Chapter 8: Negotiable Debt, A Bit of History



This chapter is a quick summary and clarification of what happens when debt becomes negotiable. The focus is on money, but other aspects are referred to, highlighting the general undesirability of making debt negotiable. There will be some repetition of material previously covered, for the sake of assembling it all in one place.


We all know what money is: a special, universal kind of property whose purpose is to be exchanged for things that are up for sale. Because money can buy almost anything, hijacking the money supply is an obvious objective for any person or class that wishes to become massively wealthy and/or powerful.


Thousands of years ago, when money was valuable metal, a simple way of doing this emerged. Having accumulated a quantity of the metal, a person or institution could issue promises-to pay, and these promises-to-pay could circulate as money. While their promises circulated, nothing needed to be paid out: the promises themselves acted as money. And because the promises were valuable, they could be lent at interest.


The promises were, of course, a form of debt. The issuer owed (in theory) the amount written on the note, or represented by numbers in an account, to anyone owning a ‘promise’.


Debt lent at interest! It’s an idea that still seems strange and unfamiliar, even though it has dominated the world of wealth and power on and off for thousands of years.


This strange hybrid of debt and money is known today as ‘credit’. We are all familiar with ‘credit’; when we have money at the bank, we are ‘in credit’. Legally, the bank owes us money. The bank’s debt circulates as money, so it is best referred to as ‘circulating credit’.


For credit to work as money, the State must support the idea that debt can be bought and sold. When debt can be bought and sold, it is called ‘negotiable’. Negotiable debt and circulating credit are, therefore, the same thing.


A State does not make debt ‘negotiable’ out of love for bankers and financiers: it does it because it increases the power and wealth of the State. Today, for instance, when debt is negotiable, a person who lends money to a government or a big corporation gets an asset in return – a ‘bond’ – which can be bought and sold. A lender loses nothing by lending, because the bond they get in return is as valuable as (or more valuable than) the money lent.[1] When debt is ‘negotiable’ makes it much easier for governments to borrow.


This method of using law to exploit citizens is alive and well today. All across the world, laws are in place to support the buying and selling of debt. They underpin the globalisation of financial power, they make the powers of finance and politics heavily dependent on each other, and they siphon money and assets from the rest of us in such a way that we notice the results, but not the process.


There was a precise decade in modern history when negotiable debt was first established in law. This was in England, by the English Parliament, between the years of 1694 and 1704.[2] At that time, Parliament consisted of rich males voted in by other rich males.[3] The most significant laws were the Bank of England Act (1694) and the Promissory Notes Act (1704).[4]


This was when the practice was precisely authorised in law, but the practice of negotiable debt has an ancient history, and this chapter aims to give a very brief survey of that history. Not much information is available on the subject, partly because time has obliterated much of the evidence, but also because economists pay little attention to the subject and historians tend to ignore it or refer to it only in passing.


It’s been very interesting nevertheless trawling through the literature on economies in ancient civilisations looking for signs of a history.[5]



Starting with ancient Mesopotamia, we find temples and palaces holding all the gold and silver and renting out credit notes in the form of clay tablets that contain a negotiability clause: ‘pay the bearer of this tablet’.[6] These tablets were a form of circulating credit.

In other words, the ruling order employed an ancient form of fractional reserve banking. In 1928, A.H. Pruessner wrote of these clay tablets: ‘imperfect though they were, these early notes contained in embryo the principle by which it was made possible to divest a debt of its personal character as between the contracting parties, and bind it as it were to the record of indebtedness, which then could be passed readily from person to person as a representative of money. After this principle was once discovered, its advantages and benefits were found to be so manifold that nothing could stay its victorious advance.’[7]


These ‘advantages and benefits’ were, of course, mostly to the ruling class. In ancient Mesopotamia, debt crises were a regular occurrence. Rulers found it politic to cancel all debts every now and then, to prevent debt-slavery engulfing the nation.[8]


Moving on to Ancient Greece, historians traditionally asserted that its economy and payment systems were based on coin. Then in 1992, Edward E. Cohen, himself a banker, pointed to the overwhelming evidence that by the fourth century in ancient Athens, banks and bank-credit were very significant indeed. His book Athenian Economy and Society: A Banking Perspective is dense and learned.[9]

It is significant that during the fourth century in Athens, all pretence of social equality among free men disappeared. Athenian democracy became subservient to wealth and celebrity moderated by so-called ‘sycophants’ who puffed up and brought down wealthy citizens for profit, much as the tabloid newspapers do today.[10] And in this new political climate a series of stupid mistakes led to the downfall of the Athenian city-state.[11]

Moving on to Ancient Rome, recent books and scholarly articles have established that it, too, had fractional reserve banking.[12] But another form of negotiable debt in the Roman Empire has attracted more attention over the years, and that is tax farming. Tax farming occurs when a ruling order finds it tiresome to organise tax-collection: instead, it auctions off the tax-debts of citizens to private enterprise, to ‘tax-farmers’, referred to in Latin as ‘publicani’. It is a limited form of debt negotiability, but it had stupendous consequences.

