Chapter 10 of 14

The Ledger: Money, Banks and Debt as the Modern Fence

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Two rooms

On the afternoon of Monday 13 October 2008, the chief executives of nine of the largest banks in the United States were shown into a conference room at the Treasury in Washington. The world financial system was in the middle of its worst crisis since the 1930s. A month earlier the investment bank Lehman Brothers had collapsed; the insurance giant AIG had been rescued by the government; credit markets had frozen. Across the table sat the Treasury Secretary, Henry Paulson, a former chief executive of Goldman Sachs, together with the chairman of the Federal Reserve, Ben Bernanke, and the president of the Federal Reserve Bank of New York, Timothy Geithner.

Each banker was handed a single sheet of paper. It set out the terms on which the government would buy a stake in his bank — 125 billion dollars across the nine banks, the first instalment of a much larger programme. The terms were generous: a modest dividend, no control over management, no requirement to replace executives. Some of the bankers did not think their institutions needed the money, but the government wanted all of them to take it, so that no single bank would be stigmatised. By the evening, every one of them had signed.

A few hundred miles away, in an office of the mortgage company GMAC in Pennsylvania, another kind of document was being signed. In a deposition given in 2010, a GMAC employee named Jeffrey Stephan testified that he signed around ten thousand foreclosure documents a month — affidavits swearing that he had personally reviewed each homeowner's file and confirmed the debt. He had not; there was no time. He was one of many "robo-signers" across the mortgage industry whose signatures were used to take people's homes. In 2012, five of the largest mortgage servicers agreed to a twenty-five-billion-dollar settlement with federal and state authorities over these and other abuses. By then, millions of American families had lost their homes.

In one room, the ledger was rewritten to save the banks. In the other, it was used to evict their customers. This chapter is about the relationship between those two rooms.

The oldest fence

We have met debt many times in this book. In Chapter 2, the Sumerian word for interest meant a young goat, and families were taken into bondage when the harvest failed. In Chapter 4, Solon cancelled the debts of Athenian farmers and Rome abolished debt bondage for citizens. In Chapter 8, freed slaves in the American South were tied to the land by sharecropping debts. Debt has always been one of the farm's most effective fences, for a simple reason: it is a fence that the debtor carries inside his own head.

The anthropologist David Graeber, whose book Debt: The First 5,000 Years we have drawn on before, began it with a conversation at a garden party in London. He had been describing the debt crises of poor countries and the suffering caused by the measures imposed on them to keep paying, and a lawyer he was talking to replied, as if it settled the matter, that surely one has to pay one's debts. Graeber spent the rest of his book on that sentence. What made it so powerful, he argued, was that it turned a relationship of power into a matter of morality. A tax collector who takes your grain is plainly exercising power. A creditor who takes your house is merely collecting what you owe — and the failure, if there is one, is yours.

Modern economies run on debt to a degree that no previous society did. Governments borrow; companies borrow; households borrow to buy homes, cars, education and, increasingly, to cover ordinary living costs. Much of this borrowing is productive and freely chosen, and a society without credit would be far poorer. But the flows of interest that run through the modern ledger have a direction, and the purpose of this chapter is to follow them.

The bank and the war

The modern financial system has its origin, like so much of the farm, in war.

In 1694, the government of King William III of England, at war with France and unable to raise enough money through taxation, accepted a proposal from a group of merchants and financiers led by the Scottish projector William Paterson. They would lend the crown £1.2 million, raised from subscribers, at eight per cent interest. In return, the subscribers would be incorporated as a bank — the Governor and Company of the Bank of England — with the right to issue notes and conduct banking business. The Bank of England was born as a device to finance war through a permanent national debt.

The model was enormously successful. Over the following century Britain, with a smaller population than France, was able to borrow vast sums at low interest to fight a series of wars against its larger rival, and to win most of them. The historian John Brewer called the resulting state the "fiscal-military state". Its debt was held by a class of wealthy investors — the "fundholders" — and the interest on it was paid out of taxes. Much of that taxation fell on everyday consumption: excise duties on beer, salt, soap, candles, leather and other goods bought by ordinary households. In effect, a significant share of what working people paid in taxes flowed, through the national debt, to the people who owned it.

