The Greek crisis is being used to find out how far finance can drive down
wages and privatize the public sector.

Michael Hudson interviewed by Paul Jay

Note: This is my editing of an interview Professor Michael Hudson gave to The Real
News Network. I have edited Professor Hudson’s interview for clarity and
have not changed the meaning of any of his statements. It is posted on this
site with Professor Hudson’s permission. — Paul Craig Roberts

Transcript

PAUL JAY, Senior Editor, TRNN:

Welcome to The Real News Network. I’m Paul Jay in Washington.

In Greece, the financial elites of Europe have received agreement from the
Greek government to another round of what some people are calling savage
austerity measures, for example, lowering the minimum wage by 22 percent, a
new round of privatizations, and cuts to pensions and many other social
programs.

Now joining us to discuss all of this: Michael Hudson.

So, Michael, what should we be learning from what’s going on in Greece?

HUDSON: We should be learning what the European bankers are learning, which
is that a great experiment is being conducted. For the last five years in
Latvia, the neoliberals have lowered wages by about thirty percent. The
basic premise of today’s model builders is: you don’t know how far you can
lower wages and pensions until people begin to press back. Well, in Latvia
they still haven’t begun to press back when they’ve lowered by thirty
percent. Now they’re moving towards Greece on the way to Spain and Portugal
and Italy, and they’re trying to figure out how much can wages be lowered,
how much can an economy be drained until there is unrelenting pressure from
the afflicted population.

The EU and the banks have appointed a bank lobbyist, who is euphemistically
called a “technocrat”, to be in political charge of Greece. His job is to
see how much labor renumeration can be squeezed out. The neoliberals realize
that the left in Europe is completely fragmented and does not have a defense
against neoliberal policies. However, lowering wages shrinks an economy.
When you’re cutting the budget deficit, you’re reducing the amount of money
that comes into the economy to promote demand. So in effect what the EU is
doing is bleeding economies, very much like a medieval doctor would bleed
blood, believing that the loss restores health.

The only response that the Greek people have, as they are not represented by
“their” government, is to tear the economy apart so that nothing is left for
the creditors. The PASOK and the socialist party that bought into the
austerity program now have an eight percent approval rating in Greece.
That’s even lower than Obama, the greatest fraud in American political
history.

The Greek people are saying: look, when the premier said that they were
going to have a referendum for whether we want to cut back wages in order to
pay the bankers, the first thing Angela Merkel said was, you cannot have a
referendum. We’re going to suspend democracy, we’re going to impose a
dictator on you, and we’re going to tell you what to do.

Under international law, if there is no democratic commitment to the debt,
the debt taken on is null and void. Therefore, the European Union has had
its lawyers say, okay, we’re going to get the agreement of the Greek
congress. Well, the Greek people can say, look, you can come down with bags
of money and you can buy all the parliament members that you want to approve
the deal, but as soon as there is an election, we’re going to throw them
out, because they are not acting on our behalf.

JAY: Is not one of the big objectives here privatization? Will the Greek
government have to sell everything off? Apparently they’re talking now about
selling airports and seaports.

HUDSON: Yes and also the water systems, the sewer systems, real estate, the
islands. The debt crisis is being used to create a grab bag for private
interests to take ownership over the Greek public sector. And bankers and
people who have a plan usually do much better in a crisis than people who
don’t have a plan. So this indeed seems to be it. Finance today achieves
what military invasion used to do in times past. So the new mode of warfare
is financial, not military. It’s much cheaper and it’s much safer for the
country doing the attack.

To enforce privatization is why yesterday [February 14] the European Union
said, wait a minute, we’re not even going to lend you the money to pay our
own banks that have bought your bonds, unless you spell out exactly what
you’re going to privatize and commit to it now. And this is a sticking
point. In the past, the Greeks have made promises, and thank heaven they
haven’t privatized, because once they begin to sell things off, there’s
going to be a real squeeze and even more of an opposition. So you’re right.
The bailout is a property grab.

JAY: There does seem to be some kind of different approach between Wall
Street and the Europeans. Some Wall Street representatives actually say, no
to the austerity measures. Why the mixed message?

HUDSON: There are two reasons. Number one, from the very beginning, from the
last century, America has already had in the private sector what was in the
public domain in Europe. Europe had its power companies, electric and gas
systems in the public domain. America privatized them, but as regulated
public utilities. The public utilities were regulated as to how much bond
and equity they could get, what their rate of return would be. Europe has no
body of law to regulate the prices or rent extraction the public utilities
can charge, because they’d always had these in the public domain, just like
the Soviet Union had no regulated private system. In Europe there’s much
more property and public assets to grab than were available in the United
States. There is no regulatory body in Europe, because in the past, power,
sewer, water and other public utilities were supplied either at cost or at
subsidized rates to make the economy more competitive.

The idea in Europe is not only that you cut wages by thirty percent, but
also prices can be raised for access to water, sewers, transportation,
everything else. The rise in price means higher profits for the private
interests who privatize Greece’s public sector.

The result in Greece will probably be the same as it was in Iceland, Latvia,
and other countries. There’s going to be a large emigration of working-age
labor. And the result will, of course, be to make the economy much less
competitive.

In this morning’s newspaper it turned out that Greece’s GDP fell at a seven
percent annual rate, not the five percent expected, as usual the newspaper
said, to everyone’s surprise, the situation is worse than projected. Well,
of course it wasn’t really to our surprise, because we know that when you’re
strangling an economy, of course it can’t cope very well. And they’re
strangling the Greek economy.

Greece is being used as a laboratory experiment to determine the results
when labor is squeezed very hard. It’s like trying to feed a horse less and
less and see whether it’s really going to be more efficient until it keels
over dead.

[I believe Professor Hudson meant to add that some on Wall Street are
worried that harsh austerity measures will result in Greece defaulting, thus
exposing US financial institutions, such as Goldman Sachs, to having to make
good on the swaps that guarantee Greek public debt.]

JAY: Large-scale unemployment is always a good threat against the employed
within a country, the more you can beat up Greece and Spain, Portugal, the
more you can threaten the working class of France and Germany, where I guess
the big targets eventually will be.

HUDSON: Well, if that happens, there’s going to be a renewed nationalism
that’s going to break the common market apart. There will be a sudden
realization that when Europe united, the whole idea of unity was to prevent
another European war. But now with unity under neoliberal bank rules, the
implication is class war.

If the EU is merely a mechanism for war of the rich against the poor, a
number of countries are going to say NO to Europe, just as the Icelanders
have voted not to join Europe, just as other countries that had planned to
join Europe, all the way to Turkey at the other end, are saying, wait a
minute, if that’s the Europe that’s coming, an oligarchic Europe whose
program is austerity and shrinkage, why on earth would we want to join?

The EU is proving that it works for private banks, but not for its citizens.

Schuldenkrise – Gute Bank, böse Bank
Warum kapitulieren die Staaten vor der Macht der Banken? Es gibt Beispiele genug in der Geschichte für eine Politik, bei der die Banken produktive Aufgaben hatten.

Von MICHAEL HUDSON
Wenn es in der Schuldenkrise einen Silberstreif am Horizont gibt, dann ist es die Erkenntnis, dass es so mit den Banken nicht weitergehen kann. Uns bleibt gar nichts anderes übrig, als das System neu zu strukturieren. Die entscheidende Frage ist, wer im Wirtschaftsleben das letzte Wort hat – der Staat oder der Finanzsektor. Vor einem Jahrhundert wusste man noch, wie ein produktiver Bankensektor aussehen sollte. Doch davon haben wir uns weit entfernt.

Früher liehen Banken ihnen anvertraute Einlagen weiter, wobei sie für kurzfristige Guthaben weniger Zinsen zahlten, als sie für weniger liquide Darlehen berechneten. Das Risiko trugen allein die Banken. Heute werden Kredite für spekulative Tradinggeschäfte verwendet. Finanzkrisen verschärfen sich und betreffen mehr Menschen, da der Schuldenberg weiter wächst.

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Um sich der Kontrolle des Staates zu entziehen, haben die Banken diesem vorgeworfen, den freien Markt zu verzerren. Sie wollen die Planung in die eigenen Hände nehmen. Das Problem ist, dass sie in kurzen, selbstzerstörerischen Zeiträumen denken und gern auf rücksichtslose Aktivitäten setzen, so dass Länder am Ende hoch verschuldet sind. Mit der Drohung, die Wirtschaft werde zusammenbrechen, wenn ihnen gesetzliche Beschränkungen auferlegt werden, nehmen die Banken den Staat in Haftung. Ohne noch mehr Rettungsschirme, Zentralbankkredite und staatliche Kreditgarantien werde die Wirtschaft Schaden nehmen. Muss der Staat vor der Macht der Banken kapitulieren?

Finanzierung von Produktionsmitteln
Früher wurden schlechte Schulden letztlich abgeschrieben. Das bedeutete Verluste für Banken und Anleger. Heute wird die Schuldenlast aufrechterhalten, das Finanzsystem bleibt unangetastet. Die Rettungsmaßnahmen, heißt es, sollen die Banken in die Lage versetzen, so viele Kredite zu geben, dass sich die Wirtschaft wieder erholt und das Land seine Schulden bezahlen kann.

Die verschuldeten Staaten, so wird behauptet, könnten durch Kreditaufnahme zu Wachstum zurückkehren. Es ist aber rechnerisch unmöglich, bestehende Schulden ohne Sparmaßnahmen zu tragen, ohne Schuldendeflation und Depression. Seit dem Finanzcrash von 2008 sind Staaten die wichtigsten Anteilseigner der in Schwierigkeiten geratenen Banken. Anstatt die Gelegenheit zu ergreifen, diese Banken als öffentliche Dienstleister zu führen und die Kreditkartengebühren zu senken – oder die Kreditvergabe an Hasardeure zu beenden -, können diese Banken weiter Kasinokapitalismus praktizieren. Wir stehen also wieder vor der Frage, welche Rolle den Banken zukommt. Über dieses Problem wurde vor dem Ersten Weltkrieg ausführlich diskutiert – es ist heute dringlicher denn je.

England war der Ausgangspunkt der industriellen Revolution, aber es gab kaum langfristige Kredite für Finanzinvestitionen in Fabriken und andere Produktionsmittel. Britische und niederländische Handelsbanken liehen kurzfristig Geld auf Immobilien oder Lieferverträge, und die Geschäfte gingen so gut, dass man an der Praxis festhielt. In Frankreich und Deutschland dagegen förderten die Banken die Industrie. Die Saint-Simonisten regten die Schaffung eines industriellen Kreditsystems an, das der Finanzierung von Produktionsmitteln dienen sollte. Sie schlugen die Einrichtung genossenschaftlich organisierter Banken vor. Den Anfang machte der 1852 von den Brüdern Péreire gegründete Crédit Mobilier.

Kampf der Finanzsysteme
Ziel war es, von der Schuldenfinanzierung wegzukommen und eine Eigenkapitalvergabe zu praktizieren, bei der statt Zinsen Dividenden gezahlt werden, die je nach Lage des Schuldners steigen oder sinken. Eine solche Praxis, die Betrieben die Möglichkeit gibt, bei Umsatzeinbußen geringere Dividenden zu zahlen, umgeht das Problem, dass auch in einem solchen Fall Zinsen bezahlt werden müssen. Bei Ausfall von Zinszahlungen muss der Schuldner eventuell Insolvenz anmelden.

Im Bismarckschen Deutschland fand langfristige Finanzierung ihren Ausdruck in der Reichsbank und anderen Industriebanken, im Sinne der „Dreifaltigkeit“ von Banken, Industrie und staatlicher Planung. Die deutschen Banken machten aus der Not eine Tugend. Britische Banken, deren Mittel hauptsächlich aus Einlagen bestanden, lenkten Spar- und Geschäftsguthaben in die Handelsfinanzierung. Einheimische Firmen waren daher gezwungen, Investitionen aus eigenen Mitteln zu finanzieren. In Deutschland jedoch „musste sich die Industrie wegen Kapitalmangels an die Banken wenden“, schreibt der Finanzhistoriker George Edwards. Die deutschen Banken widmeten sich vor allem dem Investitionsgeschäft.

