Platypus interview on The Destiny of Civilization
The destiny of civilization: An interview with Michael Hudson
On July 15, 2022, Platypus Affiliated Society member D. L. Jacobs interviewed Michael Hudson to discuss his new book, The Destiny of Civilization: Finance Capitalism, Industrial Capitalism or Socialism (2022). An edited transcript follows.
D. L. Jacobs: Can tell us about your background regarding Marxism and how you came to political economy?
Michael Hudson: Well, I grew up in a Marxist household. My father was a political prisoner, one of the Minneapolis 17.1 Minneapolis was the only city in the world that was a Trotskyist city, and my parents worked with Trotsky in Mexico. So, I grew up not having any intention of going into economics. I wanted to be a musician, and when I was 21, I began writing a history of the connection between music, art, drama theory, and the Renaissance in the 19th century. But then I went to New York and went to work on Wall Street just to get a job. I met the translator of Marx’s Theories of Surplus Value, Terence McCarthy, who convinced me that economics was more interesting than anything else that was happening. He became my mentor, I took a PhD in economics, and that’s it.
DLJ: You begin The Destiny of Civilization by talking about how it was the historical task of both industrial capitalism and classical political economy to emancipate the economy from feudal rentiership. How was classical political economy revolutionary?
MH: Marx said that the role of industrial capitalism was to cut costs of production in order to compete with industrial capitalists in other countries. There are two ways of reducing the costs if you are a capitalist. One is to simply lower wages, but if you lower wages, you don’t get high productivity labor. The Americans, by the 19th century, realized that the higher the wage was, the higher the labor productivity, because productive labor was well-educated. well-fed, healthy labor. The idea of capitalism was, number one, to reduce the costs of production that were unnecessary. Namely, what did labor have to pay just to live that wasn’t really necessary. The biggest cost of labor was land rent — this paid for high food prices if there was agricultural protectionism, as in London, England until 1846 — and housing rent. The idea was that socialism would replace all landlords as rent recipients by either taxing away the land rent or nationalizing the land.
The state would be the landlord and that would be its source of fiscal funding. It didn’t have to tax labor, but would tax landlords. The other way that capitalism would reduce labor’s living costs was working to prevent monopolies, to prevent all forms of economic rent. That was revolutionary because feudalism was based on a hereditary landlord class: the heirs of the warlords, the Normans, who had conquered France, England, and the rest of the earth. The monopolies that had been privatized and created were largely by governments running into war debts. The bank of England was a monopoly created with £1.2 million to be paid and government debt. Many British trading companies and monopolies, like The South Sea Company of the South Sea Bubble, were created this way in order to finance their war debts.
Capitalism wanted to get rid of all of the economic overhead and to be a more efficient society. Instead of having private monopolies produce basic needs like health care, it will have public health care. Instead of monopolies providing communications, transportation, or telephone services, the government would have these basic needs provided either freely or subsidized so that labor wouldn’t require a high salary from its industrial employers to pay for its own education, health care, or the other basic needs. In the late-19th century, everybody thought that industrial capitalism was evolving into socialism of one kind or another: not only Marx, but a proliferation of socialists and books on socialism, e.g., John Stuart Mill, Christian socialists, libertarian socialists. The question was, what kind of socialism would everyone take? That made capitalism revolutionary, until the point that World War I broke out and changed the whole direction.
DLJ: You begin Chapter 5 of Destiny with, “[t]he 19th century’s fight to tax away land rents, nearly succeeded, but lost momentum after World War I.”2 Can you elaborate on this?
MH: In the late 1890’s, the rentiers began to fight back. In academia the real-estate interests and the banks got together and denied that there was any such thing as economic rent. Capitalism is revolutionary, because it wanted to bring market prices in line with the actual cost of production; economic rent was the excess of price over the intrinsic cost value. The idea was that economic rent was a free lunch. and that because it was an empty price, it was a price without a corresponding cost-value. In the U.S., John Bates Clark was saying, there’s no such thing as economic rent. The landlord actually provides a public service in deciding who to rent to and the banks provide a public service in deciding to whom they will make loans. Everybody deserves whatever they can make. This concept underlies today’s Gross National Product (GNP) accounting. If you look at America’s GNP accounting, you have a rent and interest included as a profit — not only interest, but bank penalties and fees.
A few years ago, I called up the Commerce Department that makes the national income and product accounts, and I said, “where do bank and credit card companies’ penalties and late fees occur?” I’d read that banks make even more money on late fees and penalties than they do on the enormous interest charges on their credit cards. And they said, “that’s financial services.” I asked, “how is that a financial service?” And they said, “that’s what banks do: they provide the service, and what they charged was the value of the service.” That’s not what the classical economists would have said. They would have said that what banks charge is an economic rent for the service, and this should be a subtraction from the national income and product accounts, not in addition to it.
I’m working with Dirk Bezemer and others on an article where we calculate how much of the GNP, the reported product, is actually overhead. In other words, what is Gross Domestic Product (GDP) without the FIRE sector (finance, insurance and real estate)? A strict classical economist would say, let’s take out the monopolist rent. How much of American industry’s reported profits, e.g., in healthcare, are really monopoly rent? The idea of industrial development today is to carve out a monopoly where there’s no competition and get super profits. This is a concept that has been dropped, really, ever since World War One, about a century ago. There’s no distinction between productive and unproductive labor, between wealth and overhead. John Bates Clark said that if somebody’s wealthy, they earned the wealth; there’s no such thing as unearned wealth. Today wealth is mainly achieved by asset-price inflation; by capital gains. You won’t find a single wealthy family that made money simply by saving up what they earned. They make money by increasing the price of their stocks and bonds and real estate holdings, not by saving up their earnings. Yet, capital gains, i.e., asset-price inflation, are left out of the statistics of almost every country. So it is very hard to explain how wealth is achieved, and yet that was the purpose of economics in the 19th century and centuries before. But suddenly the idea of wealth has been suppressed as sex was in the day of Sigmund Freud.
DLJ: In Destiny and your articles, you note how the classical conception of the free market has been inverted.3 I.e., it used to be freedom from rentiership, and now it is the freedom of rents. You made reference to GDP, and this goes back to Adam Smith and Ricardo’s distinction of productive and unproductive labor, or net revenue and gross revenue. But Smith also described the government officials as unproductive in that sense, and you can find it in Smith’s translators and Marx.4 In Destiny, you bring up Simon Patten talking about the “fourth factor of production.”5 How does that fourth factor relate to what Smith and Ricardo talk about regarding value? They would say the government officials are not productive labor, yet you’re discussing how they reduce costs by providing public infrastructure.
MH: From Antiquity up through Adam Smith’s time, the main government expense was war, e.g., ancient Rome. Almost all of the public budget was war-making and police, which Smith sees as the same thing. Government had not begun to provide many public needs by the late-19th century. Things that change there were basically from 1815 when the Napoleonic Wars ended outbreak of war in 1914. They call, that was almost a people. Call it a war free Century, despite the Crimean War, and the Civil War, but basically, there wasn’t a World War at that time. Increasingly more of the government budget was spent on public utilities as they were introducing the new industrial, transportation, and health technology.
After the Civil War, American students interested in economics mainly went to Germany to study, and they came back to the U.S. with an idea of Bismarckian state socialism. The chair of the first business school at Wharton School of Economics at the University of Pennsylvania was Simon Patten, who said that land, labor, and capital all receive the respective forms of income, but there is a fourth factor of production: public infrastructure. Public infrastructure differs in that it’s not trying to make a profit or an economic rent. It sells at less than the cost of production, because it’s trying to subsidize the economy, and its productivity should be measured in principle by the degree to which it lowers the economy’s overall cost of production by providing subsidized or free public services.