Contemporaries noticed. The radical journalist William Cobbett, in the early nineteenth century, railed against "the Thing" — his name for the whole system of national debt, paper money, taxation and placemen that he believed was draining the wealth of the labouring countryside into the pockets of fundholders and financiers. Cobbett's economics were often muddled, but his central observation was sound: the national debt was a mechanism for transferring income from taxpayers to bondholders, and the bondholders were rich.

The cross of gold

For most of the nineteenth century, the leading economies tied their money to gold. Under the gold standard, a currency could be exchanged for a fixed quantity of gold, and the amount of money in circulation was limited by the gold available.

The gold standard had many defenders, who saw it as a guarantee of sound money and honest dealing. But money that cannot expand easily tends, in a growing economy, to become scarcer and more valuable over time — which means that prices fall. In the United States, prices fell for much of the period from the 1870s to the 1890s. For anyone who owed money, falling prices were a disaster: the farmer who had borrowed a thousand dollars to buy land and equipment had to repay it in dollars that were worth more each year, earned by selling crops whose prices were falling. For anyone who was owed money, deflation was a gift.

The result was one of the great political breakouts of American history. Farmers in the South and the West, squeezed between falling crop prices, railroad freight rates and the interest charged by banks and merchants, organised the Farmers' Alliance, a movement of cooperatives, lecturers and newspapers that by the late 1880s had more than a million members. In 1892 they founded the People's Party — the Populists — which called for, among other things, an expansion of the money supply, a graduated income tax, public ownership of the railroads and a government-backed system of credit for farmers. In 1896 the Democratic Party adopted the Populists' demand for the free coinage of silver to expand the currency, and nominated as its presidential candidate a young congressman from Nebraska, William Jennings Bryan. At the party's convention, Bryan ended his speech with the most famous words ever spoken about money in American politics: "You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold."

Bryan lost the election to William McKinley, whose campaign was funded on an unprecedented scale by the banks and corporations of the East. The Populist movement collapsed. But many of its demands — a graduated income tax, the direct election of senators, a more flexible currency, public credit for farmers — became law within the following decades. As we saw at the end of the last chapter, the Federal Reserve was created in 1913, after J. P. Morgan's private rescue of the banks in 1907 had shown how dependent the American economy was on a handful of financiers.

A note on conspiracy

The history of banking is, more than any other subject in this book, surrounded by conspiracy theories, and it is worth pausing to say why this book will not repeat them.

The Federal Reserve Act was drafted in part at a private meeting of senators and bankers at the Jekyll Island Club in Georgia in November 1910. The meeting was kept secret at the time. It has since become the centrepiece of a whole literature claiming that a hidden cabal of bankers seized control of the American money supply. The meeting was real, and it is documented. So is the influence of bankers on the shape of the Fed. But the Federal Reserve Act was then debated publicly, amended and passed by Congress, and the Fed has been criticised, investigated and reformed in public ever since.

Worse, conspiracy theories about banking have for centuries been entangled with antisemitism, most notoriously in myths about the Rothschild family and "Jewish finance" that were used to justify persecution and, ultimately, genocide. Those myths are false, and they are not merely false but poisonous: they turn the real, analysable mechanics of debt and power into a fantasy about a hidden ethnic enemy. This book's argument is the opposite. As Chapter 1 put it, the farm works without a secret plan. Bankers, bondholders and central bankers respond to the incentives of their positions, often in public. The ledger is not hidden. It is merely complicated, and the complication is part of how it works.

Who makes money?

One of those complications concerns where money comes from.

