illustration by MILES COLE

Without borrowing money Northern governments would not
have been able to fight wars – let alone win them, fiddle the balance sheet of history
and impose a crippling form of debt slavery on the South.
The NI charts the irresistible rise of ‘public’ debt in capitalist societies –
and the repudiations, defaults and write-offs that regularly came with it.

Merchants in European city-states like Venice, Genoa and Florence helped fund the Crusades, which aimed to take Jerusalem and the Holy Land from Islamic rule in the name of Christianity. Made rich by regional trade, these merchants eventually wielded enormous political power over governments – including the Papacy. Longer European voyages of discovery and conquest relied on support from monarchs and merchants, both of whom expected a good return on their investment. So colonial expansion was driven by adventurers who were daring and curious about the world but also owed a lot of money.

The theft of gold and silver from the indigenous cultures of Latin America confirmed how profitable such expeditions might be, and enthusiasm for them redoubled. Colonial administrations were set up in the new lands to transfer wealth back to Europe. But there was a troubling problem, particularly in the Americas. Native peoples were decimated by European diseases and often refused to work for the colonizers – thus threatening the whole enterprise. Eventually, the shipping of enslaved Africans to new sugar plantations in Brazil and the Caribbean and to cotton plantations in the southern US became the most profitable trade of all – and thus the main source of capital for future borrowing.

 

Lending to nation-states in Europe was good business. Governments could ensure repayment by taxing their citizens and they could not legally go bankrupt. So states borrowed heavily – most often to fight wars among themselves.

In 1692 legislation in England pledged the receipts from beer and liquor taxes as security for a loan to the Government of £1 million. ‘Public’ debt increased steadily and by 1840 had reached £827 million, almost all of it used to fight wars.

Government debt and burdensome taxes were a major source of discontent in France. The revolution of 1789 repudiated two-thirds of the debts then owed by the French Crown. Napoleon financed his military exploits largely from foreign levies, but public debt rose again thereafter. By 1870 it had reached 12 billion francs as a consequence of the Franco-Prussian war – the victorious Prussians demanded 5 billion francs in reparations from France. The Japanese Government borrowed 250 million yen for war with China in 1894 and 1.5 billion yen in foreign bonds for war with Russia in 1905.

 

Meanwhile, newly independent governments in the Americas began to borrow too. In 1790 the US Federal Government assumed $75 million of debts incurred by states during the War of Independence. But their prior debts to British banks remained unpaid – in 1842 11 US states eventually defaulted on them. In 1861, when Mexico defaulted on its debts, Britain, France and Spain promptly invaded.

Federal debts incurred during the US Civil War rose to $2.6 billion by 1865. The Canadian Government started off with a debt of $75 million (Canadian) passed on from the provinces at the time of Confederation in 1867. The Government continued to borrow – but largely to finance railroads.

The two ‘world’ European wars (1914-18 and 1939-45) sharply increased public debt. The French Government owed 34.2 billion francs in 1914 and the total rose steadily when war began. British national debt increased from £610 million in 1900 to £7.8 billion in 1920 and £21.3 billion in 1945 – making Britain one of the world’s largest debtors.

Germany’s defeat in 1918 led to financial chaos. Excessive war reparations were considered partially responsible for the rise of Nazism. In 1934 Hitler repudiated war debt, then built the Nazi war machine with loans that reached 300 billion marks by 1945. Japan’s public debt stood at 151 billion yen at the end of the war.

During the 1930s Britain and other European countries defaulted on their war loans from the US, valued at around $30 billion. In the US borrowing for the ‘New Deal’ to mitigate the effects of the Great Depression increased Federal debts to nearly $43 billion by 1940. But the cost of the Second World War was far greater, so that Washington’s debt jumped to $269 billion by 1945.

 

After the defeat of Germany in 1945, ‘hot’ war was replaced by ‘cold’ war against the Soviet Union. In 1951 West Germany was told to use 10 per cent of its exports to repay its debts, but as the Cold War hotted up the ratio was reduced to 3.5 per cent. Eventually the ‘London Agreement’ of 1953 wrote off two-thirds of what Germany owed. British repayments to the US were capped at four per cent of exports. In 1960, France adopted a ‘new’ franc that was valued at 100 ‘old’ francs, which meant that the nominal value of its public debt was immediately reduced to one per cent of its previous level.

The US financed the Marshall Plan to promote post-war European reconstruction, while the Bretton Woods institutions (the World Bank, the International Monetary Fund [IMF] and the General Agreement on Tariffs and Trade) were established to promote Western-style ‘development’. In 1950 the World Bank made its first African loan to Ethiopia. In 1956 the Paris Club of creditor governments entered its first debt renegotiation – with Argentina. In 1965 President Sukarno, unhappy with loan conditions imposed on Indonesia, withdrew from the World Bank and the IMF. A bloody military coup followed and the new regime of General Suharto, more sympathetic to the West, received massive debt relief and much easier terms from the Paris Club.

 

Lavish spending by the United States on the Vietnam War, combined with an oil-price hike by Arab producers in 1973, massively increased the worldwide circulation of US dollars. Private banks began to lend these ‘petrodollars’ to governments in the South. At least 20 per cent of the new loans were spent on arms, often to fight ‘proxy’ wars between the Cold War superpowers.

In 1982, when Mexico told its creditors it could no longer pay, the Third World debt crisis began. Governments stepped in to bail out private banks. Between 1985 and 1988, under the US ‘Baker’ and then ‘Brady’ plans, ‘private’ debt was transformed into ‘public’ debt. Between 1982 and 1990 developing countries’ debt service alone totalled $1,345 billion – the equivalent of six Marshall Plans. ‘Structural adjustment’ programmes were imposed by the IMF and World Bank as a condition of new lending.

 

The Cold War ended in 1989 after a decade of US Government borrowing for military projects like ‘Star Wars’. The Gulf War against Iraq followed in 1991 – debt relief was offered to Arab countries, and Egypt in particular, in exchange for their support against Iraq. Elsewhere, loans to countries of the former Soviet empire began. In nations as far apart as Yugoslavia, Rwanda and Peru, debt slavery lay concealed behind outbreaks of violent civil unrest. All attempts to organize relief for the South were rebuffed on principle until 1996, when the ‘Heavily Indebted Poor Countries Initiative’ was launched to make debt repayments ‘sustainable’. Meanwhile, private lending resumed to a small number of ‘boom’ economies in Asia – and ended in a dramatic crisis that began in Japan and brought civil unrest to South Korea and the downfall of Suharto in Indonesia. Speculative debt-driven ‘contagion’ spread to Russia, then Brazil and may yet reach China, the US and Europe – within a decade, the ‘cold’ war has been replaced by a ‘financial’ war that is still being fought.

Sources
Joseph Hanlon, We’ve been here before, paper prepared for the Jubilee 2000 Coalition (London, 1998).
Patricia Adams, The World Bank’s Finances, see website: http://www.cato.pubs/pas/pa-215.html
Jacques B Gélinas, Freedom from Debt, (Zed Books, 1998).
Michael Rowbotham, The Grip of Death, (John Carpenter/Charlbury, 1998).
Michael Barratt Brown, ‘The Morphology of Debt’ in The Spokesman 63 (Russell Press, 1997).
Michel Chossudovsky, The Globalization of Poverty, (Third World Network, 1997).