That concept is antithetical to Margaret Thatcher and Ronald Reagan, who began privatizing these public utilities. The difference is that a privatized, public utility is going to use borrowed money usually — so you have interest charges — and it must make a profit — so you have profits added on the price. In fact, public utilities are natural monopolies, which is why they’re public in the first place. You have economic rent added on, along with other privatized costs that have to be covered. Government doesn’t have to cover the cost: that’s what the taxes are for. If the taxes are a public collection of rent, a rent tax, they’re not only preventing economic rent and lowering the whole economies close to production, but they’re funding public infrastructure to further lower the cost of production. That’s what helped the U.S. undersell Europe, especially England, and become the leading industrial power — by staying out of WWI, except to act as a creditor — emerging from WWI as by far the world’s major intergovernmental predator, to such an extent that it brought on the Great Depression and WWII to resolve the reparations and inter-allied debt problem from WWI.
DLJ: You mentioned Bismarck, and I think of the famous painting of the Battle of Sedan6 where he’s sitting with Louis Bonaparte, the other Bonaparte — to use this language in Europe at the time. Right after the 1848 revolutions, Louis Bonaparte invested in railroads and a lot of investment in Paris, and Marx refers to this as “Imperialist Socialism.”7 The state is stepping in but doing so in order to quell the class struggle. How do you see that then related to this question of government intervention? On the one hand we could say yes, lowering the cost, but on the other hand, isn’t it preserving the conditions that are giving rise to capitalist exploitation and production?
MH: The question is who’s going to control the state? Is the state going to be run by leaders who are engaged in long-term planning as to how to make the economy more productive and raise living standards, or is the state going to be taken over by a financial oligarchy that wants to increase the cost and deindustrialize?
Already 2,500 years ago, Aristotle said that many economies and constitutions that are thought of as being democracies are really oligarchies. That certainly is the case today. Oligarchies call themselves democracies. President Biden says, the world is dividing into two right now: democracy versus autocracy. The autocracy is in the U.S. That’s the oligarchy. Democracy is a confusing word. Political democracy has not been effective in checking economic oligarchy, because, as Aristotle said, democracies tend to evolve into oligarchies and they make themselves into hereditary aristocracies.
The only counter example in early history of what America calls autocracy or Karl Wittfogel called “Oriental Despotism” was the Near-East take off. Every Near-East, Mesopotamian, Egyptian ruler would begin their reign with a debt cancellation, a clean slate. They would free the indentured servants, cancel the debts, and return land that was forfeited to the former holders to prevent an oligarchy developing. Civilization in the 3rd–1st centuries BC — all non-Western cultures, going all the way to India and China — try to prevent a mercantile and financial oligarchy from developing.
The West didn’t do that. They had no tradition of royal clean slates, and when they did have their own revolutions in Greece, you had the so-called tyrants. I.e., reformers, who overthrew the closed aristocracy, canceled the debts and redistributed the land. They did just exactly what the Near East did and they catalyzed democracy in Greece. There was infrastructure spending in ancient Greece in the 7th and 6th centuries BC. By the 3rd and 2nd century BC the Greeks were saying that when the oligarchy had taken over, a reformer was someone seeking tyranny. That’s when tyranny took on a bad connotation, like “socialism” today.
The same thing happened in Rome. Rome began with kings trying to make Rome grow in a mosquito-laden, hilly area near the Tiber River. Rome began by offering land rights to fugitives fleeing debt bondage, and the neighboring towns of central Italy. The kings were overthrown in 509 BC, the oligarchy took over, and there were five centuries of revolts by the Romans: the secession of the plebs in the 490s BC, the second secession after 450, and then the many fights. The oligarchy accused any reformers urging alleviation, urging more equal distribution of “seeking kingship.” because there can’t be any state strong enough to check their ability to impose land rent and other forms of economic rent.
When President Biden juxtaposes democracy to autocracy, he wants America to fight against any country — Russia, China — that does not privatize its public domain like Thatcher and Reagan were doing. Biden defines an autocracy as a country that does not privatize and make a free market for the rentiers to take over. The ideal of American neoliberalism is what the Americans did to Russia under Boris Yeltsin: take all of the public assets, the nickel mines, oil, gas, and the land and give it to the managers to register in their own name. The result was that Russia lost more of its population as a result of neoliberal privatization than it had lost during WWII, as President Putin likes to say. This is the whole framework of Destiny, where I am trying to clarify, what is democracy, and what is autocracy, and what is socialism?
DLJ: You write that this is something Western civilization has never dealt with8 — even the political economy has shown it to be unproductive. Marx frequently makes reference to the debtor and creditor struggles in ancient Rome and he usually quotes Simone de Sismondi, who will say that whereas the ancient proletariat lived at the expense of society, modern society lives at the expense of the proletariat.9 Likewise, Smith in Wealth of Nations says that the modern representative institutions were unknown in ancient Rome.10 While there have been examples of debt cancellations today, wouldn’t one say that they also had a different organization of society, when a king would cancel debts in ancient traditional societies? To some degree, yes, we can do it today, but there are different institutions, and the bourgeois revolution might complicate the cancellation of debts, at least, creating a kind of political problem unknown in ancient Greece.
MH: They’re different kinds of debts, and canceling them requires different kinds of institutions. E.g., what’s most in the news these days is student loan debt and that it could be canceled by just an act of President Biden, which he won’t do, because he’s the person that sponsored the bankruptcy law.11 That law made it impossible to cancel student debts by bankruptcy laws. It could be done by a congressional law. The government has all sorts of regulatory agencies to handle corporate debt write-downs. Corporate write-downs in bankruptcy proceedings are a normal course, taking place almost continually, and we’re going to see that again. There are real estate debts.
When the junk mortgage frauds peaked in 2008, President Obama ran by promising to write-down the junk mortgage debts to the actual market value of the homes bought by the victims of bank fraud and to bring the mortgage payments in line with the current rent. As soon as he was elected, Obama invited the bankers to the White House and said, “don’t worry. I’m the only guy standing between you and the pitchforks. That was just to get elected. I’m on your side.” He proceeded to evict seven or eight million American families.
Not only did Obama not write-down the debts, but he started quantitative easing that has given nine trillion dollars to support the real estate market, the stock market, and the bond market, so that the banks and the wealthy rentier 10% of the American economy would not lose any money.
The result was that American home ownership rates have fallen from 69% and plunged into the 50s. America is being turned from a middle-class home ownership economy into a landlord economy. We’re regressing back towards the 19th century, including its legacy of feudalism. That’s what we’re moving toward, as official government policy. We still have a strong government, but the role of the government is now to enforce the debts, not to write them down, and the most serious debts in the news are actually international debts. And of course, international debts cannot be settled by one nation. What is the vehicle to cancel the debts of global South countries like Argentina, that is now in yet another crisis with the International Monetary Fund (IMF). The Argentinian crisis, Sri Lanka — all this will characterize the Global South by this fall as a result of rising energy prices for oil and gas, rising food prices, and capital flight to the U.S. as it raises its interest rate.
If countries have to pay more for food and energy, how can they afford to pay their foreign debts? It’s necessary to have a new international organization to sponsor this. That’s what both President Putin and President Xi have said: we’re going to create a BRICS12 bank as an alternative to the World Bank and the IMF and this will have to accompany a new world court. We are going to provide a different philosophy of operations for this bank: the principle is that no country should be obliged to lower its living standards, bankrupt itself, and privatize its public domain in order to pay foreign debts. If a country can’t pay its debt, it’s a bad loan, and just as individuals and corporations are allowed to declare bankruptcy, countries should be able to declare bankruptcy.
These are mainly dollarized debts. Even though they’re not owed to the U.S., they’re often owed to their own oligarchies. Most dollar debts in Brazil are owned by Brazilians. Most dollar debts of Argentina are owned by wealthy Argentines because no one else is going to take a risk that they won’t pay. But the Brazilians say, we run the presidency, the central banks, and most of all, we run the police: if someone wants to cancel the debts, we’ll just kill them.