Most people imagine that banks lend out money that savers have deposited. In 2014 the Bank of England published an article in its Quarterly Bulletin, "Money creation in the modern economy", explaining that this is largely the wrong way round. In modern economies, most of the money in circulation is not notes and coins issued by the central bank, but deposits in commercial banks — and those deposits are mostly created when banks make loans. When a bank lends a customer money to buy a house, it does not hand over someone else's savings; it simply credits the borrower's account with a new deposit, creating new money in the process. The bank's ability to do this is limited by regulation, by the demand for loans, by competition and by the central bank's interest rates. But within those limits, the power to create money rests largely with private banks, which earn interest on the money they create.

This is not a scandal, and it is not a secret; it is how modern banking works, and economists across the political spectrum accept it. But it has a consequence that matters for this book. The decision about who receives newly created money, and at what price, is made mostly by banks, on commercial grounds. In practice, that means the money flows first to those who already have assets to pledge as collateral — above all, property — and the interest flows back to the banks and to those who own them.

In 1971, President Richard Nixon closed the "gold window" through which foreign governments could exchange dollars for gold, ending the last link between the world's main currency and gold. Since then, all the major currencies have been "fiat" money, backed by the authority of the state and the decisions of central banks rather than by a metal. Some critics argue that fiat money is itself a form of theft from savers. That claim is contested, and most economists regard the gold standard's record — including its role in deepening the Great Depression — as a strong argument against returning to it. The more useful question for this book is not whether money is backed by gold, but who controls its creation and in whose interest it is managed.

The shepherds of money

Over the course of the twentieth century, the management of money passed increasingly into the hands of central banks — and, from the 1990s, central banks that were deliberately made independent of elected governments. The argument for independence was that politicians, facing elections, would always be tempted to print money and cause inflation; experts insulated from politics would manage money better. There is evidence that independent central banks have indeed kept inflation lower. But independence also took some of the most consequential decisions in the economy — the price of credit, the level of unemployment the economy would tolerate, the rescue of failing banks — out of democratic politics and placed them with a small body of technical experts, most of them economists and many of them former or future bankers.

The power of these shepherds was demonstrated most dramatically between 1979 and 1982. Facing inflation of over ten per cent a year, the chairman of the Federal Reserve, Paul Volcker, drove interest rates to unprecedented heights; the Fed's key rate peaked at around twenty per cent in 1981. The "Volcker shock" broke inflation. It also triggered the deepest American recession since the 1930s, with unemployment reaching nearly eleven per cent in late 1982, devastated manufacturing communities, and greatly weakened the bargaining power of trade unions. Inflation had eroded the real value of debts, to the benefit of debtors; the Volcker shock restored the value of money, to the benefit of creditors. As we will see in the next chapter, it was one of the turning points of the late twentieth century.

The household ledger

As the twentieth century went on, debt moved from the margins of ordinary life to its centre.

Instalment credit, which allowed people to buy cars, furniture and appliances on monthly payments, spread rapidly in the United States in the 1920s. In 1958 the Bank of America mailed sixty thousand unsolicited credit cards to residents of Fresno, California, launching the modern credit card. Over the following decades, credit cards, car loans, personal loans and, above all, mortgages became normal features of life throughout the rich world. By the third quarter of 2025, according to the Federal Reserve Bank of New York, American households owed some 18.6 trillion dollars.

At the bottom of the ledger, the price of credit is highest. A typical payday loan in the United States — a small, short-term loan against the borrower's next pay cheque — charges a fee that, according to the Consumer Financial Protection Bureau, is equivalent to an annual percentage rate of almost 400 per cent. The poorest borrowers, with the least collateral and the lowest credit scores, pay the most for money. The richest borrow most cheaply of all.

Credit scores themselves have become a kind of fence. Introduced widely in the United States from the late 1980s, they are used not only by lenders but by landlords, insurers and some employers. A family that falls behind on its debts finds it harder to rent a home, get insurance or find a job — and so harder to pay its debts. The ledger has become a record not only of what you owe, but of who you are allowed to be.

