by Alan Cibils
Related Module: Global Debt Slavery
Keywords: Illegitimate debt Odious Debt unsustainable debt Creditor Debtor Troika Petro-dollars Neoclassical economics
The history of capitalism shows that in the absence of strong state regulation of economic activity, financial crises are inevitable and endemic. The greatest financial crisis before the one currently unfolding in Europe began in 1929. Even though the crisis of 1929 started in the U.S, its effects were felt world-wide with a decade-long depression (known as the Great Depression) that left millions of people destitute around the world.
As a consequence of that crisis, industrialised countries signed the Bretton Woods Agreement in 1944 that established a comprehensive set of regulations on international financial transactions, limiting movements of capital between nations. Coupled with strict financial regulations at the national level, this agreement led to an extended period of economic stability and prosperity between 1945 and the early 1970s—the longest in the history of capitalism—known as capitalism’s “golden age”.
Regulation and prosperity, however, reduced capitalist profits, especially financial sector profits. As a result, starting in the early 1970s, first in the U.S. and the U.K. and then around the world, pressures from powerful corporate and financial actors resulted in increasing deregulation of domestic and international financial markets, reducing the role of the state in the economy and giving more power to already powerful corporate and financial sectors.
This deregulation led to a dramatic increase in international financial flows, resulting in increased economic instability and periodic financial crises. National economic policy priorities shifted from full-employment and production to financial speculation and higher corporate profits, with governments using austerity policies to keep workers from challenging this unjust order.
With financial deregulation, the world became the playground for the speculative and profit-seeking activities of Northern financial institutions. And one of the most profitable activities was lending to Third World governments, many of which were illegitimate (military dictatorships), that borrowed freely and amassed significant levels of national public debt.
When increases in Northern interest rates in the early 1980s made Third World debts unsustainable, the first wave of debt crises occurred in Latin America, Asia and Africa. The Northern financial establishment—the International Monetary Fund (IMF), World Bank and regional development banks—reacted to these early Third World debt crises by imposing a set of policies that are now being imposed by the Troika in indebted countries in Europe:
- They require that States bail out the corporations and banks affected by the financial crisis: the State takes on private debt, foisting upon all of society what had been private (corporate) obligations.
- They enforce austerity policies to make sure the State will have the funds to make the scheduled payments of the newly acquired debt (a product of the bailout): cuts in spending on services like education, health care, social programs for working people and the poor resulting in deepening of inequality, poverty and social exclusion.
What can we learn from the history of debt?
There are important lessons which we should learn from our recent history of neoliberal deregulation and debt crises.
The first lesson is that financial crises and debt crises are a hallmark of the neoliberal policies promoted by the international financial institutions since the early 1970s.
These policies have favoured the financial and corporate sectors, leaving working people worse off with more precarious and unstable employment, greater poverty levels, and deteriorated social services.
The second lesson is that neoliberal economic policies violate one of the central rules of capitalism: that investors (financial or productive) take risks and are responsible for the outcome.
Sometimes they win and make handsome profits and sometimes they lose. However, under neoliberalism, capitalists rarely lose, as their losses are taken on by the State forcing society as a whole to pay them off.
A third lesson is that the experience of countries like Argentina shows that the neoliberal road is not the only one for dealing with unjust and illegitimate debt. Default, that is refusing to pay, is a valid and viable option which could work well in Ireland, Greece, Spain and other European countries struggling under the burden of unjust debt.
Finally, it is essential that we think about alternative forms of organizing society’s economic activities that centre on full employment, equitable distribution of wealth and income and environmental sustainability. As long as countries continue to favour the financial and corporate sectors, working people will continue to see their living conditions deteriorate.