Two Types of Debt

One of the most important underconsidered issues in economics is that of debt. While the concept of debt is simple--a good or service extended now, in return for payment later--this hides several difficult underlying problems. One of these is that, when debt is treated as the fundamental economic transaction (as it is today), it creates a growth impetus: payback on credit requires growth, whether the system is interest-based or not; otherwise lenders wouldn't have a viable business model. When this is coupled, as it is today, with debt being the money base--the way new money is made--this results in the particular growth problem I call unsustainable money. But not all debt is monetary. In fact, the most common type of debt transaction historically has been about something else: labor.

Monetary Debt

Debt realized with money--what I call monetary debt--is by far the most common type of debt in the United States. It works like this: a lender institution, or creditor, advances, or extends, a certain amount of money, called the principal, to a recipient, or debtor, in exchange for certain guarantees that this principal would be used for some productive enterprise; the value rendered from this enterprise then allows the debtor to return this principal to the creditor, with a little something extra--usually interest, but in places that equivocate the issuance of interest at all with usury, instead fees. A semi-temporal transaction, the creditor advances money under the expectation that the debtor returns it with value added.

Indenture Debt

Debt realized with labor--what I call indenture debt--is by far, historically, the most common type. It can work several ways.

1. A person can offer, or extend, his labor for a given period of time to a landlord; in exchange, the landlord guarantees the indenture's landownership after a given period of time. This is, for example, how Tidewater's indentured-servant system worked.
2. A person can offer, or extend, his labor for a given period of time to a guild, union, or master craftsman. In exchange, they guarantee training in the relevant discipline, as well as startup help and a not-insignificant bit of prestige. This is the classic apprenticeship system.
3. A person can guarantee his labor to clear debts previously extended, for example, working for a bar for a set period of time to clear a bar tab. Rarely seen in the developed world today, this particular type of debt was one of the two main types of slavery in the ancient world.

Terminology

You will note that, while the creditor/debtor duality is the most common to refer to the two sides of a debt transaction, it is really only valid for monetary debt. This is because creditor/debtor is actually a reference to power, and in monetary debt, the one with the power is the one who extends. To put it another way, there is no difference between the power relation and the temporal relation: The one who advances the principal always has the power.

This is, however, not the case in indenture debt. In fact, in most indenture debt, the power relation is exactly backwards--the one who has the upfront labor is the one without power! So to decouple power relations from temporal relations, let me introduce a second duality, that of the extendor vs. the guarantor. In this, the temporal duality, the extendor (note "o") is the one with a transaction's upfront element; the guarantor holds its delayed element. So,

1. In Tidewater indenture service's temporal relation, the laborer was the extendor, and the landowner the guarantor; however, in its power relation, the laborer was the debtor and the landowner the creditor. 
2. In an apprenticeship's temporal relation, the apprentice is the extendor and the master (guild, union, craftsman, etc.) the guarantor; similarly, the apprentice is the debtor and the master the creditor. 
3. Finally, when someone sells him/herself to pay existing debts, the laborer is the guarantor for one or more extendors. In this case, however, the extendors are the creditors; they control the debt; they can sell the debt to a new owner. But the laborer has to pay: he is the debtor.

Splitting Hairs?

Not necessarily. If using debt as a money base is one of the root causes of unsustainable money, then it follows that for money itself to be sustainable, it must be separated from debt. Since--as the apprenticeship example in particular shows--a healthy economy (even one that is not "growing" in our sense) all but requires a debt element: nearly every type of training for a skill position is a type of indenture debt. This implies the need for a debt base parallel to the money base.


The problem is that it is very difficult to envision such a system. For example, medieval guilds clearly controlled most of the indenture debt base: They were the ones that matched apprentices with their masters, and provided training, contacts, startup wherewithal, and prestige to their apprentices. But in exchange, those apprentices, upon completion of their apprenticeships, were expected to be guild members for life, to pay dues to the guild, and to rely on the guild for most of their social and financial needs (the Church and the Italians/Jews provided the rest). In this latter behavior, guilds resemble a cross between unions and modern banks; the dues system can be interpreted either as the guild facilitating a cross-subsidization network ensuring proper apprentice training, or as a form of rent extracted by the guild in exchange for their extendor services to the apprentice (i.e. the apprentice essentially sells himself to the guild). The reality is, of course, that it is a mix of both.

So the guild comes close to the system we want, but doesn't quite.

And because it doesn't, it leaves us with an open question: If, to fix unsustainable money, we need to divorce our money base from our debt base, what does our money base look like? debt base? Since they'd interact about as well as carbon monoxide and our lungs, how do we keep them separated? And in particular, since training is an integral part of the debt base, how is skill training effected? What, in short, are the necessary exchanges in a healthy, post-growth economy?