The most striking modern fence is student debt. In the United States, outstanding student loans reached around 1.65 trillion dollars in 2025, owed by more than forty million people. Unlike almost every other kind of consumer debt, student loans are extremely difficult to discharge in bankruptcy. Congress restricted the discharge of federal student loans in 1976, tightened the rules further in 1998, and in 2005 extended the same protection to most private student loans. A young person who borrows to study, and then cannot find work that pays enough to repay, may carry the debt for decades; in some cases, the government can deduct unpaid student loans from Social Security benefits in old age. There is no modern equivalent of Solon's shaking off of burdens. It is the closest thing in the contemporary rich world to the debt bondage of the ancient world: a debt incurred in youth that the debtor cannot escape.

Who owns the ledger?

Every debt is someone else's asset. When households pay interest on their mortgages, credit cards and student loans, and when governments pay interest on their bonds, the money goes to the owners of those debts — directly, or through the banks, pension funds and investment funds that hold them.

Ownership of financial assets is extraordinarily concentrated. According to the Federal Reserve's Distributional Financial Accounts, in 2025 the richest one per cent of American households held around half of all corporate equities and mutual fund shares, and the richest ten per cent held well over four-fifths. Bonds and other interest-bearing assets are similarly concentrated. Pension funds spread some of this ownership more widely, and many middle-class households hold a stake in the financial system through retirement accounts. But the great bulk of the income that flows through the ledger flows to the top.

The ledger also carries the divisions of the farm forward through time. In the 1930s, the federal Home Owners' Loan Corporation drew maps of American cities grading neighbourhoods by lending risk; areas with Black residents were typically shaded red and marked as hazardous. This "redlining" was adopted by private lenders and by the Federal Housing Administration, which for decades insured mortgages for white families in new suburbs while largely refusing them for Black families. The scholar Richard Rothstein, in The Color of Law (2017), showed how deliberate federal, state and local policy created segregated neighbourhoods. Because home equity is the main form of wealth for most American families, the effects compounded across generations. In 2022, according to the Federal Reserve's Survey of Consumer Finances, the median white household had a net worth of about $285,000; the median Black household, about $45,000.

2008

The crisis with which this chapter began grew out of the household ledger.

In the early 2000s, American lenders made millions of mortgages to borrowers who would struggle to repay them — "subprime" loans, often with low "teaser" rates that reset to much higher ones after a few years. Many borrowers were steered into these loans even when they qualified for better ones; Black and Hispanic borrowers were disproportionately targeted. The lenders did not keep the loans. They sold them to investment banks, which bundled them into securities, sliced the securities into layers of different risk and sold them to investors around the world. Credit-rating agencies, paid by the banks that issued the securities, gave many of them the highest possible rating. Everyone in the chain earned fees. The risk was passed along until it was held by everyone and understood by almost no one.

When house prices stopped rising in 2006 and borrowers began to default, the whole structure collapsed. The official Financial Crisis Inquiry Commission concluded in 2011 that the crisis had been avoidable, and that it was the result of widespread failures of financial regulation, corporate governance and risk management, and of excessive borrowing, risky investment and a lack of transparency.

The response revealed the farm's priorities with great clarity. The government and the Federal Reserve committed trillions of dollars in loans, guarantees and asset purchases to stabilise the financial system. The Troubled Asset Relief Program provided up to 700 billion dollars. AIG received assistance eventually totalling some 180 billion dollars — and in 2009, after the rescue, paid around 165 million dollars in bonuses to employees of the very division whose bets had nearly destroyed it. In fairness, much of the money lent to banks under TARP was repaid with interest, and the government ultimately made a profit on its bank investments. The rescue probably prevented a far worse depression. But its terms were set to protect the institutions and their creditors, not to make them pay for what they had done.

For homeowners, the help was far smaller and slower. The administration's main programme to modify mortgages, HAMP, was intended to help three to four million homeowners; it produced far fewer permanent modifications. Neil Barofsky, the special inspector general appointed to oversee TARP, later wrote that Timothy Geithner, by then Treasury Secretary, had described the programme to him as a way to "foam the runway" for the banks — to spread out foreclosures so that the banks could absorb the losses gradually. Geithner has disputed Barofsky's account. Between 2007 and 2010, according to the Survey of Consumer Finances, the median net worth of American households fell by almost forty per cent, much of it in home equity. The wealth of the richest households, concentrated in financial assets, recovered quickly as the Federal Reserve's policies drove up stock and bond prices; the Bank of England, discussing its own programme of asset purchases in 2012, acknowledged that their benefits had flowed disproportionately to the households holding the most financial assets.

