the humble aphoristic world of my father for a place where things were not created through planning, saving, and achievement. The law of this other world was entropy and the collapse of the distinction between a want and need, whim and life plan. And there was nothing I actually wanted to buy at that age. Credit couldn't help me age to 21 more quickly. And yet I activated the card, signed the back, and put it into my wallet, where it sat for years before I actually used it.
The first thing I remember buying with a credit card was an iMac in 2006, almost 10 years after that first card arrived. I had just returned to the U.S. after four years overseas and thought having a computer to send emails and edit my résumé would be a worthwhile investment. And I couldn't check in at the university computer lab anymore. Because Apple gave a discount to people who used one of their associated credit cards to finance the purchase, which also came with a free printer, I signed up for a new card and came home with a $700 email machine.
With the computer I discovered a vast network of Internet commerce baited with free money in the form of a new credit-card account. There was $50 toward a Buy.com purchase, and $25 off from Amazon, each of which seduced me into stupid purchases that seemed utilitarian at the time — USB storage, a Wi-Fi receiver, books I never actually read. Suddenly I had more than $1,000 of debt spread across four credit cards. It took me almost four months to find a job, a seasonal temp position through a staffing agency. The company I worked for paid the agency $17 an hour for my work, of which $9 made it through to me: enough for my rent and groceries but not enough to pay down my debt. Many months I put more on the cards than I took off.
It was no accident that I received my first credit card. Credit card companies knew I was one of theirs based on my parents, dual-income homeowners with cars on financing. At 19, I wasn't like them yet, but the algorithmic spirit inside the credit-manufacturing machine was willing to bet that I would eventually get there.
Capitalism is nothing but a collection of rules, which are tenable only in the presence of other moderating rules. In Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism, published just after the collapse of the credit market in 2009, economists George A. Akerlof and Robert J. Shiller argued we are "not really in a crisis for capitalism. We must merely recognize that capitalism must live within certain rules." If money is a medium of exchange that changes the people it connects, is this money's fault or ours?
As the mechanism of credit and cash creation evolved into the obscurantism of derivatives and securities, the communal faith that money was infinitely tradable — and, thus, perpetually buoyant — made risk tolerance more valuable than currency itself. It was as if the grain in the ancient temple had suddenly become less valuable than the pots to cook it, so the priests gave grain away to everyone in exchange for crockery. They began to believe the real purpose of grain was to get pots, and when no one had more pots to give, they cut off access to the collective grain store.
"Nobody wants to hold [an excess supply of money],” economist Nick Rowe wrote on the website Worthwhile Canadian Initiative. “But everybody is perfectly willing to accept it, because he knows he can pass it on to someone else, who in turn accepts it because he knows he can pass on to another. I might buy a refrigerator even if I knew I could never sell it again. I would never buy money if I thought I could never sell it again."
These episodes of manic confusion leave the oily fingerprints of human delusion on pristine economic models, which are designed to be workable as a matter of logic rather than adrenaline and chased dreams. That such models aren’t workable in practice does not make them untrue. Nor does their clean symmetry doom us to a cyclical purgatory of insufficiency and unwitting self-destruction. They are artifacts from a separate world, one where we pass not as bodies but where our bodies are an asterisk affixed to a line on a balance sheet, a ghost in the line items.
Goldman Sachs CEO Lloyd Blankfein told a Senate subcommittee in 2010 when answering charges of short-selling clients — like the Rothschilds' dumping French war bills in advance of the news of Lord Wellington's victory at Waterloo — that "what we and other banks, rating agencies, and regulators failed to do was sound the alarm … that there was too much lending and too much leverage in the system — that credit had become too cheap."
There is something haunted in Blankfein’s sentiments, like a corpse describing its fatal accident at an autopsy. When the system fails it is because we have failed to perceive the cries for help sent out by its ghosts, disembodied by math, whose only remaining mode of self-expression comes through spending, moving numbers in ways that make the system seem to lurch and sob. Credit grows exponentially; the economy does not. Send help. Love, me.
My first formal debt in the world didn't come from a credit card. My dad had mismanaged his finances while I was in college, quitting his job in our hometown to take one 220 miles away. He put his and my mother's house on the market in 1998, during the first subprime crisis. Unable to sell the house I'd grown up in, he slept on a thin camping mat in the office on weekdays and drove six hours back to the house every weekend to try and renovate the old hulk in hopes of making it more marketable, taking out a second mortgage and running up his own credit cards in the process. He and my mother had promised they'd pay my tuition through college if I went to a state school, and I remember the softness in his voice when, halfway through my studies, he asked me if I would take a student loan to pay my own way for the last two years.
He'd run out of magic drapery to shield the discordant backstage of his finances from me. This was not a tragic nor especially dramatic moment. To have escaped college with only $6,000 of debt was a lucky turn for me. What was strange was how my sudden indebtedness made it as if we had changed roles. He seemed to think he owed me something, and he now had to admit he couldn’t pay. How can you release someone from an agreement you never actually made? I was sure he owed me nothing.
I thought about that moment, eyes cast downward like my father's, while I was waiting for the ATM to produce a $20 bill for me, the last one I had in my account. As I listened to the electric motor whirring behind the facade, looking up to see my exaggerated reflection in the mirror covering the security camera, I imagined the signals being sent from this nook in Manhattan to a server that would, within a minute or two, release an "Alert" email informing me that my balance has dipped below $25. The bank infobot does not care about me when I have more money than I need in the account, but it knows too well when insufficiency betides my stores.
These alerts have become commonplace for me and the 27 million other unemployed or underemployed Americans, their bank accounts hovering near empty. The luxuries of my lifestyle consist buying new socks and underwear a couple times a year — almost exclusively for emotional cheer — and spending $20 at a bar every week or so. I eat quinoa, brown rice, and canned beans. Moral tales of austere self-restraint don't have much to attach to in my daily life.
A few months earlier, I'd traveled to Vancouver for a story even though I'd just gotten one of these alerts of insufficiency. I'm still able to spend $300 on taxi, hotel, train fare to and from the airport, and feed myself because everyone I meet accepts my plastic credit card as easily as they would some ink-stained cloth. There is a distinction between the two objects for me, but for those I am begging help and food from, there is none. The magazine assured me they will reimburse the expenses.
And so I pass, a busy-seeming person secretly knowing that every dollar spent after the alarm of insufficiency is creating a negative world of obligation to some meta-organism, something irreducible to any one single face or feature, but which collectively forms an invisible country whose borders can be passed with no one's knowledge, besides me and the cashier. The only missing element is human acceptance of the invitation, a haunted scrawl of imperfection at the bottom of each receipt, surrounded by computer-modeled precision authorizing the numbers pass from one column to the other.
As one waits for the missing numbers to return to one side — it takes almost half a year before the reimbursement finally arrives, and $100 short — they pile up on the other. It's manageable, of course. Everyone is always paid in arrears. The money will come back to erase the black lumps of credit. What one needs is patience. Checks will be run again next week, or next month. Can you send the invoice again? It seems to have been misplaced. Do you still have those receipts? Are you sure that was the fee we'd agreed upon?
And down one dips into a minus world of debt, always temporary, the reprieve always a month away. When one bill is paid off another appears, the newly cleaned bright spot always framed with the lightless limbs of ghosts, people you needed once, who remain where you left them.
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Coming August 6: The New Inquiry Magazine, No. 7, Cops.