U.S. resistance to a new global court outside of its control has maintained a vacuum filled by default by local U.S. law. By letting holdouts demand full payment even when a majority of creditors agree to a write-down, the effect is to block any negotiated writedowns of sovereign debt. This pro-creditor default policy leaves no court or body of economic theory to determine the ability to pay or assess the consequences of debt repayment.
Leaving Argentina’s debt resolution in the hands of local New York bankruptcy courts has spurred attempts to create an alternative global financial system to the dollar area and its satellite eurozone. The BRICS have been driven together into a critical economic mass to defend their sovereignty and policy independence. A quantum leap occurred in July 2014. Russia and its BRICS partners (China, Brazil, India and South Africa) took the lead toward creating an alternative financial system, starting with a $50 billion BRICS bank and a $100 billion intra-BRICS financial clearing system as an alternative to the IMF and World Bank.
The aim of these countries, along with Argentina and Iran, is to insulate themselves from neoliberal economic policy, debt coercion, forced privatization selloffs and asset seizures. Under today’s conditions this will entail debt writedowns, backed by a body of theory to analyze an economy’s ability to pay domestic and foreign-currency creditors.
27. Finance as Warfare
To simple people it is indubitable that the nearest cause of the enslavement of one class of men by another is money. They know that it is possible to cause more trouble with a rouble than with a club; it is only political economy that does not want to know it.
The financial sector has the same objective as military conquest: to gain control of land and basic infrastructure, and collect tribute. To update von Clausewitz, finance has become war by other means. What formerly took blood and arms is now obtained by debt leverage. Direct ownership is not necessary. If a country’s economic surplus can be taken financially, it is not necessary to conquer or even to own its land, natural resources and infrastructure. Debt leverage saves the cost of having to mount an invasion and suffer casualties. Who needs an expensive occupation against unwilling hosts when you can obtain assets willingly by financial means — as long as debt-strapped nations permit bankers and bondholders to dictate their laws and control their planning and politics?
The creditor’s objective is to obtain wealth by indebting populations and even governments, and forcing them to pay by relinquishing their property or its income. Such financial conquest is less overtly brutal than warfare waged with guns and missiles, but its demographic effect is just as lethal. For debt-strapped Greece and Latvia, creditor-imposed austerity has caused falling marriage rates, family formation and birth rates, shortening life spans, and rising suicide rates and emigration.
War as the catalyst for national debts
The first recorded example of compound interest calculating the tribute owed to the Sumerian city of Lagash by neighboring Umma after a fight over their buffer territory in the 25th century BC. Inscribed on the Stele of the Vultures, the astronomically high levy led to prolonged future conflict, not unlike the reparations imposed by the Allies on Germany after World War I.
From antiquity down through medieval Europe, wars were viewed as profitable propositions yielding loot and tribute. Historians find a military origin of coined money in Greece, in the form of booty being melted down and divided among the officers and troops, with a tithe donated to the city-temple. Mesopotamian, classical Greek and Roman temples were adorned with the spoils of war, monetizing their bullion in war emergencies to pay mercenaries. The word “money” derives from Rome’s Temple of Juno Moneta, where the city minted its first silver and gold coins during the Punic wars with Carthage. It was said that the honking of the Juno temple’s geese warned Rome’s commander of the impending attack by the Gauls in 390 BC. Hence, Juno’s epithet Moneta, from Latin monera, “to warn” (also the root of “monster,” an omen).
“Money, endless money, is the sinews of war,” wrote Cicero in his Philippics (43 BC). Not only money, but credit, too. Venice financed the Crusade against Constantinople in 1204 for a quarter of the loot, which it and other Italians monetized and lent to secular kings to wage their own wars of conquest. This influx of silver and gold from the looting of Constantinople catalyzed the financial sector’s rise to power. After 1492 the looting of the New World provided silver and gold to finance the expansion of commerce — and also the increasingly expensive imperial rivalries to carve out new conquests.
Financializing the costs of war led to public debts and the modern bond market. Rulers borrowed to buy cannons and build navies, pay troops, hire mercenaries and support allies. Indeed, warfare became financialized long before industry or real estate. And as in any financialized sector, creditors usually ended up with the winnings. Governments issued interest-bearing bonds, a word that originally meant physical shackles on bondservants, a fitting analogy for the position in which governments found themselves. They typically paid off these war debts by selling land, mines and creating public monopolies to exchange for bonds they had issued.
War debts as the mother of royal monopolies
The Church’s banking orders — the Knights Templar and Hospitallers — lent to kings and nobles at the top of the social pyramid, first to embark on the Crusades and then to wage wars backed by the papacy. Being uniquely free from religious censure against gain-seeking — along with the high status of their borrowers — permitted an end-run around Church doctrine condemning the charging of interest. It was only a short step to legitimize commercial credit, on the ground that trade helped unify nations as part of divine order giving each region its own particular role to play in global harmony.
Playing the role that the temples of Athena and Juno Moneta had done in antiquity, bankers financed military conquest. Unlike the case in antiquity, owing royal debts to private bankers (often foreign) instead of to public temples led to a proliferation of taxes to pay their interest charges. Rulers sought to pay down the principal by creating Crown trading monopolies and selling them for payment in royal war bonds.
The new owners tended to be foreign. The Dutch became major investors in England’s Crown monopolies (including the Bank of England, formed in 1694) as high finance became the mother of monopolies: the East and West Indies Companies in Holland, England and France after about 1600, and the South Sea and Mississippi Companies in the 1710s. Remitting their dividends and interest abroad caused a balance-of-payments drain whose monetary effect was like paying tribute to military victors.
The traditional objective of warfare — conquest of the land and natural monopolies to siphon off their rent — has become the prime objective of today’s high finance. The strategy is more peaceful, but retains a tributary character. Debt leverage forced Britain and France in the 17th and 18th centuries, the Ottoman Empire in the 19th century, Latin American and African governments the 20th century, to sell off assets to buyers eager to turn public services into opportunities for rent extraction.
Since 2008 a similar strategy of asset grabbing has been used against Portugal, Ireland, Italy, Greece and Spain. The idea is to enable privatizers to turn industrial economies into tollbooth opportunities. The idea in today’s New Enclosure Movement is to privatize what used to be called the Commons. Russians call this grabitization — privatization of public enterprises and natural resources by insiders and their backers.