Die anfänglichen Erfolge im Ersten Weltkrieg wurden weithin als Ausdruck der Überlegenheit des deutschen Finanzsystems betrachtet und der Krieg als ein Kampf zwischen rivalisierenden Organisationsformen des Finanzwesens. Es ging nicht nur darum, wer die führende europäische Macht war, sondern welche Wirtschaftsform sich durchsetzen würde. Deutschland, schreibt Friedrich Naumann 1915, habe klarer als andere Nationen erkannt, dass die industrielle Entwicklung langfristige Finanzierung und staatliche Unterstützung benötige. Sein Buch „Mitteleuropa“ inspirierte Professor H.S. Foxwell 1917 zu zwei bemerkenswerten Aufsätzen im „Economic Journal“, in denen er sich auf Naumanns These bezog, dass der alte individualistische, englische Kapitalismus einer neuen, unpersönlicheren Organisation Platz mache, dem disziplinierten, wissenschaftlichen Kapitalismus deutscher Ausprägung. Industrie, Banken und Staat beteiligten sich daran, der Erfolg der modernen deutschen Wirtschaft verdankte sich in erster Linie dem Finanzsektor. Deutsche Banken hatten Experten, die sich mit der Industrie beschäftigten.

Banken und industrielle Entwicklung
Foxwell warnte davor, dass britische Fabrikanten zunehmend ins Hintertreffen geraten würden. In Deutschland seien die Banken hingegen wesentliche Instrumente zur Förderung des Außenhandels und der Stärkung der Macht des Reichs. Britische Banken gründeten ihre Kreditentscheidungen nicht auf neuen Produkten und Einkommen, die ihre Darlehen potentiell generierten, sondern auf Sicherheiten, die ihnen bei der Insolvenz eines Schuldners zufielen. Statt in die Firmen zu investieren, zahlten sie Gewinne zumeist als Dividenden aus. Unternehmer mussten deshalb auf Liquidität achten und konnten keine langfristigen Strategien verfolgen. Deutsche Banken bezahlten nur halb so viel Dividenden wie die britischen Banken, da sie Einkünfte als Kapitalreserven zurückbehielten und in Aktien ihrer Kunden investierten. Banken, die solche Firmen als Verbündete betrachteten und nicht bloß als Kunden, die möglichst rasch viel Profit abwerfen sollten, entsandten Vertreter in die Aufsichtsräte und unterstützten das Geschäft, indem sie den Staaten Kredite zur Verfügung stellten, sofern diese deutschen Unternehmer bei Investitionen herangezogen würden.

In der Anfangszeit flossen kaum Bankkredite in die britische Industrie. Auch der Aktienmarkt war keine große Hilfe. England hatte mit der Gründung von Staatsunternehmen wie der East India Company, der Bank von England oder der South Sea Company früh ein Signal gesetzt. Die Londoner Börse war ein beliebtes Investitionsinstrument für britische und ausländische Anleger. Marktbeherrschend aber waren Eisenbahnen, Kanäle und große öffentliche Versorger; Industrieunternehmen zählten nicht zu den namhaften Emittenten. Britische Börsenmakler versagten ebenso wie die Banken, wenn es um die Finanzierung der industriellen Entwicklung ging. Sobald sie ihre Kommission eingestrichen hatten, wandten sie sich der nächsten Emission zu, ohne darüber nachzudenken, was aus den Investoren geworden war.

Ähnlich verhielten sich auch amerikanische Unternehmer. Sie waren Individualisten, politische Insider, die oft am Rande der Legalität operierten. Eine typische Figur war Thomas Edison, der, anders als deutsche Kollegen, jederzeit bereit war, Patente und Monopolrechte einzuklagen.

Noch nie hat ein Staat seine Schulden zurückbezahlt
Die Entwicklung des Industriekredits brachte Ökonomen dazu, zwischen produktiven und unproduktiven Darlehen zu unterscheiden. Bei einem produktiven Darlehen verfügt der Darlehensnehmer über Mittel für sein Unternehmen, und er kann nun so viel erwirtschaften, dass er das Darlehen plus Zinsen zurückzahlen kann. Ein unproduktives Darlehen muss aus anderen Quellen zurückgezahlt werden. Staaten müssen Kriegsanleihen mit Steuergeldern, Verbraucher müssen Kredite mit dem zurückzahlen, was sie verdienen. Es kann also nicht mehr so viel Geld ausgegeben werden, die Wirtschaft schrumpft. Das führt zu Krisen, an deren Ende Schulden gestrichen werden, vor allem unproduktive Schulden.

Nach dem Ersten Weltkrieg waren Sieger- wie Verlierernationen mit Rüstungsschulden und Reparationszahlungen konfrontiert. Als Amerika bei seinen Verbündeten überraschenderweise die Tilgung ihrer Schulden für Waffenkäufe einforderte, kapitulierte England, getreu der alten Denkweise, dass Schulden zurückgezahlt werden müssen, ganz gleich, ob es überhaupt möglich ist. Die amerikanische Forderung brachte die Alliierten dazu, sich an Deutschland schadlos zu halten. Nie zuvor hatte es Zahlungsverpflichtungen in diesem Umfang gegeben. Dennoch war Deutschland bemüht, ihnen durch Besteuerung der Wirtschaft nachzukommen. Da Steuern in der nationalen Währung erhoben werden, musste die Reichsbank diese Gelder in Pfund Sterling und andere Währungen umtauschen. England, Frankreich und die übrigen Empfängerländer konnten nun ihre interalliierten Schulden bei den Vereinigten Staaten begleichen.

Adam Smith hat darauf hingewiesen, dass noch nie ein Staat seine Schulden zurückgezahlt hat. Aber kein Gläubiger gesteht sich gern ein, dass ein Schuldner zahlungsunfähig ist. In seiner Blindheit denkt er, es sei in seinem Interesse, darauf zu bestehen, dass selbst höchste Beträge zurückbezahlt werden. Und obwohl Einschnitte bei Konsum und Investitionen nur extraktiv sein können, wollen gläubigerorientierte Ökonomen nicht wahrhaben, dass Schulden nicht beglichen werden können, indem man die Wirtschaft schrumpfen lässt; oder dass die Tilgung von Auslandsschulden in der eigenen Währung mit einem schlechteren Wechselkurs bezahlt werden muss.

Inflation von Vermögenspreisen
Je mehr Reichsmark umgetauscht wurden, desto tiefer fiel der Kurs gegenüber dem Dollar und anderen Goldstandard-Währungen. Importe wurden für Deutschland also immer teurer. Grund für die Hyperinflation war der Kollaps des Wechselkurses, nicht die aufgeblähte Geldmenge, wie heute von Monetaristen gern behauptet wird. Vergeblich wies Keynes auf das Spezifische der deutschen Zahlungsbilanz hin, er forderte, die Gläubiger sollten angeben, in welchem Umfang sie deutsche Exportgüter kaufen wollten, und sagen, wie Reichsmark in ausländische Währung konvertiert werden könne, ohne dass der Wechselkurs einbricht und eine Preisinflation entsteht. Leider entschieden sich die Alliierten für den Ricardoschen Tunnelblick. Bertil Ohlin und Jacques Rueff erklärten, dass durch den Ankauf deutscher Importe Reparationsleistungen wieder nach Deutschland und in andere Schuldnerstaaten zurückflössen. Wenn Einkommensanpassungen nicht für stabile Wechselkurse sorgten, so würde der sinkende Kurs der Reichsmark billigere Exporte bewirken, auf diese Weise würde Deutschland seine Schulden bezahlen können.

Dieser Logik folgte der Internationale Währungsfonds fünfzig Jahre später, als er von verschuldeten Entwicklungsländern verlangte, Exporterlöse für den Schuldendienst zu verwenden, Kapitalflucht zu ermöglichen und die Auslandsschulden vollständig zu tilgen. Dies ist die neoliberale Politik, die jetzt Griechenland, Irland und Italien harte Einschnitte abverlangt.

Banklobbyisten erklären, die EZB werde eine Lohn- und Preisinflation in Gang setzen, wenn sie das tue, wofür Notenbanken gegründet wurden – nämlich Haushaltsdefizite zu finanzieren. Nun übernehmen Europas Geldinstitute diese Aufgabe und kassieren Zinsen für etwas, was Notenbanken auf ihren eigenen Computern generieren könnten. Aber warum entsteht weniger Inflation, wenn Haushaltsdefizite von Geschäftsbanken und nicht von Zentralbanken finanziert werden? Dank der Bankkredite, die seit den Achtzigern eine globale Finanzblase angeheizt haben, sind wir heute mit einer Verschuldung konfrontiert, die ebenso wenig finanzierbar ist wie in den Zwanzigern, als Deutschland seine Reparationsschulden nicht bezahlen konnte. Hätten staatliche Kredite auch zu einer solchen Inflation von Vermögenspreisen geführt?

Wir erleben Habgier
Nach Artikel 123 des Lissabon-Vertrags dürfen EZB und nationale Notenbanken den Regierungen keine Kredite zur Verfügung stellen. Aber genau dafür wurden Banken ursprünglich geschaffen – um Haushaltsdefizite zu finanzieren. Wenn Kreditschöpfung den Geschäftsbanken vorbehalten ist, können Staaten zur Bekämpfung von Wirtschafts- und Finanzkrisen nicht auf ihre eigene Notenbank zurückgreifen. Inzwischen benötigen europäische Regierungen Kredite, um ihre defizitären Haushalte auszugleichen. Und die Banken wollen eine Zentralbank, die ihnen die faulen Kredite abnimmt.

Banker haben argumentiert, dass Staaten ehrliche Makler benötigen, um zu entscheiden, ob ein Kredit oder die öffentliche Haushaltspolitik verantwortlich ist. Inzwischen empfehlen sie verschuldeten Regierungen den Verkauf von Staatseigentum. Die Idee gründet auf dem Mythos, dass Privatisierung effizienter sei. Dabei fallen hier Zinsen, höhere Managergehälter, Aktienoptionen und andere Kosten an. Einsparungen werden vor allem durch die Beschäftigung von Billigarbeitern erzielt. Davon profitieren Privatisierer, Banken und Anleiheninhaber, nicht aber die Öffentlichkeit. Und Banken fördern Deregulierung, in deren Folge die Preise steigen. Der Standort wird also teurer und weniger konkurrenzfähig – genau das Gegenteil dessen, was versprochen wurde.

Der Bankensektor hat sich so weit von der Finanzierung von Wirtschaftswachstum entfernt, dass er sich inzwischen auf Kosten der Allgemeinheit bereichert. Das ist das große Problem unserer Zeit. Verluste sollen von der Allgemeinheit getragen werden, eine Depression wird in Kauf genommen. Wir erleben Habgier und ein ausgesprochen unsoziales und aggressives Verhalten.

Demokratische Option der öffentlichen Kreditschöpfung
Europa muss sich entscheiden, welche Interessen Vorrang haben sollen – die der Banken oder die der Realwirtschaft. Die Geschichte liefert viele Beispiele dafür, wie gefährlich es ist, vor den Bankern zu kapitulieren, aber auch dafür, wie eine andere Politik aussehen könnte, in der die Banken eine produktivere Linie verfolgen. Die wesentlichen Fragen lauten: Haben die Banken ihre historisch sinnvolle Rolle ausgespielt oder können sie so umstrukturiert werden, dass die Finanzierung produktiver Kapitalinvestitionen Vorrang hat? Können staatliche Kredite günstiger sein und vor allem zielgerichteter eingesetzt werden? Wäre es nicht sinnvoller, die Wirtschaft durch einen Schuldenschnitt anzukurbeln, statt aggressiven Gläubigern immer mehr Geld in den Rachen zu werfen?

