The history of debt: Some notes.

10.2.2012

Hudson (2011) discusses the immense power of debt in shaping society.  From ancient times to the present it has brought about the rise and fall of societies.  “Debt has been the main dynamic driving these shifts....It polarizes wealth to create a creditor class.”  This class rules until discontent overthrows it.

In the Mediterranean around 750 BC debt became a major mechanism to get hold of land.  In our economy loans are often given to desperate people, many of whom then find they cannot repay, so they have to sell their property at whatever price they can get to pay off the debt...and thus property is transferred cheaply to the rich.  In many Third World regions children inherit the debts of their fathers and can never pay them off; they have to work for a lifetime on the terms set by the money lender.  This is “debt slavery”.

Many ancient societies set up arrangements for periodic debt cancellation.  Kings did this because they didn’t want potential soldiers in jail when they were needed.  It would also gain supporters from the many released from debt.  However rulers who cancelled debts were at times killed by the lending class. Some of Rome’s historians blamed this struggle for the fall of Rome.

Hudson says, “It has been a political constant of history since antiquity that creditor interests opposed both popular democracy and royal power able to limit the financial conquest of society, a conquest aimed at attaching interest bearing debt claims for payment on as much of the economic surplus as possible.”

So a major force in history has been the constant effort by the rich to control societies and increase their own wealth via financial means, as distinct from military or trade effort, i.e., by lending, creating debt ,and then receiving interest and being able to take over the assets of those unable to repay.

Before around the 18th century big debt was taken on by individual kings etc., so lenders could not be certain debts would be repaid; the king might be deposed, or die, or he might refuse to repay.  Holland and Britain began organising loans to the state, not the king, and thus lenders were more willing to make capital available.  This was possible because of the advent of parliaments, which could undertake the commitment of all people to the repayment. At this point in history the entire nation began to take on the responsibility of repaying the debt.  This was important in the rise of these nations to global imperial power; they were more able to borrow the money to fund ventures, especially wars.  Wars were very costly and could bankrupt a king.  Re the Dutch effort to break free from Hapsburg Spain, Hudson says, “Access to credit was accordingly their most powerful weapon in the struggle for their freedom.”  In this era Spain, Austria and France were more despotic than Holland and Britain, so had more difficulty raising money, and this fed into their decline relative to the former two.  Thus “...the first two democratic nations ...developed the most active capital markets and proceeded to become leading military powers.”

This brought immense power to lenders in general, and bankers in particular...the power to get interest on debt, and to get hold of assets when borrowers could not repay.  In Europe at present , notably in Greece, this has led to the pressure on nations to sell of large amounts of their national infrastructure, cheaply, to foreign banks and corporations, and local rich people.

“This is turning international finance into a new form of warfare.  Its objective is the same as military conquest in times past; to appropriate land and mineral resources...”

At the end of World War 11 the US made sure that the arrangements for financing trade and deficits in trade balances were based on the same credit-debt system that suited the bankers and exporting corporations (e.g., they demanded arrangements that did not limit the amount of exporting the US could do; i.e., they overruled Keynes who saw that unless trade surpluses as well as deficits were kept in check there would eventually be trouble).  The IMF-World Bank system provided funds for governments with large debt to borrow, but these “structural adjustment packages” set conditions on this assistance.  This was the start of era wherein indebted countries are forced to accept the “free market” conditions that enable foreign corporations to come in and do what they like, that prohibit state action to solve problems (i.e., there must be no “interference with market forces”) and that enable the sell off and take-over of assets when repayments can’t be made.  This is what is happening in Greece now; pressure to sell of assets, cut spending on needs, in order to divert wealth to repay creditor banks in Europe.  In fact the “rescue packages” of new loans are the things which contribute most to the rise of impossible debt, because they increase the debt and impose conditions that make it harder to repay; e.g., higher interest on the new loans.  Hudson says, “...the rescue of banks organised by the EU and European Central Bank now represents the largest category of rising debt.”

One of the most stunning aspects is that the debts accumulated by the private banks are taken on by governments, i.e., governments undertake to pay them with taxes paid by all people, instead of letting the banks go bankrupt.  “The private bank debts taken onto government balance sheets in Ireland and Greece have been turned into taxpayer obligations.”   Hudson says, ”The same is true for the America’s $13 trillion added since Sept. 2008...” It is supposed to be a free enterprise system where those firms that fail go bankrupt, and where state intervention is rejected as “socialism”, but the big banks are said to be “too big to fail” so it’s alright to bail them out with public money. (Some/many banks have failed in the GFC.)

The Greek et al. banks are in debt to big European etc. banks, so if they go broke those foreign banks will lose a lot of money and many will fail, and thus that solution is not acceptable to the central European decision makers.  They impose the solution that suits them and their banks, i.e., force countries like Greece to repay by cutting needed social services such as pensions, and by selling national assets (cheaply to foreign corporations, and super-rich Greeks.)

Great power has been taken from elected governments into the hands of the finance technocrats, especially in the European Union and the European Central Bank. The key decisions are made by a few non-elected EU technocrats and imposed; e.g., the EU blocks countries like Greece conducting referenda on how they want the debt crisis to be managed, and have actually forced the Italian and Greek prime ministers out.  (“...in the space of two weeks the eurocrats have managed to eliminate two troublesome elected leaders...”; Auerback, 2012.)  Elected representatives do not make the most important decisions.  Roberts (2012) points out that many of the top decision makers have come from Goldman Sachs, so it is not surprising that the EU pushes strategies that suit the banks.

The role of these technocrats “...is to calculate just how much unemployment and depression is needed to squeeze out a surplus to pay creditors...”    Of course the harder they squeeze the more the economy shrinks and the less able it is to repay...and asset sales become the best option. “ The aim has been to disable public checks and balances, shifting planning power into the hands of high finance on the claim that this is more efficient than public regulation.”