Violence has always been hand-and-hand with a high finance ever since Rome, through the Spanish, English, and French empires. The advocates of debt cancellation, from Catiline to Julius Caesar, were assassinated. There were five centuries of assassinations of Roman senators and reformers wanting to alleviate the debt. The U.S. is engaged in similar practices today. So you are right to put the debt in the political context. What is the vehicle to oversee debt cancellation, when in almost every Western economy, the oligarchies — often creditor oligarchies — have taken control of the government, as in the U.S. via election funding and dominating policy. This is unique in Western Civilization.
There’s always been empires consolidated by extortion of colonies. Today, we don’t say that America is involved in colonialism; we say America is a leader of globalization, which is a euphemism for colonialism, specifically, financial colonialism that indebts other countries, using that as a lever to privatize their public domain, utilities, national resources, and their commanding heights.
DLJ: Returning to the 1890s, this is the period leading up to 1914, which is, as you put it, the turning point for the dollar creditocracy: the 1890s as the imperialist era, in the Second International and going into the Third International. I was thinking about Lenin’s view of the growth of finance and of how you had banks that were taking over different companies, that were maybe even competing with each other and/or different sectors. He saw this as an opportunity for socialism. In your text, you mention how finance capitalism has diverted from socialism, or inhibited or blocked that opportunity.13 I was thinking of Lenin’s famous line, “[w]ithout big banks socialism would be impossible.”14 This doesn’t mean that J. P. Morgan and Bank of America are socialist, but rather that they created the institutional apparatus that could be the transformation into a socialized society.
MH: In terms of how economies allocated their resources and how they were planned, this forward-planning was coordinated largely by banks, often in conjunction with the government. This occurred most clearly in Germany where the German government worked with the Reichsbahn and heavy industry, especially in the military field, to build warships and armaments. The idea was state capitalism in Germany: a three-way linkage between government, industry, and finance. In the U.S., these were separated: finance took the form of the mother of trusts. The Wall Street banks would create a steel trust, a copper trust, and they would integrate all the different companies in the field to create a monopoly. In this case they were the former planners trying to create monopolies, but there was the Sherman Antitrust Act of 1890 and Teddy Roosevelt coming on as a trust-buster. Roosevelt tried to prevent finance acting as a promoter of the rentier class, as the monopoly class, to prevent industrial capitalism from being turned into monopoly capitalism. All of this momentum ended in the wake of WWI.
But there was this question of what kind of socialism are we going to have? What kind of government are we going to have? Are we going to have a government that is in charge of steering prosperity and raising living standards or a government by the 1%, the elite, who will impoverished societies? Two things happened in 1913 in the U.S.: first, income tax that only fell on the wealthiest 1% of Americans, mainly on monopoly rent and real estate. The other event of 1913, at the very end of the year, was the Federal Reserve was created to replace the Treasury and to take over the Treasury’s function, shift financial policy, moving away from Washington to Wall Street, and other financial centers, such as Philadelphia and Boston. This was the explicit aim.
The National Monetary Commission published a series after the 1906–07 crash: a wonderful set of volumes about reviewing the global financial situation all over the world. David Kinley wrote a book on the U.S Treasury, showing that essentially the Treasury was performing all of the functions that we now think of as part of the Federal Reserve. The Federal Reserve has 12 districts, the Treasury had sub-Treasuries all over the country that were in charge of local development. All of this was privatized under the leadership of J.P. Morgan, who organized the Fed and sponsored President Wilson, who also got the country into war. The Democrats were, from the very beginning, the party of the rentiers, the anti-Labor party, as they are today. They were the sponsors of Wall Street as opposed to the Republicans, who until the 1970s and 80s, had represented industrial capitalism protecting itself from the rentiers.
Looking at the turn of the 20th century, you see the different roads that could have been taken, and you realize that there were many alternatives and that there’s nothing natural in the way that today’s economy is structured. Economists say this is the result of Darwinian struggle for existence, and that’s what the free market is, and there is no alternative as Thatcher said. But there were plenty of alternatives back in the 1890s, when the world seemed to be moving towards socialism of one form or another, especially the Marxian socialism dominated by the wage-earning class which was going to be democratic socialism.
Instead we have oligarchic socialism in the U.S. and oligarchic state capitalism really isn’t state capitalism. Think of America’s policy as state neo-feudalism, because the purpose of the state is to protect the rents of finance, real-estate, oil, mining, and natural resources. The idea of the Biden Administration — really of both the Republican and Democratic Parties — is that since America has moved its industry and manufacturing to Asia in order to lower the wages here, how can Americans continue to get high-living standards, if it doesn’t produce raw materials or manufacturers? How can it be a post-industrial society, getting rich on economic rents and interest on and profits paid by foreign countries? How can America get rich by being a parasite? That was a problem that the Roman Empire had, and we know what happened to the Roman Empire. It was a problem that the British Empire had, and we know what happened to that: it can’t be done.
This attempt to make America into a post-industrial society means a rent-seeking, neo-feudal society, treating the rest of the world as a colony under globalization. How can that work? Well, It’s not working. Biden’s war, the NATO war, against Russia in the Ukraine is the catalyst dividing the world into two. That’s why Secretary of State Anthony Blinken said that the Ukraine war is part of a process that will go on for at least two decades, because it takes time for the world to split away into a neo-feudal West and a productive, basically socialistic Asia, or industrial capitalist and socialist Asia, and Eurasia, along with much of the global South.
DLJ: You have an interesting history about Georgists, socialists, and the debates between them regarding the rent question, or the emphasis on capital and labor. Is the neo-feudalism or the new rentiership of the West bound up with a failure of socialism in some way? I.e., you discuss the manner in which mainstream socialists forgot the rent question or subordinated it to capital and labor.15
MH: Henry George was one of the first investigative reporters that exposed the inequity of rent-seekers. His first book was a wonderful exposé of how the railroads got land grants in order to develop the land, using the land grants to become highly exploitative landlords throughout the western states. This was impoverishing the farmers by siphoning farm income off in the form of land rent and railroad charges. George became popular in the large cities that were largely Irish — New York, and Boston — by writing a wonderful book on the Irish land question. His writings inspired a generation of journalists in the 1870s–90s, such as Ida B. Wells and Upton Sinclair. Many of these reformers had originally been supporters of George. When there was a New York City election, the socialists and the labor parties selected George to run as mayor, as a celebrity-candidate, because he had written Progress and Poverty (1879). It’s not a very good book, but it was very popular at the time.
George said he could only run if he could get rid of everything that the socialists had wanted; everything that the working-class had wanted. He said, “I have a panacea, it’ll solve everything: just tax the land. You don’t need control of landlords, you don’t need to make them have decent housing. All you need is land-rent.” The socialists said, “There’s much more to the economy than taxing the landlord; there’s a labor problem. There’s a financial problem. The banks seem to be running everything.” George said, “the enemy is big government.” The socialists replied, “you need a strong enough government to check the landlords, who are the strongest class in New York City which is largely a rental city?” So, George formed his own political party, expelling any socialists and he defended the banks.
Many bankers supported him because he called for the banks to remain in private hands. He said, “I can’t figure out a way to tax a bank interest, like you can tax land-rent.” He was criticized for that, the party didn’t go anywhere, and he ended up expelling his strongest supporters, who had joined him thinking that taxing the land was part of an overall social restructuring. The word panacea, sort of developed specifically because it went hand-in-hand with the name of the Georgists. George’s followers became libertarians and anti-socialist.