No senior executive of a major American bank went to prison for conduct related to the crisis. In Iceland, whose banks had collapsed spectacularly, prosecutors convicted dozens of bankers and financiers. In the United States, the journalist Jesse Eisinger counted a single banker jailed for crisis-related wrongdoing: a mid-level trader at Credit Suisse.

In Europe, the crisis became a sovereign debt crisis. Greece, which had borrowed heavily from European banks, could no longer pay. In 2010 and after, the "troika" of the European Commission, the European Central Bank and the International Monetary Fund lent it vast sums on condition of severe cuts to pensions, wages and public services. A 2016 study by the ESMT business school in Berlin estimated that of more than two hundred billion euros lent to Greece, less than five per cent reached the Greek government's budget; most of it went to repay existing creditors and to recapitalise Greek banks. The loans rescued the creditors. The Greek people paid. Greece's economy shrank by around a quarter.

The ledger of nations

The modern ledger does not stop at national borders. Some of its harshest effects have fallen on whole countries.

In the 1970s, banks in New York, London and elsewhere, flush with deposits from oil-exporting states after the oil price rises of 1973 and 1979, lent heavily to the governments of developing countries, especially in Latin America. Much of this lending was in dollars at floating interest rates. When the Volcker shock drove American interest rates to around twenty per cent, the cost of servicing those loans soared, at the same time as the prices of the commodities these countries exported fell. In August 1982 the Mexican government announced that it could no longer meet its payments. Within months, much of Latin America was in the same position.

What followed is remembered in the region as la década perdida — the lost decade. The creditor banks were protected; the debtor countries were not. To obtain new loans and the rescheduling of old ones, governments had to accept programmes designed by the International Monetary Fund and the World Bank. These "structural adjustment" programmes typically required cuts in public spending and food subsidies, the privatisation of state enterprises, the opening of markets to foreign trade and investment, and the devaluation of currencies. In 1989 the economist John Williamson gave this package of policies the name by which it became known: the "Washington Consensus". For much of the 1980s, Latin America as a whole paid out more each year in interest and repayments to its foreign creditors than it received in new loans — a net transfer of resources from some of the poorer countries in the world to banks in some of the richest. Living standards fell across much of the region, and poverty rose. A partial write-down of the debts under the "Brady Plan", launched in 1989, eventually eased the crisis — after the banks had had a decade to strengthen their balance sheets.

The same pattern was repeated, with variations, across sub-Saharan Africa in the 1980s and 1990s, and again in the Asian financial crisis of 1997–98. It continues today. According to the United Nations Conference on Trade and Development, by 2024 some 3.3 billion people lived in countries that spent more on interest payments on their public debt than on either health or education.

Seen through the lens of this book, the international ledger performs the same function as the household ledger, on a larger scale. It is a fence that limits what governments may do for their own people, enforced not by soldiers but by the threat of being cut off from credit. And its shepherds — the economists and officials of the international financial institutions — present their conditions not as the demands of creditors but as the requirements of sound economics. Sometimes they are right. But the people who bear the cost of being wrong are rarely the people who made the loans.

The story

The ledger has its own story, and it is perhaps the most persuasive of all, because it is mostly true. Debts should be paid. Borrowers should take responsibility for their choices. Lenders who could not count on repayment would stop lending, and everyone would be poorer. Central banks should be run by experts, free from political pressure. Rescuing reckless borrowers creates "moral hazard" — it encourages others to be reckless too.