Ob Banken oder Staaten siegreich aus der Krise hervorgehen werden, ist nicht absehbar. Die Interessen von Schuldnern und Gläubigern stehen einander diametral gegenüber, derweil staatliche Planung auf die Banken und deren Verbündete übergeht. Um Macht und Einfluss zu behalten, ist es für sie am einfachsten, auf ihrem Kreditschöpfungsmonopol zu beharren und Einmischungsversuche der Zentralbank oder des öffentlichen Sektors abzublocken. Staat und Zentralbank sollten auftragsgemäß handeln und auf einer demokratischen Option der öffentlichen Kreditschöpfung bestehen.

Aus dem Englischen von Matthias Fienbork

The inherently symbiotic relationship between banks and governments recently has been reversed. In medieval times, wealthy bankers lent to kings and princes as their major customers. But now it is the banks that are needy, relying on governments for funding – capped by the post-2008 bailouts to save them from going bankrupt from their bad private-sector loans and gambles.

Yet the banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. The process has gone furthest in the United States. Joseph Stiglitz characterizes the Obama administration’s vast transfer of money and pubic debt to the banks as a “privatizing of gains and the socializing of losses. It is a ‘partnership’ in which one partner robs the other.”1 Prof. Bill Black describes banks as becoming criminogenic and innovating “control fraud.”2 High finance has corrupted regulatory agencies, falsified account-keeping by “mark to model” trickery, and financed the campaigns of its supporters to disable public oversight. The effect is to leave banks in control of how the economy’s allocates its credit and resources.

If there is any silver lining to today’s debt crisis, it is that the present situation and trends cannot continue. So this is not only an opportunity to restructure banking; we have little choice. The urgent issue is who will control the economy: governments, or the financial sector and monopolies with which it has made an alliance.

Fortunately, it is not necessary to re-invent the wheel. Already a century ago the outlines of a productive industrial banking system were well understood. But recent bank lobbying has been remarkably successful in distracting attention away from classical analyses of how to shape the financial and tax system to best promote economic growth – by public checks on bank privileges.

How banks broke the social compact, promoting their own special interests
People used to know what banks did. Bankers took deposits and lent them out, paying short-term depositors less than they charged for risky or less liquid loans. The risk was borne by bankers, not depositors or the government. But today, bank loans are made increasingly to speculators in recklessly large amounts for quick in-and-out trading. Financial crashes have become deeper and affect a wider swath of the population as debt pyramiding has soared and credit quality plunged into the toxic category of “liars’ loans.”

The first step toward today’s mutual interdependence between high finance and government was for central banks to act as lenders of last resort to mitigate the liquidity crises that periodically resulted from the banks’ privilege of credit creation. In due course governments also provided public deposit insurance, recognizing the need to mobilize and recycle savings into capital investment as the Industrial Revolution gained momentum. In exchange for this support, they regulated banks as public utilities.

Over time, banks have sought to disable this regulatory oversight, even to the point of decriminalizing fraud. Sponsoring an ideological attack on government, they accuse public bureaucracies of “distorting” free markets (by which they mean markets free for predatory behavior). The financial sector is now making its move to concentrate planning in its own hands.

The problem is that the financial time frame is notoriously short-term and often self-destructive. And inasmuch as the banking system’s product is debt, its business plan tends to be extractive and predatory, leaving economies high-cost. This is why checks and balances are needed, along with regulatory oversight to ensure fair dealing. Dismantling public attempts to steer banking to promote economic growth (rather than merely to make bankers rich) has permitted banks to turn into something nobody anticipated. Their major customers are other financial institutions, insurance and real estate – the FIRE sector, not industrial firms. Debt leveraging by real estate and monopolies, arbitrage speculators, hedge funds and corporate raiders inflates asset prices on credit. The effect of creating “balance sheet wealth” in this way is to load down the “real” production-and-consumption economy with debt and related rentier charges, adding more to the cost of living and doing business than rising productivity reduces production costs.

Since 2008, public bailouts have taken bad loans off the banks’ balance sheet at enormous taxpayer expense – some $13 trillion in the United States, and proportionally higher in Ireland and other economies now being subjected to austerity to pay for “free market” deregulation. Bankers are holding economies hostage, threatening a monetary crash if they do not get more bailouts and nearly free central bank credit, and more mortgage and other loan guarantees for their casino-like game. The resulting “too big to fail” policy means making governments too weak to fight back.

The process that began with central bank support thus has turned into broad government guarantees against bank insolvency. The largest banks have made so many reckless loans that they have become wards of the state. Yet they have become powerful enough to capture lawmakers to act as their facilitators. The popular media and even academic economic theorists have been mobilized to pose as experts in an attempt to convince the public that financial policy is best left to technocrats – of the banks’ own choosing, as if there is no alternative policy but for governments to subsidize a financial free lunch and crown bankers as society’s rulers.

The Bubble Economy and its austerity aftermath could not have occurred without the banking sector’s success in weakening public regulation, capturing national treasuries and even disabling law enforcement. Must governments surrender to this power grab? If not, who should bear the losses run up by a financial system that has become dysfunctional? If taxpayers have to pay, their economy will become high-cost and uncompetitive – and a financial oligarchy will rule.

The present debt quandary
The endgame in times past was to write down bad debts. That meant losses for banks and investors. But today’s debt overhead is being kept in place – shifting bad loans off bank balance sheets to become public debts owed by taxpayers to save banks and their creditors from loss. Governments have given banks newly minted bonds or central bank credit in exchange for junk mortgages and bad gambles – without re-structuring the financial system to create a more stable, less debt-ridden economy. The pretense is that these bailouts will enable banks to lend enough to revive the economy by enough to pay its debts.

Seeing the handwriting on the wall, bankers are taking as much bailout money as they can get, and running, using the money to buy as much tangible property and ownership rights as they can while their lobbyists keep the public subsidy faucet running.

The pretense is that debt-strapped economies can resume business-as-usual growth by borrowing their way out of debt. But a quarter of U.S. real estate already is in negative equity – worth less than the mortgages attached to it – and the property market is still shrinking, so banks are not lending except with public Federal Housing Administration guarantees to cover whatever losses they may suffer. In any event, it already is mathematically impossible to carry today’s debt overhead without imposing austerity, debt deflation and depression.

This is not how banking was supposed to evolve. If governments are to underwrite bank loans, they may as well be doing the lending in the first place – and receiving the gains. Indeed, since 2008 the over-indebted economy’s crash led governments to become the major shareholders of the largest and most troubled banks – Citibank in the United States, Anglo-Irish Bank in Ireland, and Britain’s Royal Bank of Scotland. Yet rather than taking this opportunity to run these banks as public utilities and lower their charges for credit-card services – or most important of all, to stop their lending to speculators and gamblers – governments left these banks operating as part of the “casino capitalism” that has become their business plan.

There is no natural reason for matters to be like this. Relations between banks and government used to be the reverse. In 1307, France’s Philip IV (“The Fair”) set the tone by seizing the Knights Templars’ wealth, arresting them and putting many to death – not on financial charges, but on the accusation of devil-worshipping and satanic sexual practices. In 1344 the Peruzzi bank went broke, followed by the Bardi by making unsecured loans to Edward III of England and other monarchs who died or defaulted. Many subsequent banks had to suffer losses on loans gone bad to real estate or financial speculators.

By contrast, now the U.S., British, Irish and Latvian governments have taken bad bank loans onto their national balance sheets, imposing a heavy burden on taxpayers – while letting bankers cash out with immense wealth. These “cash for trash” swaps have turned the mortgage crisis and general debt collapse into a fiscal problem. Shifting the new public bailout debts onto the non-financial economy threaten to increase the cost of living and doing business. This is the result of the economy’s failure to distinguish productive from unproductive loans and debts. It helps explain why nations now are facing financial austerity and debt peonage instead of the leisure economy promised so eagerly by technological optimists a century ago.

So we are brought back to the question of what the proper role of banks should be. This issue was discussed exhaustively prior to World War I. It is even more urgent today.

How classical economists hoped to modernize banks as agents of industrial capitalism
Britain was the home of the Industrial Revolution, but there was little long-term lending to finance investment in factories or other means of production. British and Dutch merchant banking was to extend short-term credit on the basis of collateral such as real property or sales contracts for merchandise shipped (“receivables”). Buoyed by this trade financing, merchant bankers were successful enough to maintain long-established short-term funding practices. This meant that James Watt and other innovators were obliged to raise investment money from their families and friends rather than from banks.

It was the French and Germans who moved banking into the industrial stage to help their nations catch up. In France, the Saint-Simonians described the need to create an industrial credit system aimed at funding means of production. In effect, the Saint-Simonians proposed to restructure banks along lines akin to a mutual fund. A start was made with the Crédit Mobilier, founded by the Péreire Brothers in 1852. Their aim was to shift the banking and financial system away from debt financing at interest toward equity lending, taking returns in the form of dividends that would rise or decline in keeping with the debtor’s business fortunes. By giving businesses leeway to cut back dividends when sales and profits decline, profit-sharing agreements avoid the problem that interest must be paid willy-nilly. If an interest payment is missed, the debtor may be forced into bankruptcy and creditors can foreclose. It was to avoid this favoritism for creditors regardless of the debtor’s ability to pay that prompted Mohammed to ban interest under Islamic law.

Attracting reformers ranging from socialists to investment bankers, the Saint-Simonians won government backing for their policies under France’s Second Empire. Their approach inspired Marx as well as industrialists in Germany and protectionists in the United States and England. The common denominator of this broad spectrum was recognition that an efficient banking system was needed to finance the industry on which a strong national state and military power depended.

Germany develops an industrial banking system
It was above all in Germany that long-term financing found its expression in the Reichsbank and other large industrial banks as part of the “holy trinity” of banking, industry and government planning under Bismarck’s “state socialism.” German banks made a virtue of necessity. British banks “derived the greater part of their funds from the depositors,” and steered these savings and business deposits into mercantile trade financing. This forced domestic firms to finance most new investment out of their own earnings. By contrast, Germany’s “lack of capital … forced industry to turn to the banks for assistance,” noted the financial historian George Edwards. “A considerable proportion of the funds of the German banks came not from the deposits of customers but from the capital subscribed by the proprietors themselves.3 As a result, German banks “stressed investment operations and were formed not so much for receiving deposits and granting loans but rather for supplying the investment requirements of industry.”

When the Great War broke out in 1914, Germany’s rapid victories were widely viewed as reflecting the superior efficiency of its financial system. To some observers the war appeared as a struggle between rival forms of financial organization. At issue was not only who would rule Europe, but whether the continent would have laissez faire or a more state-socialist economy.

In 1915, shortly after fighting broke out, the Christian Socialist priest-politician Friedrich Naumann published Mitteleuropa, describing how Germany recognized more than any other nation that industrial technology needed long‑term financing and government support. His book inspired Prof. H. S. Foxwell in England to draw on his arguments in two remarkable essays published in the Economic Journal in September and December 1917: “The Nature of the Industrial Struggle,” and “The Financing of Industry and Trade.” He endorsed Naumann’s contention that “the old individualistic capitalism, of what he calls the English type, is giving way to the new, more impersonal, group form; to the disciplined scientific capitalism he claims as German.”

This was necessarily a group undertaking, with the emerging tripartite integration of industry, banking and government, with finance being “undoubtedly the main cause of the success of modern German enterprise,” Foxwell concluded (p. 514). German bank staffs included industrial experts who were forging industrial policy into a science. And in America, Thorstein Veblen’s The Engineers and the Price System (1921) voiced the new industrial philosophy calling for bankers and government planners to become engineers in shaping credit markets.

Foxwell warned that British steel, automotive, capital equipment and other heavy industry was becoming obsolete largely because its bankers failed to perceive the need to promote equity investment and extend long‑term credit. They based their loan decisions not on the new production and revenue their lending might create, but simply on what collateral they could liquidate in the event of default: inventories of unsold goods, real estate, and money due on bills for goods sold and awaiting payment from customers. And rather than investing in the shares of the companies that their loans supposedly were building up, they paid out most of their earnings as dividends – and urged companies to do the same. This short time horizon forced business to remain liquid rather than having leeway to pursue long‑term strategy.