Followers of George and the socialists went all around the U.S., having debates, most of which were transcribed and published by Charles H. Kerr & Co., the socialist collective that published Marx’s Capital in English. The common theme of the debate was that society is going to go in one direction or another: either socialist or middle-class. The problem is that taxing the land rent doesn’t solve the labor problem. It doesn’t solve the tension between wage-earners and employers as to working conditions that they have. It doesn’t have anything to do with economic planning. George had actually become libertarian and anti-socialist, and his followers became so anti-socialist that in Europe they were the among the earliest supporters of the Nazis. In the U.S. they were noted Nazi sympathizers. Many of the leading Georgists were known for their anti-Semitism. When I went to the Henry George School Library in New York, I was amazed at all the anti-semitic books in their library. I knew a number of teachers there, and they said that because the school was supporting Germany early in WWII, most of the attendants were FBI agents. The head of the School told me that the number two guy at the Henry George School was part of the Nazi intelligence operation in the U.S. before escaping back to Germany.
I realized that a government strong enough to check the landlords has to be a socialist government. You can’t say, I’m a libertarian, I’m against strong government, and then hope that the landlords are going to end up being taxed. That’s an oxymoron.
DLJ: You write:
[i]t always should be borne in mind that solving the problem of finance capitalism and the rentier legacy of feudalism would still leave the class conflict of industrial capitalism in place. Freeing the economy from rentier overhead charges would not solve the problem of exploitation of labor by its employers. But taking the intermediate step of creating a classical economy free of rentier claims is a precondition before the labor/capital conflict can become the focal point of political reform, having finally freed capitalism from the rentier legacy of feudalism.16
It seems the socialists should have paid heed to this question of rentiership and that this was an opportunity missed at the turn of the 20th century. You’re saying that today financialization is a more immediate barrier rather than subordinating finance to the capital-labor relationship.
MH: This shows the role of personalities in history. The Georgists were so anti-socialist that the socialists left the rent issue to followers of George. That’s why it was Marxists and socialists who wrote about finance capitalism, whereas most of the society treated finance as if it were part of the industrial system, not extraneous to the industrial system.
So you’re right. The socialists after WWI didn’t focus highly on finance, but things changed quite a bit after WWII. The CIA put money into supporting progressive literary and cultural figures as leaders of the socialist movement, focussing on what the CIA called, “the mighty Wurlitzer,” to control public opinion concerning the socialist parties. This results in the British Labour Party having Tony Blair, who was to the Right of Thatcher, who identified Blair as her greatest legacy, in privatizing Britain’s railroads. The social democratic parties in Europe jumped on the neoliberal bandwagon largely because of the U.S. meddling in foreign politics, which pushed neoliberals and socialists to stop talking about economic issues.
In the U.S., there is identity politics, but the one kind of identity you don’t have is the identity of wage earners. That’s been stripped away from the socialist parties of the United States and Europe, and so the socialist parties are no longer socialist. The irony is that what people thought of as being a socialist in a sense of a more efficient economy, free of bad statism and free of war — the Republicans in the U.S. and the nationalists in France and Germany are against the war in Ukraine, the NATO War. The socialists, Bernie Sanders and AOC, voted for giving money to Ukraine. So the word socialism has changed quite a bit into the opposite. Almost the whole economic vocabulary that is used today is the opposite of what it meant a century ago, and that’s what my book, J is For Junk Economics is all about.17 That’s what I talk about when I’m in China.
DLJ: Do you see China as realizing the ideals of classical political economy better than the West? That might be a provocative statement because, for a lot of Americans, China means communism, and so it would mean the opposite of Adam Smith — at least that’s what we’ve been taught since the 20th century by something like the Adam Smith Institute, a neoliberal think-tank.
MH: The Adam Smith Institute hates everything that Adam Smith stood for. That’s why it’s called the Adam Smith Institute: to confuse people! Smith wanted to tax land-rent. The Adam Smith Institute wants to glorify the landlords, privatize public housing, and create a rentier and financial utopia for the 1%. There’s a reason why the economics curriculum in the U.S. no longer has the history of economic thought, because if you study the history of economic thought, which they taught when I was in school 60 years ago, you would know that when people talk about Adam Smith and free markets, it’s the exact opposite of the kind of free market that Smith talked about. What Marx described was capitalism. That’s why he called his book Capital, not Socialism.
What the Chinese government is trying to follow has been called a “state-capitalist society” or a “communist society”: the focus is on productive labor and productive investment. The most important feature of China is that it kept the banking sector and money creation in the public domain. In the West, commercial banks create credit against assets that are already in place. Mortgage loans are made against real estate in place. Corporate takeover loans are made to corporations in place. Government control of money, as it was in Germany in the late 19th century, created new means of production, especially public infrastructure.
China does not have its banks make loans for corporate takeovers, or for mergers and acquisitions. China makes them increase the means of production. In that sense they are following the industrial capitalist policy that evolves naturally into socialism, which is why they call themselves a socialist economy, and rightly so, because they’re not running the economy on behalf of the 1%. Obviously, by letting a hundred flowers bloom, they realized that the state cannot act as the Stalinist state did as a central planner. They need innovation, they need individual innovators to create market opportunities and new products and that’s been best done by letting market forces take place. But when somebody achieves such a hyper-billionaire level, as did Jack Ma with his phone payments company, they coordinate the private wealth that is created to serve the long-term public interest. That’s why there is a strong state.
The Communist Party of China is delegated to administer economic democracy, something that political democracy has not been able to do in the Western countries. You need a state to act as the agent of social planning, so that it’s not the banks and the rentier sector that does it, as occurred in the U.S. and Western Europe. Europe. China is doing what most of the world was doing before Western civilization took off and in an oligarchic form.
DLJ: Do you think the U.S. could do that? In many ways, China’s extraordinary growth, especially post-Deng Xiaoping reform era has presupposed the U.S.’s current account deficit; these “twin deficits” where the U.S. is this large importer from China. I’m thinking to what degree there’s also a mutual character to it as well. Maybe that has been in crisis. When Trump came to office – I’m not saying whether or not he was correct – he was expressing to some degree a process of deindustrialization in the U.S. that has turned the U.S. into a consumer nation without having any production. When I think of two nations having industrial production, I also think back to the end of the 19th century, what Karl Kautsky called the fall of the Manchester School: once one country begins to have state intervention, it encourages other nations to have state intervention. How do you see this working out, besides the more violent past? What do you think would be a more positive way of this working out?
MH: Technologically, of course, the U.S. could redevelop; it has developed before. But it can’t do so, because politically it’s controlled by the anti-labor party. Both Democrats and Republicans are controlled by the rentier interests that seek to increase corporate profits by looking around the world for the cheapest labor, which is not in the U.S.
An even more serious problem is that the rulings in the Supreme Court have turned America into a failed state, e.g., how the Supreme Court ruled that the existing anti-pollution laws, the environmental protection laws by the EPA were unconstitutional, because the government has no power over the states. Or when they say “we on the Supreme Court know that the Constitution was written by slave owners who wanted state power to be in the states, not the federal government, because they feared that if there were a federal government and the northern population wanted to abolish slavery, we could abolish it. Every state gets to go their own way.”
America is an evolved slave-owning state, even though there’s no more slavery, the fight against federal power has been adopted by rentier class. It’s literally a neo-feudalism class. If you cannot have the government, either Congress or the president impose basic environmental, social, educational, or any other social regulation, and if everything is deregulated state-by-state, you have a dissolution of the government and a paralysis. The U.S. now is in a state of political paralysis locking itself into the current status quo, which means that the U.S. cannot have any kind of an industrial recovery, because that requires a federal policy to check the overhead of the banking system, the real estate sector, and the insurance sector. You can’t have a Supreme Court that would prevent any kind of a public health system, a single-payer public health system, and yet 18% of America’s GDP is for medical care. America has priced its labor and its industry out of world markets by having to pay so much debt service, so much insurance for medical care, home insurance, and real estate rents. As long as this revenue is paid out in the form of rent, you’re not going to develop.
DLJ: It almost sounds like you’re pointing to the need for a political revolution. If the potential for development in the U.S. is checked by a rentier class, it is an infringement upon the people, from the perspective of classical bourgeois political theory.
