Photo by Mert Kahveci on Unsplash
Just before the British occupied the Cape in 1795, Johannes Frederik Kirsten wrote a letter to the British government. ‘By far the greater part of the Farmers and the Inhabitants of the Town,’ he explained, ‘are Bankrupt. The rest have their property under Sequester, and every individual looks forward to impending ruin’. In his view, ‘the Farmer’ was ‘in every aspect a looser [sic], and had nothing to look forward to but unavoidable poverty’.
Debt was the primary reason for Kirsten’s pessimism. He was a rich man, owning 100 slaves, 674 oxen and 130 horses, to name a few, the consequence of his marriage to the widow of Marthinus Melck, the son of Martin Melck, the richest man in the Colony. But Kirsten’s brother, Jan Pieter Kirsten, was deep in debt: he owed more than 2000 rixdollars. This was a lot of money: a lieutenant in the VOC earned 200 rixdollars a year; a soldier 40.
Kirsten’s letter is a good approximation of what most people think of when they think of debt. The more debt, the more problems, right? The implication is that debt will lead to ruin and poverty, just like Kirsten alluded to. And there are many modern examples, from the financial crisis in 2008 that began with easy access to home loans to loan sharks that exploit the most vulnerable. Even governments can be sucked in: just witness what happened recently to Sri Lanka when they couldn’t repay the interest on their international loans. We tend to think of creditors in the same way that Shakespeare wrote about the cruel, greedy Shylock in The Merchant of Venice, the Jewish creditor that claimed a pound of flesh.
But this would be a mistake. The best way to think about debt is to consider it a technology. And like any technology, it can be used for good and evil. What does this technology do? In its most basic form, it allows us to time travel. Think about a home loan: someone gives you a lot of money today that you promise to repay in twenty or thirty years’ time; you, in fact, travel to the future to claim your future income in order to spend it today. The reverse is, of course, true for the creditor: it moves money from the present to the future, with the hope of a nice return.
Whether this is good or bad depends on what you spend the money on. Sometimes we need money urgently for our daily needs. Such loans are for consumption purposes. A government will sometimes borrow to pay employee wages. The benefit is that a crisis can be averted; the cost is that the crisis is usually just pushed down the road. (Now it is risk that time travels.) One consequence of such borrowing is that it can indeed push people (or governments) further into poverty.
But debt is not just used for consumption purposes. Farmers borrow money to buy seeds so that can plant, harvest and sell their produce and hopefully earn a profit that covers the interest on the loan. Firms invest in new factories or software systems for the same reason. Governments build infrastructure. Such investments are the cornerstone of economic growth.
That people borrow is not a new phenomenon. In fact, it is as old as the written word itself. Some of the first Sumerian texts in the ancient city of Uruk more than 5000 years ago were of tax income and debt. The historian William Goetzmann explains in his accessible Money Changes Everything: How Finance Made Cizilization Possible how debt as a technology developed over thousands of years and was responsible for the rise (and fall) of nations.
But it is really in the last two hundred years that access to credit has become accessible to more than just the elite. The bank as we know it today is a relatively recent invention; the Bank of England is less than two hundred years old. Even more recent is limited liability, the ability for investors in a company to not lose more than the capital invested in a firm. This legislation arrived as recently as the 1860s in South Africa.
As with any technology, debt evolves. The development of banks connected the savings of money into a pool that could then be redistributed to those that wanted to use it productively. Initially (district) banks fulfilled this role, but after the establishment of central banks at the start of the twentieth century, banks began to consolidate, at least in South Africa. Still, new banks were established throughout the last century: in 1977 three businessmen set up Rand Consolidated Investments with R10 000. Today FirstRand Limited is the largest listed financial company in Africa.
Two decades after the establishment of RCI, a group of young businessmen bought several micro-loan firms and established Capitec. Initially Capitec served the unbanked market, giving people access to credit that never had before. Today Capitec has more than 16 million clients. Another two decades later, TymeBank is established. TymeBank has no physical branches and reaches and entirely new unbanked market again.
And it is not just banks that are innovating. In The Power Law: Venture Capital and the Art of Disruption, Sebastiaan Mallaby explains how venture capital circumvented the traditional banks to facilitate the emergence of Silicon Valley. In contrast to traditional bank financing which demands security, venture capital investments are only made on the promise of an idea. The high risks are justified by the expected high returns in the future.
Mallaby’s book tells the fascinating stories of how the first investors in Apple, Google and Facebook saw the potential of an idea – and also the many stories of investors who missed the boat. I enjoyed learning about the different venture capital strategies to adjust to the changing business environment. One individual who stands out is Roelof Botha, now a partner at Sequoia Capital, the most successful venture capital fund. Botha himself was responsible for Sequoia’s investments in YouTube, Instagram and Square.
The venture capital industry in South Africa is still young; put differently, there is still a lot of opportunities to connect capital with those entrepreneurs who need it. And there is a good chance that the next wave of connectors will be outside the banking sector. New technologies will help. Big Data and AI will make it easier for future creditors to distinguish good from bad debtors. Smart contracts and blockchains will allow for microloans at a speed and efficiency that was not possible before. And the field between investment and debt will blur: just listen to how Charles Savage, CEO of the Purple Group (which owns EasyEquities), plans to allow their investment clients to access loans using their shares as collateral.
What Johannes Kirsten did not know when he wrote the letter – or perhaps he did know this but was reluctant to tell the British authorities – was that all the debt at the Cape was a sign of prosperity rather than poverty. As some of my own research shows, almost every farmer was a moneylender – and most of this money was used to buy productive assets. A dense, informal credit network characterised the Cape.
With the Cape now the technology hub of South Africa, it wouldn’t surprise me if we would see the rise of such a credit network again.
* An edited version of this appeared in Rapport on 8 May 2022.