German banks, by contrast, paid out dividends (and expected such dividends from their clients) at only half the rate of British banks, choosing to retain earnings as capital reserves and invest them largely in the stocks of their industrial clients. Viewing these companies as allies rather than merely as customers from whom to make as large a profit as quickly as possible, German bank officials sat on their boards, and helped expand their business by extending loans to foreign governments on condition that their clients be named the chief suppliers in major public investments. Germany viewed the laws of history as favoring national planning to organize the financing of heavy industry, and gave its bankers a voice in formulating international diplomacy, making them “the principal instrument in the extension of her foreign trade and political power.”

A similar contrast existed in the stock market. British brokers were no more up to the task of financing manufacturing in its early stages than were its banks. The nation had taken an early lead by forming Crown corporations such as the East India Company, the Bank of England and even the South Sea Company. Despite the collapse of the South Sea Bubble in 1720, the run-up of share prices from 1715 to 1720 in these joint-stock monopolies established London’s stock market as a popular investment vehicle, for Dutch and other foreigners as well as for British investors. But the market was dominated by railroads, canals and large public utilities. Industrial firms were not major issuers of stock.

In any case, after earning their commissions on one issue, British stockbrokers were notorious for moving on to the next without much concern for what happened to the investors who had bought the earlier securities. “As soon as he has contrived to get his issue quoted at a premium and his underwriters have unloaded at a profit,” complained Foxwell, “his enterprise ceases. ‘To him,’ as the Times says, ‘a successful flotation is of more importance than a sound venture.’”

Much the same was true in the United States. Its merchant heroes were individualistic traders and political insiders often operating on the edge of the law to gain their fortunes by stock-market manipulation, railroad politicking for land giveaways, and insurance companies, mining and natural resource extraction. America’s wealth-seeking spirit found its epitome in Thomas Edison’s hit-or-miss method of invention, coupled with a high degree of litigiousness to obtain patent and monopoly rights.

In sum, neither British nor American banking or stock markets planned for the future. Their time frame was short, and they preferred rent-extracting projects to industrial innovation. Most banks favored large real estate borrowers, railroads and public utilities whose income streams easily could be forecast. Only after manufacturing companies grew fairly large did they obtain significant bank and stock market credit.

What is remarkable is that this is the tradition of banking and high finance that has emerged victorious throughout the world. The explanation is primarily the military victory of the United States, Britain and their Allies in the Great War and a generation later, in World War II.

The regression toward burdensome unproductive debts after World War I
The development of industrial credit led economists to distinguish between productive and unproductive lending. A productive loan provides borrowers with resources to trade or invest at a profit sufficient to pay back the loan and its interest charge. An unproductive loan must be paid out of income earned elsewhere. Governments must pay war loans out of tax revenues. Consumers must pay loans out of income they earn at a job – or by selling assets. These debt payments divert revenue away from being spent on consumption and investment, so the economy shrinks. This traditionally has led to crises that wipe out debts, above all those that are unproductive.

  In the aftermath of World War I the economies of Europe’s victorious and defeated nations alike were dominated by postwar arms and reparations debts. These inter-governmental debts were to pay for weapons (by the Allies when the United States unexpectedly demanded that they pay for the arms they had bought before America’s entry into the war), and for the destruction of property (by the Central Powers), not new means of production. Yet to the extent that they were inter-governmental, these debts were more intractable than debts to private bankers and bondholders. Despite the fact that governments in principle are sovereign and hence can annul debts owed to private creditors, the defeated Central Power governments were in no position to do this.

And among the Allies, Britain led the capitulation to U.S. arms billing, captive to the creditor ideology that “a debt is a debt” and must be paid regardless of what this entails in practice or even whether the debt in fact can be paid. Confronted with America’s demand for payment, the Allies turned to Germany to make them whole. After taking its liquid assets and major natural resources, they insisted that it squeeze out payments by taxing its economy. No attempt was made to calculate just how Germany was to do this – or most important, how it was to convert this domestic revenue (the “budgetary problem”) into hard currency or gold. Despite the fact that banking had focused on international credit and currency transfers since the 12th century, there was a broad denial of what John Maynard Keynes identified as a foreign exchange transfer problem.

Never before had there been an obligation of such enormous magnitude. Nevertheless, all of Germany’s political parties and government agencies sought to devise ways to tax the economy to raise the sums being demanded. Taxes, however, are levied in a nation’s own currency. The only way to pay the Allies was for the Reichsbank to take this fiscal revenue and throw it onto the foreign exchange markets to obtain the sterling and other hard currency to pay. Britain, France and the other recipients then paid this money on their Inter-Ally debts to the United States.

Adam Smith pointed out that no government ever had paid down its public debt. But creditors always have been reluctant to acknowledge that debtors are unable to pay. Ever since David Ricardo’s lobbying for their perspective in Britain’s Bullion debates, creditors have found it their self-interest to promote a doctrinaire blind spot, insisting that debts of any magnitude could be paid. They resist acknowledging a distinction between raising funds domestically (by running a budget surplus) and obtaining the foreign exchange to pay foreign-currency debt. Furthermore, despite the evident fact that austerity cutbacks on consumption and investment can only be extractive, creditor-oriented economists refused to recognize that debts cannot be paid by shrinking the economy.4 Or that foreign debts and other international payments cannot be paid in domestic currency without lowering the exchange rate.

The more domestic currency Germany sought to convert, the further its exchange rate was driven down against the dollar and other gold-based currencies. This obliged Germans to pay much more for imports. The collapse of the exchange rate was the source of hyperinflation, not an increase in domestic money creation as today’s creditor-sponsored monetarist economists insist. In vain Keynes pointed to the specific structure of Germany’s balance of payments and asked creditors to specify just how many German exports they were willing to take, and to explain how domestic currency could be converted into foreign exchange without collapsing the exchange rate and causing price inflation.

Tragically, Ricardian tunnel vision won Allied government backing. Bertil Ohlin and Jacques Rueff claimed that economies receiving German payments would recycle their inflows to Germany and other debt-paying countries by buying their imports. If income adjustments did not keep exchange rates and prices stable, then Germany’s falling exchange rate would make its exports sufficiently more attractive to enable it to earn the revenue to pay.

This is the logic that the International Monetary Fund followed half a century later in insisting that Third World countries remit foreign earnings and even permit flight capital as well as pay their foreign debts. It is the neoliberal stance now demanding austerity for Greece, Ireland, Italy and other Eurozone economies.

Bank lobbyists claim that the European Central Bank will risk spurring domestic wage and price inflation if it does what central banks were founded to do: finance budget deficits. Europe’s financial institutions are given a monopoly right to perform this electronic task – and to receive interest for what a real central bank could create on its own computer keyboard.

But why is it less inflationary for commercial banks to finance budget deficits than for central banks to do this? The bank lending that has inflated a global financial bubble since the 1980s has left as its legacy a debt overhead that can no more be supported today than Germany was able to carry its reparations debt in the 1920s. Would government credit have so recklessly inflated asset prices?

How debt creation has fueled asset-price inflation since the 1980s
Banking in recent decades has not followed the productive lines that early economic futurists expected. As noted above, instead of financing tangible investment to expand production and innovation, most loans are made against collateral, with interest to be paid out of what borrowers can make elsewhere. Despite being unproductive in the classical sense, it was remunerative for debtors from 1980 until 2008 – not by investing the loan proceeds to expand economic activity, but by riding the wave of asset-price inflation. Mortgage credit enabled borrowers to bid up property prices, drawing speculators and new customers into the market in the expectation that prices would continue to rise. But hothouse credit infusions meant additional debt service, which ended up shrinking the market for goods and services.

Under normal conditions the effect would have been for rents to decline, with property prices following suit, leading to mortgage defaults. But banks postponed the collapse into negative equity by lowering their lending standards, providing enough new credit to keep on inflating prices. This averted a collapse of their speculative mortgage and stock market lending. It was inflationary – but it was inflating asset prices, not commodity prices or wages. Two decades of asset price inflation enabled speculators, homeowners and commercial investors to borrow the interest falling due and still make a capital gain.

This hope for a price gain made winning bidders willing to pay lenders all the current income – making banks the ultimate and major rentier income recipients. The process of inflating asset prices by easing credit terms and lowering the interest rate was self-feeding. But it also was self-terminating, because raising the multiple by which a given real estate rent or business income can be “capitalized” into bank loans increased the economy’s debt overhead.

Securities markets became part of this problem. Rising stock and bond prices made pension funds pay more to purchase a retirement income – so “pension fund capitalism” was coming undone. So was the industrial economy itself. Instead of raising new equity financing for companies, the stock market became a vehicle for corporate buyouts. Raiders borrowed to buy out stockholders, loading down companies with debt. The most successful looters left them bankrupt shells. And when creditors turned their economic gains from this process into political power to shift the tax burden onto wage earners and industry, this raised the cost of living and doing business – by more than technology was able to lower prices.

The EU rejects central bank money creation, leaving deficit financing to the banks
Article 123 of the Lisbon Treaty forbids the ECB or other central banks to lend to government. But central banks were created specifically – to finance government deficits. The EU has rolled back history to the way things were three hundred years ago, before the Bank of England was created. Reserving the task of credit creation for commercial banks, it leaves governments without a central bank to finance the public spending needed to avert depression and widespread financial collapse.

So the plan has backfired. When “hard money” policy makers limited central bank power, they assumed that public debts would be risk-free. Obliging budget deficits to be financed by private creditors seemed to offer a bonanza: being able to collect interest for creating electronic credit that governments can create themselves. But now, European governments need credit to balance their budget or face default. So banks now want a central bank to create the money to bail them out for the bad loans they have made.

For starters, the ECB’s €489 billion in three-year loans at 1% interest gives banks a free lunch arbitrage opportunity (the “carry trade”) to buy Greek and Spanish bonds yielding a higher rate. The policy of buying government bonds in the open market – after banks first have bought them at a lower issue price – gives the banks a quick and easy trading gain.

How are these giveaways less inflationary than for central banks to directly finance budget deficits and roll over government debts? Is the aim of giving banks easy gains simply to provide them with resources to resume the Bubble Economy lending that led to today’s debt overhead in the first place?

Conclusion
Governments can create new credit electronically on their own computer keyboards as easily as commercial banks can. And unlike banks, their spending is expected to serve a broad social purpose, to be determined democratically. When commercial banks gain policy control over governments and central banks, they tend to support their own remunerative policy of creating asset-inflationary credit – leaving the clean-up costs to be solved by a post-bubble austerity. This makes the debt overhead even harder to pay – indeed, impossible.

So we are brought back to the policy issue of how public money creation to finance budget deficits differs from issuing government bonds for banks to buy. Is not the latter option a convoluted way to finance such deficits – at a needless interest charge? When governments monetize their budget deficits, they do not have to pay bondholders.

I have heard bankers argue that governments need an honest broker to decide whether a loan or public spending policy is responsible. To date their advice has not promoted productive credit. Yet they now are attempting to compensate for the financial crisis by telling debtor governments to sell off property in their public domain. This “solution” relies on the myth that privatization is more efficient and will lower the cost of basic infrastructure services. Yet it involves paying interest to the buyers of rent-extraction rights, higher executive salaries, stock options and other financial fees.

Most cost savings are achieved by shifting to non-unionized labor, and typically end up being paid to the privatizers, their bankers and bondholders, not passed on to the public. And bankers back price deregulation, enabling privatizers to raise access charges. This raises the economy’s cost base and thus lowers its competitive advantage – just the opposite of what is promised.

Banking has moved so far away from funding industrial growth and economic development that it now benefits primarily at the economy’s expense in a predator-like extractive manner, not by making productive loans. This is now the great problem confronting our time. Banks now lend mainly to other financial institutions, hedge funds, corporate raiders, insurance companies and real estate, and engage in their own speculation in foreign currency, interest-rate arbitrage, and computer-driven trading programs. Industrial firms bypass the banking system by financing new capital investment out of their own retained earnings, and meet their liquidity needs by issuing their own commercial paper directly. Yet to keep the bank casino winning, global bankers now want governments not only to bail them out but to enable them to renew their failed business plan – and to keep the present debts in place so that creditors will not have to take a loss.