MH: If other countries in the past had a problem like the U.S. now has with the Supreme Court, they would have had a revolution. A European prime minister would invite the court into the office and say, “I’m sorry but I’ve got to make a choice: either you resign or I’m going to have to either execute you or let the mob outside come in and lynch you.” Wouldn’t you rather resign? It would be settled by some kind of revolt like you’re seeing with the Yellow Vests in France or like you saw in the 1848 Revolutions throughout Europe. That’s not likely in America because there’s no real consciousness that there is an alternative.
There’s no group in America, no political party, that is offering an alternative to the current political and economic system in America. The fact that you have two parties in America that are really the same party, means that there’s no room for a new party to come and, as it would in Europe, get represented in Congress. In Europe, you can have any number of parties, and they would be represented in Parliament in proportion to their votes. A third party would be kept off the ballots in the U.S., and that’s why Bernie Sanders and others decided not to run as a third party; there’s no way we can meet the court challenges by the Republicans and the Democrats together. Sanders had to pretend to run as a Democrat. But we’ve seen that the Democrats don’t want any part of anything progressive. There’s an illusion that somehow the Democrats can be progressive because they have people who can’t find any alternative, who are running as a Democrat. Whereas in Europe, they are running as nationalists, as third parties, e.g., Alternative für Deutschland.
I just don’t see the political development in the U.S. that would be a precondition for an economic restructuring to get back on the pre-WWI track. There was anti-monopoly legislation that would be hard to impose. Biden talks as if he’s against monopolies. but he’s supporting the monopolies, e.g., for Pfizer with regard to the vaccines: the government does the research and gives it to Pfizer who makes huge monopoly rents protected by the Biden Administration. Large companies are able to buy control of the politicians by paying for their election contributions under the Citizen’s United Supreme Court ruling, and they do. They control the mainstream media. People just don’t have an idea that there is an economic alternative, which would not be the socialism that is represented by people who call themselves socialist, but are actually enable neoliberals.
DLJ: I’m trying to think about Destiny and its purpose. How could it raise consciousness in the U.S.? You mentioned going back to pre-WWI conditions. In the Communist Manifesto (1848) Marx and Engels speak of reactionary reformers who want to turn back the wheel.18 I.e., for Marx and Engels, it was always a question of how opportunities develop out of the present, rather than trying to clean the slate. The financialization in the United States, for them, poses the question of developing this neo-feudalism into socialism. In other words, we can’t go back to pre-1914. How does one find the opportunities in the present to even point towards alternatives within the U.S.?
MH: I have not found an alternative for the U.S., and so I can’t come up with a panacea. I remember Max Schachtman gave a speech in the late 1960s, where he asked, “what’s happened to all my old socialist friends? What happened to the socialists?” He said, they all went out West; they all withdrew. They thought, “we can just have community development,” and there were all sorts of ideas and utopian communities founded throughout the U.S.. There were French followers of Saint Simon attempting to make utopian communities, followers of Henry George, making utopian land-tax communities. They’re all middle-class bourgeois communities today. All the socialist communities were all very artsy: they’ve all become arts and crafts centers today. The last thing they want is a land tax that prevents their housing prices from going up.
I don’t see how things can be fixed in the U.S., which is why I’ve spent most of my time analyzing what’s happening in Asia and working primarily with countries from Asia and elsewhere, which seems to be where most of the flexibility and innovation resides. My idea is that if people see that what Asia is doing is quite simply what America could be doing and isn’t, it would be the only way to show them that there is an alternative. You can’t just draw an alternative and apply it as an idealistic application. You have to show that it’s working somewhere. I’m trying to explain why China was able to make its economy grow and raise the living, educational, and health standards for its population, and that the West hasn’t. And that is the path on which the West would have to develop, but it has not been able to check oligarchies.
Non-Western countries are able to do that, and that’s what the fight of global South reform is going to be by this fall when the grace of the debt crisis, really is the trigger for a restructure.
DLJ: Economies are interdependent. I.e., it would still be a question of the Chinese working class and the American working class building bonds across nations.
MH: The Democratic Party has produced such an anti-Asian, hate-filled racism, that I don’t think that can be. The Democratic Party has done everything it could to spur an ethnic war between the black and Asian populations. You see that here in New York by the attacks on the subways, on the street, mainly by blacks against Asians. The Democratic Party, by pushing this ethnic identity, has pushed ethnic hatred.
That’s why the Democrats are surprised that the Hispanics and Asians are moving towards the Republicans. The Hispanics and Asians realize that the Democrats have a race-hatred policy, much like the Nazis. I don’t believe that any political progress can be made in the U.S. until the Democratic Party, certainly the current leadership, is swept away. There cannot be any progress in America today led by the Democratic Party, which is today the ideologically Right-wing party that has turned what should be an economic problem into an ethnic and non-economic problem. It’s like the old industrial capitalist was supposed to have said, “if I can get half the working class fighting against the rest of the working class, then we have won.” That’s the Democratic Party. They asked, “how do we do it?” We divide the working class into ethnicities, ethnic identity, gender identity.
DLJ: You can have the working class cancel each other.
- Carlos Hudson. See Michael Hudson, “Dad’s Many Proverbs” (June 17, 2017), available online at https://michael-hudson.com/2017/06/dads-many-proverbs/;.
- Michael Hudson, The Destiny of Civilization: Finance Capitalism, Industrial Capitalism or Socialism (Glashütte: ISLET-Verlag, 2022), 85.
- Hudson, Destiny, 165: “Reversing the tradition of classical value, price and rent theory, neoliberal economics teaches that all income is earned, and that all forms of economic rent are not merely transfer payments but contribute to output, as measured by neoliberal formulations and redefinition of Gross Domestic Product (GDP). This inversion of classical logic is so far-reaching and censorial that it has influenced Chinese and Russian planning as well as that in the Western economies.”
- See Karl Marx, “Theories of Productive and Unproductive Labor,” in Theories of Surplus Values (1863), available online at https://www.marxists.org/archive/marx/works/1863/theories-surplus-value/ch04.htm;.
- Hudson, Destiny, 120: “China has invested in a vast public infrastructure network to facilitate its industrial production by minimizing the cost of living and doing business. This has saved employers from having to pay higher wages for labor to afford privatized education, health care, transportation and other essential services. These basic needs are provided by public infrastructure, which Simon Patten called a ‘fourth factor of production.’”
- Wilhelm Camphausen, “Napoleon III and Bismarck, on the morning after the Battle of Sedan” (1878).
- Karl Marx, “The French Crédit Mobilier,” The People’s Paper 214, June 7, 1856, available in Marx and Engels Collected Works, vol. 15, and online at http://marxengels.public-archive.net/en/ME0978en.html;.
- Hudson, Destiny, 270: “These redistributive and fiscal principles are the basis of modern socialism but not of Western economies. Ever since classical Greece and Rome stopped the Near Eastern practice of Clean Slates, Western economies have not been able to save themselves from polarizing between creditors and debtors, landlords and tenants, patrons and clients. Today, the neoliberal reaction against social democracy has ensured such polarization, first by letting debts grow faster than the ability to be paid and hence concentrating wealth in the hands of creditors, and second by advocating that basic public utilities be privatized and run by financial managers, not provided as a human right.”
- Karl Marx, Preface to the Second Edition (1869), in The Eighteenth Brumair of Louis Bonaparte (1852), available online at https://www.marxists.org/archive/marx/works/1852/18th-brumaire/preface.htm;: “Lastly, I hope that my work . . . will contribute toward eliminating the school-taught phrase now current, particularly in Germany, of so-called Caesarism. In this superficial historical analogy the main point is forgotten, namely, that in ancient Rome the class struggle took place only within a privileged minority, between the free rich and the free poor, while the great productive mass of the population, the slaves, formed the purely passive pedestal for these combatants. People forget Sismondi’s significant saying: The Roman proletariat lived at the expense of society, while modern society lives at the expense of the proletariat. With so complete a difference between the material, economic conditions of the ancient and the modern class struggles, the political figures produced by them can likewise have no more in common with one another than the Archbishop of Canterbury has with the High Priest Samuel.”