With the help of state-violence, these tax-farmers collected the taxes plus a bit extra – or more often, a lot extra – for themselves. According to tax historian Charles Adams, Roman tax-farmers formed the first private business corporations, and their shares were bought and sold in the Forum.[13] The ruling class invested heavily in their companies, and individuals became fantastically rich.

Historian A.H.M. Jones comments that this selling-off of debt corrupted the political and financial system of the Roman republic from top to bottom. Provincial governors became greed-obsessed, top senators invested in profitable tax-extortion, and ordinary working people were driven into debt.[14] Parallels with today’s privatizations spring to mind.

Charles Adams blames these tax-farmers not just for the downfall of the Roman Republic; but also, and more momentously, for the eclipse of republican and democratic forms of government for fifteen hundred years.[15]


In Europe, the so-called Dark Ages provided some respite from these extortions via negotiable debt. Trade became difficult, and rulers could only consume what was locally produced. There wasn’t much point over-exploiting peasants and craft workers if you couldn’t sell their produce abroad.[16]

By the time what we call ‘civilization’ began to return with the Middle Ages, the Church was enforcing harsh laws against usury. The Church had become not just a moral influence, it was also by this time a worldly power.

Powerful princes and merchants found ways around these laws of usury.[17] But monarchs and barons were wary of giving power to the growing merchant class: they were as likely to rob as to borrow from them, and frequently they did both – by borrowing and then defaulting on their debts.

As trade returned, so the merchant class grew in strength, and pressure grew again for debt to be legally recognised as a negotiable commodity. After several centuries of pushing against the existing order, the merchant class was victorious and today, all legal systems provide some way in which debt can be bought and sold.[18]

To finish off this micro-survey, there is one small tale left to relate, and that is of 18th Century France.

In 1720, the same year as the South Sea Bubble in England, a Scotsman named John Law brought financial disaster to France. He concocted a wild scheme involving bank-credit and national debt consolidated into shares in a project to develop Mississippi. This resulted in the Mississippi Bubble, which bankrupted a lot of wealthy Frenchmen. After this, the French were wary of banks for a century or more.

Tax-farming, on the other hand, suited the lazy monarchy well. Extortion of the peasantry and the middle classes was conducted via tax-farming, and this helped bring on the Revolution.

After the Revolution, the government lacked a developed credit and banking system to finance its adventures, so it tried the clumsy mechanism of printing money – which led to grotesque inflation.[19] On the back of this, Napoleon came to power. He took France to war, relying on plunder and taxation of conquered territories to finance his armies. His British enemies relied on created credit. An article in the Journal of Economic History describes how the war was won by British credit:[20] once again, credit had played a vital role in warfare.


Created credit in the form of negotiable debt has a double involvement with war. Not only does it support war on a basis of ‘fight now, pay later’; it creates economic conditions that depend upon arms production to keep the economy healthy. Economist Joan Robinson explains in Freedom and Necessity how huge expenditures on arms kept Western economies healthy during the Cold War. The well-off were taxed, supplying money to workers who would spend it upon the products of other industries.[21]


These confusions make negotiable debt, in one form or another, the ideal technique for robbery and exploitation. And more recently, it has turned democracy into kleptocracy.


All this becomes very relevant when considering how the system might be reformed.



[1] Adam Smith pointed this out two hundred and thirty years ago. “The security which it (the government) grants to the original creditor, is made transferable to any other creditor; and from the universal confidence in the justice of the state, generally sells in the market for more than was originally paid for it. The merchant or monied man makes money by lending money to government, and instead of diminishing, increases his trading capital.” Wealth of Nations (1776) Book 5, Chapter 3.

[2] Richards, R.D. The Early History of Banking in England (1958); Holdsworth. A History of English Law Vol 8 (1925) pp. 177-192; Coquillette, Daniel, The Civilian Writers of the Doctors’ Commons, London (1988).

[3] ‘Each society in which commerce plays a role sooner or later has to face a strong demand to increase the circulation of credit.’ Reinhard Zimmermann, The Law of Obligations (1996) p.59. ‘The circulation of credit’ is of course another way of saying ‘negotiable debt’.

[4] These laws have been supplemented by licensing and regulations which limit the number of businesses allowed to join the money-creation game.

[5] Not many historians go into detail of whether debts were transferable, let alone analyse the effects. Economists steer clear of the subject and historians are apt to miss its significance too. Why do economists neglect it? There is a famous story that Paul Krugman once said to Bernard Lietaer: “Didn’t they warn you about not touching the monetary system? If you insist on talking about it, it will kill you academically. It takes a university economist completely out of the system of peer approvals”. The story is confirmed by Lietaer in Rethinking Money (2013) p.36. Keynes and Milton Friedman both wrote about how banks create money early in their careers, only to drop the subject when they realised it was pointless and self-destructive: Keynes in A Treatise on Money (1930), based on the work of C.A. Phillips; Friedman in ‘A Monetary and Fiscal Framework for Economic Stability’ The American Economic Review, Vol. 38, No. 3 (June 1948).