This wish means that society should lose, and even suffer depression. We are dealing here not only with greed, but with outright antisocial behavior and hostility.

Europe thus has reached a critical point in having to decide whose interest to put first: that of banks, or the “real” economy. History provides a wealth of examples illustrating the dangers of capitulating to bankers, and also for how to restructure banking along more productive lines. The underlying questions are clear enough:

• Have banks outlived their historical role, or can they be restructured to finance productive capital investment rather than simply inflate asset prices?
• Would a public option provide less costly and better directed credit?
• Why not promote economic recovery by writing down debts to reflect the ability to pay, rather than relinquishing more wealth to an increasingly aggressive creditor class?

Solving the Eurozone’s financial problem can be made much easier by the tax reforms that classical economists advocated to complement their financial reforms. To free consumers and employers from taxation, they proposed to levy the burden on the “unearned increment” of land and natural resource rent, monopoly rent and financial privilege. The guiding principle was that property rights in the earth, monopolies and other ownership privileges have no direct cost of production, and hence can be taxed without reducing their supply or raising their price, which is set in the market. Removing the tax deductibility for interest is the other key reform that is needed.

A rent tax holds down housing prices and those of basic infrastructure services, whose untaxed revenue tends to be capitalized into bank loans and paid out in the form of interest charges. Additionally, land and natural resource rents – along with interest – are the easiest to tax, because they are highly visible and their value is easy to assess.

Pressure to narrow existing budget deficits offers a timely opportunity to rationalize the tax systems of Greece and other PIIGS countries in which the wealthy avoid paying their fair share of taxes. The political problem blocking this classical fiscal policy is that it “interferes” with the rent-extracting free lunches that banks seek to lend against. So they act as lobbyists for untaxing real estate and monopolies (and themselves as well). Despite the financial sector’s desire to see governments remain sufficiently solvent to pay bondholders, it has subsidized an enormous public relations apparatus and academic junk economics to oppose the tax policies that can close the fiscal gap in the fairest way.

It is too early to forecast whether banks or governments will emerge victorious from today’s crisis. As economies polarize between debtors and creditors, planning is shifting out of public hands into those of bankers. The easiest way for them to keep this power is to block a true central bank or strong public sector from interfering with their monopoly of credit creation. The counter is for central banks and governments to act as they were intended to, by providing a public option for credit creation.

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For instance, the World Bank is essentially an American instrument, and the United States is a food-surplus nation threatened with loss of foreign markets for farm products as modernization of European agriculture proceeds. For the World Bank to finance such institutional reforms in developing nations as would lead them toward self-sufficiency on food account would run counter to American interests. U.S. farm surpluses would become unmanageable as the overseas market for U.S. farm products dwindled. Hence, the World Bank prefers perpetuation of world poverty to the development of adequate overseas capacity to feed the peoples of developing countries.

There is a yet more subtle point to be considered. Mineral resources represent diminishing assets. It is in the interest of developing peoples to conserve such assets for their own ultimate use in manufacturing industries, as these develop within the borders of nations rich in raw materials but backward in general development. In the short run such domestic use of mineral resources is not possible because of inadequate industrial capital and consumer markets place. The specter is thus raised that in the long run these countries will find themselves depleted of resources as World Bank programs accelerate the exploitation of their mineral deposits for use by other nations.

The long-term prospect is thus for these countries to be unable to earn foreign exchange on export account sufficient to finance their required food imports. The World Bank has foreseen this. Its proposals for population limitation in these countries is a cold-blooded attempt to extort from them their mineral resources, without assuming responsibility for the sustenance of these peoples once the industrialized West has stripped them of their fuel and mineral deposits.

Consider the alternative, that World Bank loans and technical assistance foster agricultural self-sufficiency among these peoples. Assume substantial success in this endeavor in, say, a decade. Thereafter, exportation of fuels and minerals would become a matter of choice by these peoples, not a necessity. Such export might continue at current levels; it might increase, or it might diminish. The decision to conserve or to dissipate exhaustible resources would be autonomous, a matter of choice by these peoples and their governments, not something imposed upon them from outside. The decision about desirable levels of population also would be a local matter, not something demanded among the terms on which capital resources are obtained from foreign suppliers. The peoples now dependent would escape that trap. This is not intended or desired either by the World Bank or by the government of the United States and its client regimes.

It is only a seeming paradox that the World Bank simultaneously fosters the development of resources in impoverished countries while demanding reduction of their population’s rate of increase. What seems to be planned by the West is a reduction in the rate of population growth in these countries sufficient to permit the continued dissipation of their irreplaceable resources while postponing indefinitely their total immiserization. In the estimation of the World Bank, the ideal eventual population for these countries is number of people that can be sustained from their domestic agriculture above the basic poverty level, once the West has taken away the last of their recoverable minerals. The ideal short-run population is the number needed to operate the enterprises whose intent is precisely to exhaust the resources of these countries and, meanwhile, can be sustained by imported foodstuffs paid for by the minerals irretrievably lost by exportation.

The issue therefore is not between a higher rate of growth in population than in resources. It is that populations in impoverished and politically backward countries today, whatever the rate of development of their mineral resources, exceed the number of people that eventually can be fed once these minerals have been exhausted. The logic of the situation, dictated by the callousness of the West, is that populations in these countries must decline in symmetry with the approaching – no matter how gradual – exhaustion of their minerals.

Whether the United States and the World Bank have been led to this objective by their intention to preserve the obsolete and oppressive militaristic class institutions in developing nations, or whether they have been led to the preservation of these institutions in order that the mineral resources of these countries can continue to be stripped from them, may be a matter for conjecture. But the facts remain, whatever the dominant motives at work. Excessive industrialization in the United States, coupled with increasingly wasteful uses of resources on armaments and on personal luxuries that are essentially trivial in terms of human well-being, makes essential the U.S. exploitation of the developing countries, their resources and peoples. The United States is in deficit on raw-materials account, but is unwilling to limit its industrial expansion correspondingly. It is in surplus on farm products account, but is unwilling to limit its agriculture accordingly. The peoples of developing countries therefore are to be turned into the instrument through which the otherwise untenable U.S. economic process is perpetuated.

The customary pro-and-con arguments regarding birth control in these countries are a blind to the realities of the situation. Reduction of population growth might well prove desirable, but not for the reasons advanced by the World Bank and the United States to the impoverished countries. Balanced economic development, with ample sustenance from thriving agriculture, is the prerequisite not only for healthy evolution of these countries but also for postulation of what size of population is desirable for them. It bears repeating that beyond some point above the poverty level, population growth rates tend to diminish as per capita real incomes rise. To assume that this is something peculiar to Western peoples is absurd.

The anti-Malthusian argument, that beyond a point resources tend to increase more rapidly than population, is the universal experience of every developed country. The Malthus doctrine holds true only in conditions where per capita food resources are so low as to leave no surplus of human energy to devote to pursuits above the mere gathering and cultivation of crops. Malthusian advocacy by the World Bank is thus a pronouncement that the Bank intends to leave the economies of impoverished countries in the eventual condition of zero surplus of human energy.

Espousal of Malthusian doctrines, at first in U.S. foreign aid programs and soon afterward by the World Bank, is not surprising. It is in keeping with the evolving purpose of U.S.-centered aid programs. The motive for urging and even demanding population control as the remedy for malnutrition of average citizens in politically backward countries rests on the same grounds as those of Malthus in the time of England’s Poor Law debates: deliberate social retardation of the many to serve the vested interests of the few. In today’s case the few tend to be foreigners and foreign commercial and financial interests, including the U.S. economy’s own minerals-import and food-export requirements. Foreign populations are to supply raw materials and exchange them for U.S. food exports, not grow their own food and consume their fuels and minerals themselves or work them into manufactured goods to compete with U.S. producers.

Beyond this narrow economic interest is the more ancient specter that a large increase in world population may bring into question the balance of international military and political power. Centuries ago, mercantilist theorizing had viewed population growth largely as a military input. A similar view remains today. “Nothing is more menacing to world security,” testified Secretary of the Treasury Henry Morgenthau to the Senate in its 1945 hearings on the World Bank, “than to have the less developed countries, comprising more than half the population of the world, ranged in economic battle against the less populous but industrially more advanced nations of the west.”1 It thus was historically logical that Secretary of Defense Robert McNamara should become President of the World Bank upon leaving his position as architect of America’’ war in Southeast Asia.

Jose de Castro, a Brazilian sociologist, demographer, and former president of the United Nations Food and Agriculture Organization (FAO), published remarks in SLASC, the monthly organ of the Latin American Christian Workers Confederation, praising the encyclical Human Life as the most progressive the Church had yet published: “The United States imposes birth control, not to help the poor countries – no one believes any more in its ‘disinterested’ aid programs – but because that is its strategic defense policy. We must realize that the pill is North America’s best guarantee of continuing a dominant minority. . . . If ever the Third World achieves normal development, Washington’s ‘Roman Empire’ will disappear.”2

This interpretation poses the problem of political morality for liberals in the developed nations. Genuinely concerned over poverty in their own and other lands, they have seized upon regulation of population size as an immediate and automatic solution to the prevalence of malnutrition. They fail to perceive that among the many exploitations in this imperfect world is the exploitation of their very morality, that which in their fiber compels them on the course of liberalism.

The easy kind of liberalism, with its hope for ready-to-hand technocratic solutions to social problems, has led them to support the major way in which liberal institutions among backward peoples can be prevented from evolving. Their support for higher living standards for all has been exploited into de facto support of the oppressive and militarist regimes in backward countries. That indeed has become the purpose of the Malthusianism promoted by the World Bank and the government of the United States. American liberals have been its unwitting allies, and thereby the allies of the world’s most reactionary regimes.

Michael appears on Capital Account to discuss his two most recent articles, Democracy & Debt and Europe’s Transition from Social Democracy to Oligarchy.

The easiest way to understand Europe’s financial crisis is to look at the solutions being proposed to resolve it. They are a banker’s dream, a grab bag of giveaways that few voters would be likely to approve in a democratic referendum. Bank strategists learned not to risk submitting their plans to democratic vote after Icelanders twice refused in 2010-11 to approve their government’s capitulation to pay Britain and the Netherlands for losses run up by badly regulated Icelandic banks operating abroad. Lacking such a referendum, mass demonstrations were the only way for Greek voters to register their opposition to the €50 billion in privatization sell-offs demanded by the European Central Bank (ECB) in autumn 2011.

The problem is that Greece lacks the ready money to redeem its debts and pay the interest charges. The ECB is demanding that it sell off public assets – land, water and sewer systems, ports and other assets in the public domain, and also cut back pensions and other payments to its population. The “bottom 99%” understandably are angry to be informed that the wealthiest layer of the population is largely responsible for the budget shortfall by stashing away a reported €45 billion of funds stashed away in Swiss banks alone. The idea of normal wage-earners being obliged to forfeit their pensions to pay for tax evaders – and for the general un-taxing of wealth since the regime of the colonels – makes most people understandably angry. For the ECB, EU and IMF “troika” to say that whatever the wealthy take, steal or evade paying must be made up by the population at large is not a politically neutral position. It comes down hard on the side of wealth that has been unfairly taken.

A democratic tax policy would reinstate progressive taxation on income and property, and would enforce its collection – with penalties for evasion. Ever since the 19th century, democratic reformers have sought to free economies from waste, corruption and “unearned income.” But the ECB “troika” is imposing a regressive tax – one that can be imposed only by turning government policy-making over to a set of unelected “technocrats.”

To call the administrators of so anti-democratic a policy “technocrats” seems to be a cynical scientific-sounding euphemism for financial lobbyists or bureaucrats deemed suitably tunnel-visioned to act as useful idiots on behalf of their sponsors. Their ideology is the same austerity philosophy that the IMF imposed on Third World debtors from the 1960s through the 1980s. Claiming to stabilize the balance of payments while introducing free markets, these officials sold off export sectors and basic infrastructure to creditor-nation buyers. The effect was to drive austerity-ridden economies even deeper into debt – to foreign bankers and their own domestic oligarchies.