- Adam Smith, “Book IV: On the Advantages which Europe has derived from the Discovery of America, and from that of a Passage to the East Indies by the Cape of Good Hope,” in Wealth of Nations (1776), available online at https://www.marxists.org/reference/archive/smith-adam/works/wealth-of-nations/book04/ch07c-2.htm;: “The idea of representation was unknown in ancient times. When the people of one state were admitted to the right of citizenship in another, they had no other means of exercising that right but by coming in a body to vote and deliberate with the people of that other state. The admission of the greater part of the inhabitants of Italy to the privileges of Roman citizens completely ruined the Roman republic. It was no longer possible to distinguish between who was and who was not a Roman citizen. No tribe could know its own members. A rabble of any kind could be introduced into the assemblies of the people, could drive out the real citizens, and decide upon the affairs of the republic as if they themselves had been such. But though America were to send fifty or sixty new representatives to Parliament, the doorkeeper of the House of Commons could not find any great difficulty in distinguishing between who was and who was not a member. Though the Roman constitution, therefore, was necessarily ruined by the union of Rome with the allied states of Italy, there is not the least probability that the British constitution would be hurt by the union of Great Britain with her colonies. That constitution, on the contrary, would be completed by it, and seems to be imperfect without it. The assembly which deliberates and decides concerning the affairs of every part of the empire, in order to be properly informed, ought certainly to have representatives from every part of it That this union, however, could be easily effectuated, or that difficulties and great difficulties might not occur in the execution, I do not pretend. I have yet heard of none, however, which appear insurmountable. The principal perhaps arise, not from the nature of things, but from the prejudices and opinions of the people both on this and on the other side of the Atlantic.”
- Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
- Brazil, Russia, India, China, and South Africa.
- Hudson, Destiny, 42: “Finance capitalism aims to avoid what Marx and indeed the majority of his contemporaries expected: that industrial capitalism would evolve towards socialism, peacefully or otherwise. By finding its main source of exploitation to be rent-seeking, not only from land and natural resources but increasingly from privatizing public investment in infrastructure and creating new monopolies, finance capitalism renders economies high cost. That prevents industrialists from underselling competitors in less rent-and- debt-strapped economies…That is why it seemed a century ago that the destiny of industrial capitalism was to evolve into socialism. Public education, health care, roads and basic infrastructure and pensions were coming to be provided by government at subsidized administered prices or freely. Industrial capital backed this policy as a means of shifting as many ‘external’ costs as possible onto the public sector. But that is not the way matters have turned out. And today’s victorious finance capitalism, centered in the United States, is trying to prevent its takeover of industrial economies from being rolled back. That means preventing such a rollback from occurring in other countries. It also requires overcoming other countries’ resistance to finance capital’s takeover of their economies.”
- V. I. Lenin, Can the Bolsheviks Retain State Power? (October 1, 1917), available online at https://www.marxists.org/archive/lenin/works/1917/oct/01.htm;: “Capitalism has created an accounting apparatus in the shape of the banks, syndicates, postal service, consumers’ societies, and office employees’ unions. Without big banks socialism would be impossible. The big banks are the ‘state apparatus’ which we need to bring about socialism, and which we take ready-made from capitalism; our task here is merely to lop off what capitalistically mutilates this excellent apparatus, to make it even bigger, even more democratic, even more comprehensive. Quantity will be transformed into quality. A single State Bank, the biggest of the big, with branches in every rural district, in every factory, will constitute as much as nine-tenths of the socialist apparatus. This will be country wide book-keeping, country-wide accounting of the production and distribution of goods, this will be, so to speak, some thing in the nature of the skeleton of socialist society. We can ‘lay hold of’ and ‘set in motion’ this ‘state apparatus’ (which is not fully a state apparatus under capitalism, but which will be so with us, under socialism) at one stroke, by a single decree, because the actual work of book-keeping, control, registering, accounting and counting is performed by employees, the majority of whom themselves lead a proletarian or semi-proletarian existence.”
- Hudson, Destiny, 162: “One of the most fateful byproducts of George’s defense of capital was to so repel socialists that they left the issue of land taxation to his followers — and in so doing, socialists drifted away from rent theory. The socialist mainstream treated classical land and rentier problems as subordinated to problems between labor and industrial capital.”
- Hudson, Destiny, 103–04.
- Michael Hudson, J is For Junk Economics: A Guide to Reality in an Age of Deception (Glashütte: ISLET-Verlag, 2017).
- Karl Marx and Friedrich Engels “Part 1: Bourgeois and Proletarians,” in The Communist Manifesto (1848), available online at https://www.marxists.org/archive/marx/works/1848/communist-manifesto/ch01.htm.;
It may seem strange to invite an economist to give a keynote speech to a conference of the social sciences. Economists have been characterized as autistic and anti-social in the popular press for good reason. They are trained to think abstractly and use a priori deduction – based on how they think societies should develop. Today’s mainstream economists look at neoliberal privatization and free-market ideals as leading society’s income and wealth to settle at an optimum equilibrium without any need for government regulation – especially not of credit and debt.
The only role acknowledged for government is to enforce the “sanctity of contracts” and “security of property.” By this they mean the enforcement of debt contracts, even when their enforcement expropriates large numbers of indebted homeowners and other property owners. That is the history of Rome. We are seeing the same debt dynamic at work today. Yet this basic approach has led mainstream economists to insist that civilization could and should have followed this pro-creditor policy from the very beginning.
The reality is that civilization could never have taken off if some free-market economist had got into a time machine and travelled back in time five thousand years to the Neolithic and Bronze Age. Suppose that he would have convinced ancient chieftains or rulers how to organize their trade, money and land tenure on the basis of “greed is good” and any public regulation is bad.
If some Milton Friedman or Margaret Thatcher had persuaded Sumerian, Babylonian or other ancient rulers to follow today’s neoliberal philosophy, civilization could not have developed. Economies would have polarized – as Rome did, and as today’s Western economies are doing. The citizens would have run away, or else backed a local reformer or revolutionist to overthrow the ruler who listened to such economic advice. Or, they would have defected to rival attackers who promised to cancel their debts, liberate the bondservants and redistribute the land.
Yet many generations of linguists, historians and even anthropologists have absorbed the economic discipline’s anti-social individualistic world view and imagine that the world must always have been this way. Many of these non-economists have unwittingly adopt their prejudices and approach ancient as well as modern history with a bias. Our daily discourse is so bombarded with the insistence by recent American politicians that the world is dividing between “democracy” with “free markets” and “autocracy” with public regulation that there is much fantasy at work about early civilization.
David Graeber and I have sought to expand the consciousness of how different the world was before Western Civilization took the Roman track of pro-creditor oligarchies instead of palatial economies protecting the interests of the indebted population at large. At the time he published his Debt: The First Five Thousand Years in 2011, my Harvard group of assyriologists, Egyptologists and archaeologists was still in the process of writing the economic history of the ancient Near East in a way that was radically different from how most of the public imagined it to have occurred. David’s and my emphasis on how royal Clean Slate proclamations cancelling debts, liberating bond-servants and redistributing the land were a normal and expected role of Mesopotamian rulers and Egyptian pharaohs was still not believed at that time. It seemed impossible that such Clean Slates were what preserved liberty for the citizenry.
David Graeber’s book summarized my survey of royal debt cancellation in the ancient Near East to show that interest-bearing debt originally was adopted with checks and balances to prevent it from polarizing society between creditors and debtors. In fact, he pointed out that the strains created by the emergence of monetary wealth in personal hands led to an economic and social crisis that shaped the emergence of the great religious and social reformers.