[6] David Graeber Debt, The First 5,000 Years (2011) p. 214.

[7] A. H. Pruessner, The Earliest Traces of Negotiable Instruments, The American Journal of Semitic Languages and Literatures Vol. 44, No. 2, Jan 1928. The 1920’s were the last days of substantial honesty in created debt. It is significant that Pruessner was not a recognised economist.

[8] They were able to do this easily, because most of the debt was owed to themselves! Economist Michael Hudson points out that these debt jubilees were in the rulers’ interest, because war was a regular occurrence. Armies of slaves are not passionate fighters and are liable to turn on their masters. Debt jubilees also prevented the growth of a class of ‘creditor-entrepreneurs’ whose power might grow to rival that of the rulers. Hudson (ed.) Debt and Economic Renewal in the Ancient Near East (2002) p.37. Also see Marc Van De Mieroop, A History of the Ancient Near East (2010) p. 94.

[9] And in Harris (ed.) The Monetary Systems of the Greeks and Romans Cohen writes ‘Athens avoided the artificial (dare we say ‘primitive’?) condition of the United States … Athenian bankers and vendors generated ‘money’ without the legalistic dependence on physical metals familiar from the recent history of the United States.’ Pp 82-3.

[10] Jacob Burckhardt, tr.  Sheila Stern pp  304-5: ‘It must have been at this period that differences in fortune began to be more evident in the way people lived… the great Athens of old was gone and beyond recall.’

[11] Taking into account the earlier episode (6th C. BCE) of harsh inequality, debt slavery and reforms under Solon, it seems possible that before banking and before coin, perhaps early Athenian payment systems were similar to those in ancient Mesopotamia: credit managed by clan powers. Richard Seaford in The Monetary Systems of the Greeks and Romans ed. Harris (2006): p.50: ‘…the kind of command economy (more specifically ‘redistributive economy’) such as we find in the ancient Near East. In Greece this may have obtained in the Bronze Age but is not found in the polis of the archaic and classical periods.’

[12], also ‘Fractional Reserve Banking in the Roman Republic and Empire’ by Andrew Collins and John Walsh in Ancient Society 44:179–212, January 2014.

[13] Charles Adams, Good and Evil: The Impact of Taxes on the Course of Civilization (1993). Chapter 8 is headed ‘The Publicani drive the Republic to Ruin.’

[14] Jones, A.H.M. (1968) A History of Rome Through the Fifth Century. Vol. 1, The Republic: ‘Oppression and extortion began very early in the provinces and reached fantastic proportions in the later republic. Most governors were primarily interested in acquiring military glory and in making money during their year in office, and the companies which farmed the taxes expected to make ample profits. There was usually collusion between the governor and the tax contractors and the senate was too far away to exercise any effective control over either. The other great abuse of the provinces was extensive moneylending at exorbitant rates of interest to the provincial communities, which could not raise enough ready cash to satisfy both the exorbitant demands of the tax contractors and the blackmail levied by the governors.’ Also Livy, The History of Rome (tr. Rev Canon Roberts) Book 45 Ch. 18.  ‘wherever the tax-farmer flourished either the law lost its authority or the subjects their liberty.’

[15] P. 90. ‘All representative government passed away. Caesars would rule for the next fifteen hundred years. And for this tragedy, who and what was to blame? The tax system of the publicani.’

[16] Henri Pirenne, Medieval Cities, Ch 2, ‘The Ninth Century’ and A History of Europe 1948 Bk 2, Ch IV.

[17] See various works by Raymond de Roover, for instance, ‘The Scholastics, Usury, and Foreign Exchange’.

[18] Idem; and, ‘The development of explicit and unrestricted negotiability covers a period of nearly two centuries.’ Abbott Payson Usher, The Early History of Deposit Banking in Mediterranean Europe p. 98. This book contains the classic account (pp. 1-107) of the slow change in Europe.

[19] A good short survey of this is Andrew Dickson White, Fiat Money Inflation in France (1959).

[20] Michael D. Bordo and Eugene N. White, ‘A Tale of Two Currencies: British and French Finance During the Napoleonic Wars’. The Journal of Economic History, Vol. 51, No. 2 (1991).

[21] She refers to this in many places: for instance, in ‘Has Capitalism Changed’ she calls it ‘the least harmless way of keeping up employment, but the one most acceptable to orthodox opinion’ (Contributions to Modern Economics, p. 239).

Tags from the story
, ,
Written By
More from Ivo Mosley
Bank Robbery: Banks and the Money Supply
[Editor’s Note: The following is from Ivo’s forthcoming book ‘Bank Robbery’.] Chapter 1...
Read More
0 replies on “Chapter 8: Negotiable Debt, A Bit of History”