This is the treadmill on which Eurozone social democracies are now being placed. Under the political umbrella of financial emergency, wages and living standards are to be scaled back and political power shifted from elected government to technocrats governing on behalf of large banks and financial institutions. Public-sector labor is to be privatized – and de-unionized, while Social Security, pension plans and health insurance are scaled back.

This is the basic playbook that corporate raiders follow when they empty out corporate pension plans to pay their financial backers in leveraged buyouts. It also is how the former Soviet Union’s economy was privatized after 1991, transferring public assets into the hands of kleptocrats, who worked with Western investment bankers to make the Russian and other stock exchanges the darlings of the global financial markets. Property taxes were scaled back while flat taxes were imposed on wages (a cumulative 59 percent in Latvia). Industry was dismantled as land and mineral rights were transferred to foreigners, economies driven into debt and skilled and unskilled labor alike was obliged to emigrate to find work.

Pretending to be committed to price stability and free markets, bankers inflated a real estate bubble on credit. Rental income was capitalized into bank loans and paid out as interest. This was enormously profitable for bankers, but it left the Baltics and much of Central Europe debt strapped and in negative equity by 2008. Neoliberals applaud their plunging wage levels and shrinking GDP as a success story, because these countries shifted the tax burden onto employment rather than property or finance. Governments bailed out banks at taxpayer expense.

It is axiomatic that the solution to any major social problem tends to create even larger problems – not always unintended! From the financial sector’s vantage point, the “solution” to the Eurozone crisis is to reverse the aims of the Progressive Era a century ago – what John Maynard Keynes gently termed “euthanasia of the rentier” in 1936. The idea was to subordinate the banking system to serve the economy rather than the other way around. Instead, finance has become the new mode of warfare – less ostensibly bloody, but with the same objectives as the Viking invasions over a thousand years ago, and Europe’s subsequent colonial conquests: appropriation of land and natural resources, infrastructure and whatever other assets can provide a revenue stream. It was to capitalize and estimate such values, for instance, that William the Conqueror compiled the Domesday Book after 1066, a model of ECB and IMF-style calculations today.

This appropriation of the economic surplus to pay bankers is turning the traditional values of most Europeans upside down. Imposition of economic austerity, dismantling social spending, sell-offs of public assets, de-unionization of labor, falling wage levels, scaled-back pension plans and health care in countries subject to democratic rules requires convincing voters that there is no alternative. It is claimed that without a profitable banking sector (no matter how predatory) the economy will break down as bank losses on bad loans and gambles pull down the payments system. No regulatory agencies can help, no better tax policy, nothing except to turn over control to lobbyists to save banks from losing the financial claims they have built up.

What banks want is for the economic surplus to be paid out as interest, not used for rising living standards, public social spending or even for new capital investment. Research and development takes too long. Finance lives in the short run. This short-termism is self-defeating, yet it is presented as science. The alternative, voters are told, is the road to serfdom: interfering with the “free market” by financial regulation and even progressive taxation.

There is an alternative, of course. It is what European civilization from the 13th-century Schoolmen through the Enlightenment and the flowering of classical political economy sought to create: an economy free of unearned income, free of vested interests using special privileges for “rent extraction.” At the hands of the neoliberals, by contrast, a free market is one free for a tax-favored rentier class to extract interest, economic rent and monopoly prices.

Rentier interests present their behavior as efficient “wealth creation.” Business schools teach privatizers how to arrange bank loans and bond financing by pledging whatever they can charge for the public infrastructure services being sold by governments. The idea is to pay this revenue to banks and bondholders as interest, and then make a capital gain by raising access fees for roads and ports, water and sewer usage and other basic services. Governments are told that economies can be run more efficiently by dismantling public programs and selling off assets.

Never has the gap between pretended aim and actual effect been more hypocritical. Making interest payments (and even capital gains) tax-exempt deprives governments of revenue from the user fees they are relinquishing, increasing their budget deficits. And instead of promoting price stability (the ECB’s ostensible priority), privatization increases prices for infrastructure, housing and other costs of living and doing business by building in interest charges and other financial overhead – and much higher salaries for management. So it is merely a knee-jerk ideological claim that this policy is more efficient simply because privatizers do the borrowing rather than government.

There is no technological or economic need for Europe’s financial managers to impose depression on much of its population. But there is a great opportunity to gain for the banks that have gained control of ECB economic policy. Since the 1960s, balance-of-payments crises have provided opportunities for bankers and liquid investors to seize control of fiscal policy – to shift the tax burden onto labor and dismantle social spending in favor of subsidizing foreign investors and the financial sector. They gain from austerity policies that lower living standards and scale back social spending. A debt crisis enables the domestic financial elite and foreign bankers to indebt the rest of society, using their privilege of credit (or savings built up as a result of less progressive tax policies) as a lever to grab assets and reduce populations to a state of debt dependency.

The kind of warfare now engulfing Europe is thus more than just economic in scope. It threatens to become a historic dividing line between the past half-century’s epoch of hope and technological potential to a new era of polarization as a financial oligarchy replaces democratic governments and reduces populations to debt peonage.

For so bold an asset and power grab to succeed, it needs a crisis to suspend the normal political and democratic legislative processes that would oppose it. Political panic and anarchy create a vacuum into which grabbers can move quickly, using the rhetoric of financial deception and a junk economics to rationalize self-serving solutions by a false view of economic history – and in the case of today’s ECB, German history in particular.

A central bank that is blocked from acing like one
Governments do not need to borrow from commercial bankers or other lenders. Ever since the Bank of England was founded in 1694, central banks have printed money to finance public spending. Bankers also create credit freely – when they make a loan and credit the customer’s account, in exchange for a promissory note bearing interest. Today, these banks can borrow reserves from the government central bank at a low annual interest rate (0.25% in the United States) and lend it out at a higher rate. So banks are glad to see the government’s central bank create credit to lend to them. But when it comes to governments creating money to finance their budget deficits for spending in the rest of the economy, banks would prefer to have this market and its interest return for themselves.

European commercial banks are especially adamant that the European Central Bank should not finance government budget deficits. But private credit creation is not necessarily less inflationary than governments monetizing their deficits (simply by printing the money needed). Most commercial bank loans are made against real estate, stocks and bonds – providing credit that is used to bid up housing prices, and prices for financial securities (as in loans for leveraged buyouts).

It is mainly government that spends credit on the “real” economy, to the extent that public budget deficits employ labor or are spent on goods and services. If governments avoid paying interest by having their central banks printing money on their own computer keyboards rather than borrowing from banks that do the same thing on their own keyboards. (Abraham Lincoln simply printed currency when he financed the U.S. Civil War with “greenbacks.”)

Banks would like to use their credit-creating privilege to obtain interest for lending to governments to finance public budget deficits. So they have a self-interest in limiting the government’s “public option” to monetize its budget deficits. To secure a monopoly on their credit-creating privilege, banks have mounted a vast character assassination on government spending, and indeed on government authority in general – which happens to be the only authority with sufficient power to control their power or provide an alternative public financial option, as Post Office savings banks do in Japan, Russia and other countries. This competition between banks and government explains the false accusations made that government credit creation is more inflationary than when commercial banks do it.

The reality is made clear by comparing the ways in which the United States, Britain and Europe handle their public financing. The U.S. Treasury is by far the world’s largest debtor, and its largest banks seem to be in negative equity, liable to their depositors and to other financial institutions for much larger sums that can be paid by their portfolio of loans, investments and assorted financial gambles. Yet as global financial turmoil escalates, institutional investors are putting their money into U.S. Treasury bonds – so much that these bonds now yield less than 1%. By contrast, a quarter of U.S. real estate is in negative equity, American states and cities are facing insolvency and must scale back spending. Large companies are going bankrupt, pension plans are falling deeper into arrears, yet the U.S. economy remains a magnet for global savings.

Britain’s economy also is staggering, yet its government is paying just 2% interest. But European governments are now paying over 7%. The reason for this disparity is that they lack a “public option” in money creation. Having a Federal Reserve Bank or Bank of England that can print the money to pay interest or roll over existing debts is what makes the United States and Britain different from Europe. Nobody expects these two nations to be forced to sell off their public lands and other assets to raise the money to pay (although they may do this as a policy choice). Given that the U.S. Treasury and Federal Reserve can create new money, it follows that as long as government debts are denominated in dollars, they can print enough IOUs on their computer keyboards so that the only risk that holders of Treasury bonds bear is the dollar’s exchange rate vis-à-vis other currencies.

By contrast, the Eurozone has a central bank, but Article 123 of the Lisbon treaty forbids the ECB from doing what central banks were created to do: create the money to finance government budget deficits or roll over their debt falling due. Future historians no doubt will find it remarkable that there actually is a rationale behind this policy – or at least the pretense of a cover story. It is so flimsy that any student of history can see how distorted it is. The claim is that if a central bank creates credit, this threatens price stability. Only government spending is deemed to be inflationary, not private credit!

The Clinton Administration balanced the U.S. Government budget in the late 1990s, yet the Bubble Economy was exploding. On the other hand, the Federal Reserve and Treasury flooded the economy with $13 trillion in credit to the banking system credit after September 2008, and $800 billion more last summer in the Federal Reserve’s Quantitative Easing program (QE2). Yet consumer and commodity prices are not rising. Not even real estate or stock market prices are being bid up. So the idea that more money will bid up prices (MV=PT) is not operating today.

Commercial banks create debt. That is their product. This debt leveraging was used for more than a decade to bid up prices – making housing and buying a retirement income more expensive for Americans – but today’s economy is suffering from debt deflation as personal income, business and tax revenue is diverted to pay debt service rather than to spend on goods or invest or hire labor.

Much more striking is the travesty of German history that is being repeated again and again, as if repetition somehow will stop people from remembering what actually happened in the 20th century. To hear ECB officials tell the story, it would be reckless for a central bank to lend to government, because of the danger of hyperinflation. Memories are conjured up of the Weimar inflation in Germany in the 1920s. But upon examination, this turns out to be what psychiatrists call an implanted memory – a condition in which a patient is convinced that they have suffered a trauma that seems real, but which did not exist in reality.

What happened back in 1921 was not a case of governments borrowing from central banks to finance domestic spending such as social programs, pensions or health care as today. Rather, Germany’s obligation to pay reparations led the Reichsbank to flood the foreign exchange markets with deutsche marks to obtain the currency to buy pounds sterling, French francs and other currency to pay the Allies – which used the money to pay their Inter-Ally arms debts to the United States. The nation’s hyperinflation stemmed from its obligation to pay reparations in foreign currency. No amount of domestic taxation could have raised the foreign exchange that was scheduled to be paid.

By the 1930s this was a well-understood phenomenon, explained by Keynes and others who analyzed the structural limits on the ability to pay foreign debt imposed without regard for the ability to pay out of current domestic-currency budgets. From Salomon Flink’s The Reichsbank and Economic Germany (1931) to studies of the Chilean and other Third World hyperinflations, economists have found a common causality at work, based on the balance of payments. First comes a fall in the exchange rate. This raises the price of imports, and hence the domestic price level. More money is then needed to transact purchases at the higher price level. The statistical sequence and line of causation leads from balance-of-payments deficits to currency depreciation raising import costs, and from these price increases to the money supply, not the other way around.

Today’s “free marketers” writing in the Chicago monetarist tradition (basically that of David Ricardo) leaves the foreign and domestic debt dimensions out of account. It is as if “money” and “credit” are assets to be bartered against goods. But a bank account or other form of credit means debt on the opposite side of the balance sheet. One party’s debt is another party’s saving – and most savings today are lent out at interest, absorbing money from the non-financial sectors of the economy. The discussion is stripped down to a simplistic relationship between the money supply and price level – and indeed, only consumer prices, not asset prices. In their eagerness to oppose government spending – and indeed to dismantle government and replace it with financial planners – neoliberal monetarists neglect the debt burden being imposed today from Latvia and Iceland to Ireland and Greece, Italy, Spain and Portugal.