So in the era of deregulation banks have been freed to gamble and speculate wildly, i.e., to  create money and lend extravagantly.  When they get into trouble it is taken for granted that they must not be allowed to fail because unless capital can be borrowed the economy will crash.  Thus the state is called on to bail them out by giving them huge sums of money, which has come from people in general (or been created by “quantitative easing”...which could have been done to fund production of necessities).

The choice is between government regulation of banks to stop their speculation, to prevent impossible debt occurring, to control trade so that some do not fall into hopeless trade deficits, and to take (much more) control of money creation and lending...and on the other hand allowing banks to speculate and drive everyone further into debt to them.  Of course the policy options taken are always those that suit the banks and the owners of capital.  For instance banks can borrow from the European Central Bank at 1.5%, but the Greek government has to pay 6.5%.

It is obvious that the best strategy to get the economy going, and to minimise social damage, would be for the large sums of created money to be lent or given to poor/indebted ordinary people, who would spend it and “get the economy going”.  But the trillions are given to the banks, who pay off their debts to other banks, pay executives large sums, and speculate again with the rest...none of which helps to stimulate economies.  Hudson says, “The huge stimulus packages could have taken the form of money created by government owned banks, lent or given to shopkeepers and ordinary people “to get the economy going”...but that is not acceptable in an economy where what is done always tends to be what suits the owners of capital.  Note that “When banks borrow from the ECB...the EC B prints money, just as it would if it were lending to governments directly.”

This economy is a winner-take-all system; it is alright for those who are richer or stronger to take over more and more sales, businesses, markets, but to save/protect some opportunities for little people would be “socialism” so is not thinkable.  This means that Greece has no chance of earning from trade the capacity to repay international debts, given that the powerful nations like Germany have taken all the export markets.  (Again Keynes wanted a system of balanced trade, whereby countries were not allowed to build up surpluses, i.e., take most of the markets, but the Americans would not accept this, knowing that they could win most of the export markets.)

One of the mechanisms involved is that when the banks provide a lot of cheap (low interest) credit/loans many more people can get money to invest (e.g., in buying houses)and this leads to increased demand for property, raising prices (and thus the wealth of property owners, and the number of transactions and fees for banks etc), giving the impression that the economy is booming because activity and GDP are rising.  Hudson says, ”They have convinced populations that the best way to get rich most rapidly is to borrow money to buy real estate, stocks and bonds (...at prices...) being inflated by bank credit.”, i.e., by all the increased loans banks are making.  But in the US in 2009 this was only a Ponzi situation that set up the US sub-prime crash.  The banks made a lot of money on the way up...and then the US government gave them trillions because they could not be allowed to fail.  These rescue efforts were to rescue the banks, not the economy. Hudson says, “The ECB serves banks, not governments.

Before 1970 the governments of the now struggling European countries did not have big debts.  Hudson (and Ellen Brown) points out that the main reason they accumulated them was not because of over-spending on welfare etc., but because before 1970 they could borrow from their own central banks effectively at zero interest. “After the European Union was established member countries had to borrow from private banks at interest...”   (This is not to deny that Greece contributed to its own problems, e.g., by not revealing its debt situation when it joined the EU.)

So the central theme in Hudson’s account is that when the financial sector is allowed to operate a debt-money system, there is a powerful tendency to move to oligarchy.  Those with the power to create and lend money get richer and own more and more, while the rest fall increasingly into debt to them. ( In the 1990s Margrit Kennedy estimated that debt repayment actually made up 40% of every price we pay.)  Hudson stresses that if you don’t restrain ”creditor demands” you undermine democracy; oligarchy results, i.e., ownership and rule by the creditors and debt peonage for the rest of us.  His discussion helps us see the inevitability of this mechanism, and its importance in explaining the present global situation.

Much of this appalling irrationality and racketeering could be overcome if governments gave their central banks all power to create and issue new money, to lend or give it to those sectors where it would best “get the economy going” and/or meet need.  The fact that this is never contemplated by officials or politicians, despite the efforts of the many monetary reform movements, testifies to the ideological dominance of the ruling class.

Consider the astronomical sums that flow to the bankers from the present system.  Regarding the interest paid by France, Ellen Brown says “...the total sum paid in interest since the 1970s appears to be as great as the federal debt.  That means that if the federal government had been borrowing from its central bank all along, it could have been debt-free today....The figures are nearly as bad for Canada.”    For the US”...taxpayers paid a total of $8.2 trillion in interest (on the federal debt.)  That’s more than half the total $15 trillion debt, in just 24 years.”  That is about $5,000 p.a. for a family of four.

Ellen Brown points out that the laws do in fact enable governments to borrow from the ECB on the same low interest terms as the private banks; they could at least lend to governments at low interest...but they don’t .  The “monetary reform” movements are working to have all money creation and provision/lending/granting in the hands of government banks, giving them great power to restructure economies and invest where need is greatest, while totally avoiding the payment of interest to private banks.  In a good post-capitalist society there will be no interest paid on debts; you will only repay what you borrowed, (plus admin costs), because in a zero-growth economy there can be no interest payments.

Marshal Auerback, (2012),”A financial coup in the making”, ERA Review, 34, 1, Jan-Feb.

Ellen Brown, (2011), “ECB a barrier to crisis exit”, Asia Times, 1, Dec.,.

Michael Hudson, (2011), “Debt Slavery; Why it Destroyed Rome. Why It Will Destroy Us Unless It’s Stopped”.

Craig Roberts, (2012), “Goldman Sachs has taken over, ERA Review, 34, 1, Jan-Feb.