As he summarized “the core period of Jasper’s Axial age … corresponds almost exactly to the period in which coinage was invented. What’s more, the three parts of the world where coins were first invented were also the very parts of the world where those sages lived; in fact, they became the epicenters of Axial Age religious and philosophical creativity.” Buddha, Lao-Tzu and Confucius all sought to create a social context in which to embed the economy. There was no concept of letting “markets work” to allocate wealth and income without any idea of how wealth and income would be spent.
All ancient societies had a mistrust of wealth, above all monetary and financial wealth in creditor hands, because it generally tended to be accumulated at the expense of society at large. Anthropologists have found this to be a characteristic of low-income societies in general.
Toynbee characterized history as a long unfolding dynamic of challenges and responses to the central concerns that shape civilizations. The major challenge has been economic in character: who would benefit from the surpluses gained as trade and production increase in scale and become increasingly specialized and monetized. Above all, how would society organize the credit and debt that was necessary for specialization of economic activities to occur – and between “public” and “private” functions?
Nearly all early societies had a central authority in charge of distributing how the surplus was invested in a way that promoted overall economic welfare. The great challenge was to prevent credit leading to debts being paid in a way that impoverished the citizenry, e.g., through personal debt and usury – and more than temporary loss of freedom (from bondage or exile) or land tenure rights.
The great problem that the Bronze Age Near East solved – but classical antiquity and Western civilization have not solved – was how to cope with debts being paid – especially at interest without polarizing economies between creditors and debtors, and ultimately impoverishing the economy by reducing most of the population to debt dependency. Merchants engaged in trade, both for themselves and as agents for palace rulers. Who would get the profits? And how would credit be provided but kept in line with the ability to be paid?
Public vs. private theories of how land tenure originated
Ancient societies rested on an agricultural base. The first and most basic problem for society to solve was how to assign land tenure. Even families who lived in towns that were being built up around temples and civic ceremonial and administrative centers were allocated self-support land – much like Russians have dachas, where most of their food was grown in Soviet times.
In analyzing the origins of land tenure, like every economic phenomenon, we find two approaches. On the one hand is a scenario where land is allocated by the community in exchange for corvée labor obligations and service in the military. On the other hand is an individualistic scenario in which land tenure originated by individuals acting spontaneously by themselves clearing land, make it their own property and producing handicrafts or other products (even metal to use as money!) to exchange with each other.
This latter individualistic view of land tenure has been popularized ever since John Locke imagined individuals setting out to clear the land – apparently vacant wooded land – with their own labor (and presumably that of their wives). That effort established their ownership to it and its crop yield. Some families would have more land than others, either because they were stronger at clearing it or had a larger family to help them. And there was enough land for everyone to clear ground for planting crops.
In this view there is no need for any community to be involved, not even to protect themselves from miliary attack – or for mutual aid in times of flood or other problems. And there is no need for credit to be involved – although in antiquity that was the main lever distorting the distribution of land by transferring its ownership to wealthy creditors
At some point in history, to be sure, this theory sees governments enter the picture. Perhaps they took the form of invading armies, which is how the Norman ancestors of landlords in John Locke’s day acquired English land. And as in England, the rulers would have forced landholders to pay part of their crops in taxes and provide military service. In any case, the role of government was recognized only as “interfering” with the cultivator’s right to use the crop as he saw fit – presumably to trade for things that he needed, made by families in their own workshops.
My Harvard-sponsored group of assyriologists, Egyptologists and archaeologists have found an entirely different genesis of land tenure. Land rights seem to have been assigned in standardized plots in terms of their crop yield. To provide food for these community members, late Neolithic and early Bronze Age communities from Mesopotamia to Egypt allocated land to families in proportion to what they needed to live on and how much they could turn over to the palace authorities.
This tax yield turned over to palace collectors was the original economic rent. Land tenure came as part of a quid pro quo – with a fiscal obligation to provide labor services at designated times of the year, and to serve in the military. It thus was taxation that created land-tenure rights, not the other way around. Land was social in character, not individualistic. And government’s role was that of coordinator, organizer and forward planner, not merely predatory and extractive.
Public vs. private origins of money
How did early societies organize the exchange of crops for products – and most important, to pay taxes and debts? Was it simply a spontaneous world of individuals “trucking and bartering,” as Adam Smith put it? Prices no doubt would have varied radically as individuals had no basic reference to cost of production or degrees of need. What happened as some individuals became traders, taking what they produced (or other peoples’ products on consignment) to make a profit. If they traveled large distances, were caravans or ships needed – and the protection of large groups? Would such groups have been protected by their communities? Did supply and demand play a role? And most important, how did money emerge as a common denominator to set prices for what was traded – or paid in taxes and to settle debts?
A century after Adam Smith, the Austrian economist Anton Menger developed a fantasy about how and why ancient individuals may have preferred to hold their savings in the form of metals – mainly silver but also copper, bronze or gold. The advantage of metal was said to be that it did not spoil (in contrast to grain carried around in one’s pocket, for instance). It also was assumed to be of uniform quality. So pieces of metal money gradually became the medium by which other products came to be measured as they were bartered in exchange – in markets in which governments played no role at all!
The fact that this Austrian theory has been taught now for nearly a century and a half is an indication of how gullible economists are willing to accept a fantasy at odds with all historical records from everywhere in recorded world history. To start with, silver and other metals are not at all of uniform quality. Counterfeiting is age-old, but individualist theories ignore the role of fraud – and hence, the need for public authority to prevent it. That blind spot is why U.S. Federal Reserve Chairman Alan Greenspan was so unprepared to cope with the massive junk-mortgage bank crisis peaking in 2008. Wherever money is involved, fraud is omnipresent.
That’s what happens in unregulated markets – as we can see from today’s bank frauds, tax evasion and crime that pays very, very well. Without a strong government to protect society against fraud, lawbreaking, the use of force and exploitation, societies will polarize and become poorer. For obvious reasons the beneficiaries of these grabs seek to weaken regulatory power and the ability to prevent such grabitization.
To avoid monetary fraud, silver and subsequently gold coinage from Bronze Age Mesopotamia down through classical Greece and Rome was minted in temples to sanctify their standardized quality. That is why our word for money comes from Rome’s temple of Juno Moneta, where Rome’s coinage was struck. Thousands of years before bullion was coined, it was provided in metal strips, bracelets and other forms minted in temples, at standardized alloy proportions.
Purity of metals is not the only problem with using bullion money. The immediate problem that would have confronted anyone exchanging products for silver is how to weigh and measure what was being bought and sold – and also to pay taxes and debts. From Babylonia to the Bible we find denunciations against merchants using false weights and measures. Taxes involve a role of government, and in all archaic societies it was the temples that oversaw weights and measures as well as the purity of metallic metals. And the denomination of weights and measures indicate their origin in the public sector: fractions divided into 60ths in Mesopotamia, and 12ths in Rome.
Trade in basic essentials had standardized customary prices or payments to the palaces or temples. Taxes and debts were the most important used for money. That reflects the fact that “money” in the form of designated commodities was needed mainly to pay taxes or buy products from the palaces or temples and, at the end of the harvesting season, to pay debts to settle such purchases.
Today’s neoliberal economic mainstream has created a fairy tale about civilization existing without any regulatory oversight or productive role for government, and without any need to levy taxes to provide basic social services such as public construction or even service in the military. There is no need to prevent fraud, or violent seizure of property – or the forfeiture of land tenure rights to creditors as a result of debts. But as Balzac noted, most great family fortunes have been the result of some great theft, lost in the mists of time and legitimized over the centuries, as if it were all natural.
These blind spots are necessary to defend the idea of “free markets” controlled by the wealthy, above all by creditors. This is claimed to be for the best, and how society should be run. That is why today’s New Cold War is being fought by neoliberals against socialism – fought with violence, and by excluding the study of history from the academic economics curriculum and hence from the consciousness of the public at large. As Rosa Luxemburg put it, the fight is between socialism and barbarism.
Public vs. private origins of interest-bearing debt
Interest rates were regulated and stable for many centuries on end. The key was ease of calculation: 10th, 12th or 60th.