If the euro breaks up, it is because of the obligation of governments to pay bankers in money that must be borrowed rather than created through their own central bank. Unlike the United States and Britain which can create central bank credit on their own computer keyboards to keep their economy from shrinking or becoming insolvent, the German constitution and the Lisbon Treaty prevent the central bank from doing this.

The effect is to oblige governments to borrow from commercial banks at interest. This gives bankers the ability to create a crisis – threatening to drive economies out of the Eurozone if they do not submit to “conditionalities” being imposed in what quickly is becoming a new class war of finance against labor.

Disabling Europe’s central bank to deprive governments of the power to create money
One of the three defining characteristics of a nation-state is the power to create money. A second characteristic is the power to levy taxes. Both of these powers are being transferred out of the hands of democratically elected representatives to the financial sector, as a result of tying the hands of government.

The third characteristic of a nation-state is the power to declare war. What is happening today is the equivalent of warfare – but against the power of government! It is above all a financial mode of warfare – and the aims of this financial appropriation are the same as those of military conquest: first, the land and subsoil riches on which to charge rents as tribute; second, public infrastructure to extract rent as access fees; and third, any other enterprises or assets in the public domain.

In this new financialized warfare, governments are being directed to act as enforcement agents on behalf of the financial conquerors against their own domestic populations. This is not new, to be sure. We have seen the IMF and World Bank impose austerity on Latin American dictatorships, African military chiefdoms and other client oligarchies from the 1960s through the 1980s. Ireland and Greece, Spain and Portugal are now to be subjected to similar asset stripping as public policy making is shifted into the hands of supra-governmental financial agencies acting on behalf of bankers – and thereby for the top 1% of the population.

When debts cannot be paid or rolled over, foreclosure time arrives. For governments, this means privatization selloffs to pay creditors. In addition to being a property grab, privatization aims at replacing public sector labor with a non-union work force having fewer pension rights, health care or voice in working conditions. The old class war is thus back in business – with a financial twist. By shrinking the economy, debt deflation helps break the power of labor to resist.

It also gives creditors control of fiscal policy. In the absence of a pan-European Parliament empowered to set tax rules, fiscal policy passes to the ECB. Acting on behalf of banks, the ECB seems to favor reversing the 20th century’s drive for progressive taxation. And as U.S. financial lobbyists have made clear, the creditor demand is for governments to re-classify public social obligations as “user fees,” to be financed by wage withholding turned over to banks to manage (or mismanage, as the case may be). Shifting the tax burden off real estate and finance onto labor and the “real” economy thus threatens to become a fiscal grab coming on top of the privatization grab.

This is self-destructive short-termism. The irony is that the PIIGS budget deficits stem largely from un-taxing property, and a further tax shift will worsen rather than help stabilize government budgets. But bankers are looking only at what they can take in the short run. They know that whatever revenue the tax collector relinquishes from real estate and business is “free” for buyers to pledge to the banks as interest. So Greece and other oligarchic economies are told to “pay their way” by slashing government social spending (but not military spending for the purchase of German and French arms) and shifting taxes onto labor and industry, and onto consumers in the form of higher user fees for public services not yet privatized.

In Britain, Prime Minister Cameron claims that scaling back government even more along Thatcherite-Blairite lines will leave more labor and resources available for private business to hire. Fiscal cutbacks will indeed throw labor out of work, or at least oblige it to find lower-paid jobs with fewer rights. But cutting back public spending will shrink the business sector as well, worsening the fiscal and debt problems by pushing economies deeper into recession.

If governments cut back their spending to reduce the size of their budget deficits – or if they raise taxes on the economy at large, to run a surplus – then these surpluses will suck money out of the economy, leaving less to be spent on goods and services. The result can only be unemployment, further debt defaults and bankruptcies. We may look to Iceland and Latvia as canaries in this financial coalmine. Their recent experience shows that debt deflation leads to emigration, shortening life spans, lower birth rates, marriages and family formation – but provides great opportunities for vulture funds to suck wealth upward to the top of the financial pyramid.

Today’s economic crisis is a matter of policy choice, not necessity. As President Obama’s chief of staff Rahm Emanuel quipped: “A crisis is too good an opportunity to let go to waste.” In such cases the most logical explanation is that some special interest must be benefiting. Depressions increase unemployment, helping to break the power of unionized as well as non-union labor. The United States is seeing a state and local budget squeeze (as bankruptcies begin to be announced), with the first cutbacks coming in the sphere of pension defaults. High finance is being paid – by not paying the working population for savings and promises made as part of labor contracts and employee retirement plans.

Big fish are eating little fish.

This seems to be the financial sector’s idea of good economic planning. But it is worse than a zero-sum plan, in which one party’s gain is another’s loss. Economies as a whole will shrink – and change their shape, polarizing between creditors and debtors. Economic democracy will give way to financial oligarchy, reversing the trend of the past few centuries.

Is Europe really ready to take this step? Do its voters recognize that stripping the government of the public option of money creation will hand the privilege over to banks as a monopoly? How many observers have traced the almost inevitable result: shifting economic planning and credit allocation to the banks?

Even if governments provide a “public option,” creating their own money to finance their budget deficits and supplying the economy with productive credit to rebuild infrastructure, a serious problem remains: how to dispose of the existing debt overhead now acts as a deadweight on the economy. Bankers and the politicians they back are refusing to write down debts to reflect the ability to pay. Lawmakers have not prepared society with a legal procedure for debt write-downs – except for New York State’s Fraudulent Conveyance Law, calling for debts to be annulled if lenders made loans without first assuring themselves of the debtor’s ability to pay.

Bankers do not want to take responsibility for bad loans. This poses the financial problem of just what policy-makers should do when banks have been so irresponsible in allocating credit. But somebody has to take a loss. Should it be society at large, or the bankers?

It is not a problem that bankers are prepared to solve. They want to turn the problem over to governments – and define the problem as how governments can “make them whole.” What they call a “solution” to the bad-debt problem is for the government to give them good bonds for bad loans (“cash for trash”) – to be paid in full by taxpayers. Having engineered an enormous increase in wealth for themselves, bankers now want to take the money and run – leaving economies debt ridden. The revenue that debtors cannot pay will now be spread over the entire economy to pay – vastly increasing everyone’s cost of living and doing business.

Why should they be “made whole,” at the cost of shrinking the rest of the economy? The bankers’ answer is that debts are owed to labor’s pension funds, to consumers with bank deposits, and the whole system will come crashing down if governments miss a bond payment. When pressed, bankers admit that they have taken out risk insurance – collateralized debt obligations and other risk swaps. But the insurers are largely U.S. banks, and the American Government is pressuring Europe not to default and thereby hurt the U.S. banking system. So the debt tangle has become politicized internationally.

So for bankers, the line of least resistance is to foster an illusion that there is no need for them to accept defaults on the unpayably high debts they have encouraged. Creditors always insist that the debt overhead can be maintained – if governments simply will reduce other expenditures, while raising taxes on individuals and non-financial business.

The reason why this won’t work is that trying to collect today’s magnitude of debt will injure the underlying “real” economy, making it even less able to pay its debts. What started as a financial problem (bad debts) will now be turned into a fiscal problem (bad taxes). Taxes are a cost of doing business just as paying debt service is a cost. Both costs must be reflected in product prices. When taxpayers are saddled with taxes and debts, they have less revenue free to spend on consumption. So markets shrink, putting further pressure on the profitability of domestic enterprises. The combination makes any country following such policy a high-cost producer and hence less competitive in global markets.

This kind of financial planning – and its parallel fiscal tax shift – leads toward de-industrialization. Creating ECB or IMF inter-government fiat money leaves the debts in place, while preserving wealth and economic control in the hands of the financial sector. Banks can receive debt payments on overly mortgaged properties only if debtors are relieved of some real estate taxes. Debt-strapped industrial companies can pay their debts only by scaling back pension obligations, health care and wages to their employees – or tax payments to the government. In practice, “honoring debts” turns out to mean debt deflation and general economic shrinkage.

This is the financiers’ business plan. But to leave tax policy and centralized planning in the hands of bankers turns out to be the opposite of what the past few centuries of free market economics have been all about. The classical objective was to minimize the debt overhead, to tax land and natural resource rents, and to keep monopoly prices in line with actual costs of production (“value”). Bankers have lent increasingly against the same revenues that free market economists believed should be the natural tax base.

So something has to give. Will it be the past few centuries of liberal free-market economic philosophy, relinquishing planning the economic surplus to bankers? Or will society re-assert classical economic philosophy and Progressive Era principles, and re-assert social shaping of financial markets to promote long-term growth with minimum costs of living and doing business?

At least in the most badly indebted countries, European voters are waking up to an oligarchic coup in which taxation and government budgetary planning and control is passing into the hands of executives nominated by the international bankers’ cartel. This result is the opposite of what the past few centuries of free market economics has been all about.

Book V of Aristotle’s Politics describes the eternal transition of oligarchies making themselves into hereditary aristocracies – which end up being overthrown by tyrants or develop internal rivalries as some families decide to “take the multitude into their camp” and usher in democracy, within which an oligarchy emerges once again, followed by aristocracy, democracy, and so on throughout history.

Debt has been the main dynamic driving these shifts – always with new twists and turns. It polarizes wealth to create a creditor class, whose oligarchic rule is ended as new leaders (“tyrants” to Aristotle) win popular support by cancelling the debts and redistributing property or taking its usufruct for the state.

Since the Renaissance, however, bankers have shifted their political support to democracies. This did not reflect egalitarian or liberal political convictions as such, but rather a desire for better security for their loans. As James Steuart explained in 1767, royal borrowings remained private affairs rather than truly public debts [1]. For a sovereign’s debts to become binding upon the entire nation, elected representatives had to enact the taxes to pay their interest charges.

By giving taxpayers this voice in government, the Dutch and British democracies provided creditors with much safer claims for payment than did kings and princes whose debts died with them. But the recent debt protests from Iceland to Greece and Spain suggest that creditors are shifting their support away from democracies. They are demanding fiscal austerity and even privatization sell-offs.

This is turning international finance into a new mode of warfare. Its objective is the same as military conquest in times past: to appropriate land and mineral resources, communal infrastructure and extract tribute. In response, democracies are demanding referendums over whether to pay creditors by selling off the public domain and raising taxes to impose unemployment, falling wages and economic depression. The alternative is to write down debts or even annul them, and to re-assert regulatory control over the financial sector.

Near Eastern rulers proclaimed Clean Slates to preserve economic balance
Charging interest on advances of goods or money was not originally intended to polarize economies. First administered early in the third millennium BC as a contractual arrangement by Sumer’s temples and palaces with merchants and entrepreneurs who typically worked in the royal bureaucracy, interest at 20% (doubling the principal in five years) was supposed to approximate a fair share of the returns from long-distance trade or leasing land and other public assets such as workshops, boats and ale houses.

As the practice was privatized by royal collectors of user fees and rents, “divine kingship” protected agrarian debtors. Hammurabi’s laws (c. 1750 BC) cancelled their debts in times of flood or drought. All the rulers of his Babylonian dynasty began their first full year on the throne by cancelling agrarian debts so as to clear out payment arrears by proclaiming a clean slate. Bondservants, land or crop rights and other pledges were returned to the debtors to “restore order” in an idealized “original” condition of balance. This practice survived in the Jubilee Year of Mosaic Law in Leviticus 25.

The logic was clear enough. Ancient societies needed to field armies to defend their land, and this required liberating indebted citizens from bondage. Hammurabi’s laws protected charioteers and other fighters from being reduced to debt bondage, and blocked creditors from taking the crops of tenants on royal and other public lands and on communal land that owed manpower and military service to the palace.

In Egypt, the pharaoh Bakenranef (c. 720-715 BC, “Bocchoris” in Greek) proclaimed a debt amnesty and abolished debt-servitude when faced with a military threat from Ethiopia. According to Diodorus of Sicily (I, 79, writing in 40-30 BC), he ruled that if a debtor contested the claim, the debt was nullified if the creditor could not back up his claim by producing a written contract. (It seems that creditors always have been prone to exaggerate the balances due.) The pharaoh reasoned that “the bodies of citizens should belong to the state, to the end that it might avail itself of the services which its citizens owed it, in times of both war and peace. For he felt that it would be absurd for a soldier … to be haled to prison by his creditor for an unpaid loan, and that the greed of private citizens should in this way endanger the safety of all.”