What the story leaves out is the asymmetry. The Victorian economist Walter Bagehot, in Lombard Street (1873), laid down the classic rule for central banks in a panic: lend freely, to solvent institutions, against good collateral, at a penalty rate of interest. In 2008 central banks lent freely — but often at very low rates, to institutions whose solvency was in doubt, against collateral of uncertain value. The doctrine of moral hazard was applied with great rigour to homeowners, to students and to the Greek state, and with remarkable flexibility to the banks. When the 99% fell behind, they were told that debts must be paid. When the institutions at the top of the ledger fell behind, the debts were rewritten.

That asymmetry is the oldest pattern in this book. The Mesopotamian kings who cancelled debts did so to protect their tax base; the Roman Senate that killed the Gracchi refused to give up the land. The modern farm cancels debts too. It simply chooses whose.

Breakouts

The ledger, like every fence, has been challenged.

In the late 1990s, a coalition of churches, charities and campaigners launched Jubilee 2000, named after the biblical year of release in which debts were forgiven and slaves set free. It called for the cancellation of the unpayable debts of the world's poorest countries, many of which were spending more on debt service than on health and education. Its petition gathered some twenty-four million signatures, and its supporters formed human chains around the summit meetings of the world's richest countries. The result was a series of international debt-relief initiatives, culminating in the Multilateral Debt Relief Initiative of 2005, which cancelled tens of billions of dollars of debt owed by poor countries to the World Bank, the IMF and other lenders. It was not the clean slate the campaigners had sought. But it was the largest debt cancellation in modern history, and it came about because millions of people insisted on it.

In Iceland in 2010 and 2011, voters twice rejected, in national referendums, agreements under which the Icelandic state would have repaid British and Dutch depositors in a failed Icelandic bank. In the United States after Occupy Wall Street, a group called Strike Debt bought portfolios of medical debt for pennies on the dollar and abolished it, in what it called a "Rolling Jubilee"; the charity now called Undue Medical Debt has since cancelled billions of dollars of such debt. Student borrowers organised by the Debt Collective, including former students of the collapsed for-profit Corinthian Colleges who refused to pay in 2015, won the cancellation of billions of dollars of loans. The federal government's broader attempt to cancel student debt was struck down by the Supreme Court in 2023, but other programmes have since discharged loans for hundreds of thousands of borrowers.

None of these breakouts has dismantled the ledger. But they have shown, once again, that debts are not laws of nature. They are relationships, and relationships can be renegotiated — when the people at the bottom of them are organised enough to demand it.

What the ledger teaches

The fence of the modern farm is, increasingly, debt: the mortgage that must be paid, the student loan that cannot be escaped, the credit score that determines where you can live and work, and the sovereign debt that determines what a nation's government may spend.

The feed is interest, fees and the rising value of assets: flows that run from households and governments to the holders of financial assets, who are overwhelmingly concentrated at the very top.

The shepherds are the bankers, the rating agencies, the regulators and, above all, the central bankers — experts deliberately removed from democratic control, managing the price of money in ways that decide who wins and who loses.

The story is that debts must be paid, that markets are neutral, that experts know best, and that rescuing the reckless creates moral hazard — a story applied with full force to those at the bottom and with great flexibility to those at the top.

The breakouts run from the Populists' crusade against the cross of gold to Jubilee 2000, the Icelandic referendums and the debt strikes of the twenty-first century. They are the modern heirs of the amargi — the return to the mother — with which this book's account of breakouts began.

Bridge: the euthanasia of the rentier

In 1936, in the closing chapter of The General Theory of Employment, Interest and Money, John Maynard Keynes looked forward to what he called the "euthanasia of the rentier" — the gradual disappearance, as capital became abundant and interest rates fell, of the class of people who lived without working on the income from their wealth. Eight years later, Keynes led the British delegation to the conference at Bretton Woods in New Hampshire that designed the post-war international monetary system: a world of fixed exchange rates, controls on the movement of capital, and governments committed to full employment.

For about three decades after 1945, something extraordinary happened in much of the rich world. Wages rose rapidly, inequality fell to the lowest levels ever recorded in industrial societies, and the power of finance was tightly restrained. Then, from the late 1970s, it all went into reverse. In the next chapter we ask why the farm conceded so much in those years — and how it took most of it back.