The fact that the main Near Eastern creditors were the palace, temples and their collectors made it politically easy to cancel the debts. It always is easy to annul debts owed to oneself. Even Roman emperors burned the tax records to prevent a crisis. But it was much harder to cancel debts owed to private creditors as the practice of charging interest spread westward to Mediterranean chiefdoms after about 750 BC. Instead of enabling families to bridge gaps between income and outgo, debt became the major lever of land expropriation, polarizing communities between creditor oligarchies and indebted clients. In Judah, the prophet Isaiah (5:8-9) decried foreclosing creditors who “add house to house and join field to field till no space is left and you live alone in the land.”

Creditor power and stable growth rarely have gone together. Most personal debts in this classical period were the product of small amounts of money lent to individuals living on the edge of subsistence and who could not make ends meet. Forfeiture of land and assets – and personal liberty – forced debtors into bondage that became irreversible. By the 7th century BC, “tyrants” (popular leaders) emerged to overthrow the aristocracies in Corinth and other wealthy Greek cities, gaining support by canceling the debts. In a less tyrannical manner, Solon founded the Athenian democracy in 594 BC by banning debt bondage.

But oligarchies re-emerged and called in Rome when Sparta’s kings Agis, Cleomenes and their successor Nabis sought to cancel debts late in the third century BC. They were killed and their supporters driven out. 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.

When the Gracchi brothers and their followers tried to reform the credit laws in 133 BC, the dominant Senatorial class acted with violence, killing them and inaugurating a century of Social War, resolved by the ascension of Augustus as emperor in 29 BC.

Rome’s creditor oligarchy wins the Social War, enserfs the population and brings on a Dark Age
Matters were more bloody abroad. Aristotle did not mention empire building as part of his political schema, but foreign conquest always has been a major factor in imposing debts, and war debts have been the major cause of public debt in modern times. Antiquity’s harshest debt levy was by Rome, whose creditors spread out to plague Asia Minor, its most prosperous province. The rule of law all but disappeared when the publican creditor “knights” arrived. Mithridates of Pontus led three popular revolts, and local populations in Ephesus and other cities rose up and killed a reported 80,000 Romans in 88 BC. The Roman army retaliated, and Sulla imposed war tribute of 20,000 talents in 84 BC. Charges for back interest multiplied this sum six-fold by 70 BC.

Among Rome’s leading historians, Livy, Plutarch and Diodorus blamed the fall of the Republic on creditor intransigence in waging the century-long Social War marked by political murder from 133 to 29 BC. Populist leaders sought to gain a following by advocating debt cancellations (e.g., the Catiline conspiracy in 63-62 BC). They were killed. By the second century AD about a quarter of the population was reduced to bondage. By the fifth century Rome’s economy collapsed, stripped of money. Subsistence life reverted to the countryside as a Dark Age descended.

Creditors find a legalistic reason to support parliamentary democracy
When banking recovered after the Crusades looted Byzantium and infused silver and gold to review Western European commerce, Christian opposition to charging interest was overcome by the combination of prestigious lenders (the Knights Templars and Hospitallers providing credit during the Crusades) and their major clients – kings, at first to pay the Church and increasingly to wage war. But royal debts went bad when kings died. The Bardi and Peruzzi went bankrupt in 1345 when Edward III repudiated his war debts. Banking families lost more on loans to the Habsburg and Bourbon despots on the thrones of Spain, Austria and France.
  
Matters changed with the Dutch democracy, seeking to win and secure its liberty from Habsburg Spain. The fact that their parliament was to contract permanent public debts on behalf of the state enabled the Low Countries to raise loans to employ mercenaries in an epoch when money and credit were the sinews of war. Access to credit “was accordingly their most powerful weapon in the struggle for their freedom,” notes Ehrenberg: “Anyone who gave credit to a prince knew that the repayment of the debt depended only on his debtor’s capacity and will to pay. The case was very different for the cities, which had power as overlords, but were also corporations, associations of individuals held in common bond. According to the generally accepted law each individual burgher was liable for the debts of the city both with his person and his property.”[2]

The financial achievement of parliamentary government was thus to establish debts that were not merely the personal obligations of princes, but were truly public and binding regardless of who occupied the throne. This is why the first two democratic nations, the Netherlands and Britain after its 1688 revolution, developed the most active capital markets and proceeded to become leading military powers. What is ironic is that it was the need for war financing that promoted democracy, forming a symbiotic trinity between war making, credit and parliamentary democracy in an epoch when money was still the sinews of war.

At this time “the legal position of the King qua borrower was obscure, and it was still doubtful whether his creditors had any remedy against him in case of default.”[3] The more despotic Spain, Austria and France became, the greater the difficulty they found in financing their military adventures. By the end of the eighteenth century Austria was left “without credit, and consequently without much debt” the least credit-worthy and worst armed country in Europe (as Steuart 1767:373 noted), fully dependent on British subsidies and loan guarantees by the time of the Napoleonic Wars.

Finance accommodates itself to democracy, but then pushes for oligarchy
While the nineteenth century’s democratic reforms reduced the power of landed aristocracies to control parliaments, bankers moved flexibly to achieve a symbiotic relationship with nearly every form of government. In France, followers of Saint-Simon promoted the idea of banks acting like mutual funds, extending credit against equity shares in profit. The German state made an alliance with large banking and heavy industry. Marx wrote optimistically about how socialism would make finance productive rather than parasitic. In the United States, regulation of public utilities went hand in hand with guaranteed returns. In China, Sun-Yat-Sen wrote in 1922: “I intend to make all the national industries of China into a Great Trust owned by the Chinese people, and financed with international capital for mutual benefit.”[4]

World War I saw the United States replace Britain as the major creditor nation, and by the end of World War II it had cornered some 80 percent of the world’s monetary gold. Its diplomats shaped the IMF and World Bank along creditor-oriented lines that financed trade dependency, mainly on the United States. Loans to finance trade and payments deficits were subject to “conditionalities” that shifted economic planning to client oligarchies and military dictatorships. The democratic response to resulting austerity plans squeezing out debt service was unable to go much beyond “IMF riots,” until Argentina rejected its foreign debt.

A similar creditor-oriented austerity is now being imposed on Europe by the European Central Bank (ECB) and EU bureaucracy. Ostensibly social democratic governments have been directed to save the banks rather than reviving economic growth and employment. Losses on bad bank loans and speculations are taken onto the public balance sheet while scaling back public spending and even selling off infrastructure. The response of taxpayers stuck with the resulting debt has been to mount popular protests starting in Iceland and Latvia in January 2009, and more widespread demonstrations in Greece and Spain this autumn to protest their governments’ refusal to hold referendums on these fateful bailouts of foreign bondholders.

Shifting planning away from elected public representatives to bankers
Every economy is planned. This traditionally has been the function of government. Relinquishing this role under the slogan of “free markets” leaves it in the hands of banks. Yet the planning privilege of credit creation and allocation turns out to be even more centralized than that of elected public officials. And to make matters worse, the financial time frame is short-term hit-and-run, ending up as asset stripping. By seeking their own gains, the banks tend to destroy the economy. The surplus ends up being consumed by interest and other financial charges, leaving no revenue for new capital investment or basic social spending.

This is why relinquishing policy control to a creditor class rarely has gone together with economic growth and rising living standards. The tendency for debts to grow faster than the population’s ability to pay has been a basic constant throughout all recorded history. Debts mount up exponentially, absorbing the surplus and reducing much of the population to the equivalent of debt peonage. To restore economic balance, antiquity’s cry for debt cancellation sought what the Bronze Age Near East achieved by royal fiat: to cancel the overgrowth of debts.

In more modern times, democracies have urged a strong state to tax rentier income and wealth, and when called for, to write down debts. This is done most readily when the state itself creates money and credit. It is done least easily when banks translate their gains into political power. When banks are permitted to be self-regulating and given veto power over government regulators, the economy is distorted to permit creditors to indulge in the speculative gambles and outright fraud that have marked the past decade. The fall of the Roman Empire demonstrates what happens when creditor demands are unchecked. Under these conditions the alternative to government planning and regulation of the financial sector becomes a road to debt peonage.

Finance vs. government; oligarchy vs. democracy
Democracy involves subordinating financial dynamics to serve economic balance and growth – and taxing rentier income or keeping basic monopolies in the public domain. Untaxing or privatizing property income “frees” it to be pledged to the banks, to be capitalized into larger loans. Financed by debt leveraging, asset-price inflation increases rentier wealth while indebting the economy at large. The economy shrinks, falling into negative equity.

The financial sector has gained sufficient influence to use such emergencies as an opportunity to convince governments that that the economy will collapse they it do not “save the banks.” In practice this means consolidating their control over policy, which they use in ways that further polarize economies. The basic model is what occurred in ancient Rome, moving from democracy to oligarchy. In fact, giving priority to bankers and leaving economic planning to be dictated by the EU, ECB and IMF threatens to strip the nation-state of the power to coin or print money and levy taxes.

The resulting conflict is pitting financial interests against national self-determination. The idea of an independent central bank being “the hallmark of democracy” is a euphemism for relinquishing the most important policy decision – the ability to create money and credit – to the financial sector. Rather than leaving the policy choice to popular referendums, the rescue of banks organized by the EU and ECB now represents the largest category of rising national debt. The private bank debts taken onto government balance sheets in Ireland and Greece have been turned into taxpayer obligations. The same is true for America’s $13 trillion added since September 2008 (including $5.3 trillion in Fannie Mae and Freddie Mac bad mortgages taken onto the government’s balance sheet, and $2 trillion of Federal Reserve “cash-for-trash” swaps).

This is being dictated by financial proxies euphemized as technocrats. Designated by creditor lobbyists, their role is to calculate just how much unemployment and depression is needed to squeeze out a surplus to pay creditors for debts now on the books. What makes this calculation self-defeating is the fact that economic shrinkage – debt deflation – makes the debt burden even more unpayable.

Neither banks nor public authorities (or mainstream academics, for that matter) calculated the economy’s realistic ability to pay – that is, to pay without shrinking the economy. Through their media and think tanks, they have convinced populations that the way to get rich most rapidly is to borrow money to buy real estate, stocks and bonds rising in price – being inflated by bank credit – and to reverse the past century’s progressive taxation of wealth.

To put matters bluntly, the result has been junk economics. Its aim is 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. Government planning and taxation is accused of being “the road to serfdom,” as if “free markets” controlled by bankers given leeway to act recklessly is not planned by special interests in ways that are oligarchic, not democratic. Governments are told to pay bailout debts taken on not to defend countries in military warfare as in times past, but to benefit the wealthiest layer of the population by shifting its losses onto taxpayers.

The failure to take the wishes of voters into consideration leaves the resulting national debts on shaky ground politically and even legally. Debts imposed by fiat, by governments or foreign financial agencies in the face of strong popular opposition may be as tenuous as those of the Habsburgs and other despots in past epochs. Lacking popular validation, they may die with the regime that contracted them. New governments may act democratically to subordinate the banking and financial sector to serve the economy, not the other way around.

At the very least, they may seek to pay by re-introducing progressive taxation of wealth and income, shifting the fiscal burden onto rentier wealth and property. Re-regulation of banking and providing a public option for credit and banking services would renew the social democratic program that seemed well underway a century ago.

Iceland and Argentina are most recent examples, but one may look back to the moratorium on Inter-Ally arms debts and German reparations in 1931.A basic mathematical as well as political principle is at work: Debts that can’t be paid, won’t be.

Footnotes:

[1] James Steuart, Principles of Political Oeconomy (1767), p. 353.

[2] Richard Ehrenberg, Capital and Finance in the Age of the Renaissance (1928):44f., 33.

[3] Charles Wilson, England’s Apprenticeship: 1603-1763 (London: 1965):89.

[4] Sun Yat-Sen, The International Development of China (1922):231ff.