Babylonian scribes were trained to calculate any rate of interest as a doubling time. Debts grew exponentially; but scribal students also were taught that herds of cattle and other material economic output tapered off in an S-curve. That is why compound interest was prohibited. It also was why it was necessary to cancel debts periodically.
If rulers had not cancelled debts, the ancient world’s takeoff would have prematurely suffered the kind of decline and fall that impoverished Rome’s citizenry and led to the decline and fall of its Republic – leaving a legal system of pro-creditor laws to shape subsequent Western civilization.
What makes Western civilization distinctly Western? Has it all been a detour?
Civilization could not have developed if a modern Milton Friedman or kindred Economics Nobel Prize winner had gone back in time and convinced Hammurabi or the Egyptian pharaoh to just let individuals act by themselves and let wealthy creditors reduce debtors to bondage – and then to use their labor as an army to overthrow the kings and take over government for themselves, creating a Roman-style oligarchy. That is what Byzantine families tried to do in the 9th and 10th centuries.
If the “free enterprise” boys had their way there would have been no temple coinage or oversight of weights and measures. Land would belong to whomever could grab, foreclose on or conquer it. Interest would have reflected whatever a wealthy merchant could force a needy cultivator to pay. But to economists, everything that occurs is a matter of “choice.” As if there is no outright need – to eat or to pay.
An economic Nobel Prize was awarded to Douglass North for claiming that economic progress today and indeed throughout all history has been based on the “security of contracts” and property rights. By this he means the priority of creditor claims to foreclose on the property of debtors. These are the property rights to create latifundia and reduce populations to debt peonage.
No archaic civilization could have survived for long by following this path. And Rome did not survive by instituting what has become the distinguishing feature of Western Civilization: giving control of government and its lawmaking to a wealthy creditor class monopolizing the land and property.
If an ancient society had done this, economic life would have been impoverished. Most of the population would have run away. Or else, the Thatcherite/Chicago School elite would have been overthrown. The wealthy families that sponsored this grabitization would have been exiled, as occurred in many Greek cities in the 7th and 6th centuries BC. Or, discontented populations would have walked out and/or threatened to defect to foreign troops promising to free the bondservants, cancel their debts and redistribute the land, as occurred with Rome’s Secessions of the Plebs in the 5th and 4th centuries BC.
So we are brought back to David Graeber’s point that the great reformers of Eurasia rose at the same time that economies were becoming monetized and increasingly privatized – an epoch in which wealthy families were increasing their influence over how city-states were run. Not only the great religious reformers but the leading Greek philosophers, poets and dramatists explained how wealth is addictive, and leads to hubris that leads them to seek wealth in ways that injure others.
Looking over the sweep of ancient history, we can see that the main objective of rulers from Babylonia to South Asia and East Asia was to prevent a mercantile and creditor oligarchy from emerging and concentrating ownership of land in their own hands. Their implicit business plan was to reduce the population at large to clientage, debt bondage and serfdom.
That is what occurred in the West, in Rome. And we are still living in the aftermath. Throughout the West today, our legal system remains pro-creditor, not in favor of the indebted population at large. That is why personal debts, corporate debts, public debts and the international debts of Global South countries have mounted up to crisis conditions threatening to lock economies into a prolonged debt deflation and depression.
It was to protest this that David helped organize Occupy Wall Street. It is obvious that we are dealing not only with an increasingly aggressive financial sector, but that it has created a false history, a false consciousness designed to deter revolt by claiming that There Is No Alternative (TINA).
Where Western civilization went wrong
We have two diametrically opposed scenarios depicting how the most basic economic relationships came into being. On the one hand, we see Near Eastern and Asian societies organized to maintaining social balance by keeping debt relations and mercantile wealth subordinate to the public welfare. That aim characterized archaic society and non-Western societies.
But the Western periphery, in the Aegean and Mediterranean, lacked the Near Eastern tradition of “divine kingship” and Asian religious traditions. This vacuum enabled a wealthy creditor oligarchy to take power and concentrate land and property ownership in its own hands. For public relations purposes, it claimed to be a “democracy” – and denounced any protective government regulation as being, by definition, “autocracy.”
Western tradition indeed lacks a policy subordinating wealth to overall economic growth. The West has no strong government checks to prevent a wealth-addicted oligarchy from emerging to make itself into a hereditary aristocracy. Making debtors and clients into a hereditary class, dependent on wealthy creditors, is what todays economists call a “free market.” It is one without public checks and balances against inequality, fraud or privatization of the public domain.
It may seem amazing to some future historian that the political and intellectual leaders of today’s world hold such individualistic neoliberal fantasies that archaic society “should” have developed in this way – without recognizing that this is how Rome’s oligarchic Republic did indeed develop, leading to its inevitable decline and fall.
Bronze Age debt cancellations and modern cognitive dissonance
So we are led back to why I was invited to speak here today. David Graeber wrote in his Debt book that he was seeking to popularize my Harvard group’s documentation that debt cancellations did indeed exist and were not simply literary utopian exercises. His book helped make debt a public issue, as did his efforts in the Occupy Wall Street movement.
The Obama administration backed police breaking up the OWS encampments and did everything possible to destroy awareness of the debt problems plaguing the U.S. and foreign economies. And not only the mainstream media but also academic orthodoxy circled their wagons against even the thought that debts could be written down and indeed needed to be written down to prevent economies from falling into depression.
That neoliberal pro-creditor ethic is the root of today’s New Cold War. When President Biden describes this great world conflict aimed at isolating China, Russia, India, Iran and their Eurasian trading partners, he characterizes this as an existential struggle between “democracy” and “autocracy.”
By “democracy” he means oligarchy. And by “autocracy” he means any government strong enough to prevent a financial oligarchy from taking over government and society and imposing neoliberal rules – by force. The ideal is to make the rest of the world look like Boris Yeltsin’s Russia, where American neoliberals had a free hand in stripping away all public ownership of land, mineral rights and basic public utilities.
MGPE Seminar titled "De-Dollarization – Toward the End of U.S. Monetary Hegemony?" on 20 November 2019. (https://mgpe.ssc.cuhk.edu.hk/en/news/...)
Since the end of World War II, the United States has been the world’s hegemonic power. In economic, military, and cultural spheres, the U.S. has enjoyed nearly unrivalled supremacy. However, unlike past hegemons, which have been net creditors to the rest of the world, the United States is a net debitor; but this is a strength, not a weakness. U.S. debt is an integral feature of its economic dominance, through which the United States receives goods and services from the rest of the world in exchange for dollars it can print and keystroke into existence. Yet cracks are showing in the foundations of dollar hegemony, as countries look to find ways to escape from U.S. economic dominance. In this talk, Prof. HUDSON will discuss the prospects and challenges of global de-dollarization, and how countries like China may forge a way toward a different monetary system free of U.S. control.
Speaker: Prof. Michael HUDSON
Prof. Michael HUDSON is President of the Institute for the Study of Long-Term Economic Trends (ISLET), Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and author of …And Forgive Them Their Debts (2018), J is for Junk Economics (2017), Killing the Host (2015), The Bubble and Beyond (2012), America’s Protectionist Takeoff, 1815-1914 (2010), Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), and Trade, Development and Foreign Debt (1992 & 2009), amongst many others. Michael acts as an economic advisor to governments worldwide, including Iceland, Latvia, and China on finance and tax law.
Moderator: Prof Peter BEATTIE 裴弼革教授
Prof. Peter BEATTIE is Assistant Professor and Assistant Programme Director of the MSSc in Global Political Economy at The Chinese University of Hong Kong, where he teaches political economy and political psychology. His published work has focused on the role of ideas in politics, and his research has been presented at conferences in Asia, Europe, South America, and the United States.
Nearly 50 years after the original publication of "Superimperialism", Michael Hudson revisits how the lucrative dollar-based economic system that the US set up after WWII has evolved with the rise of China and the Covid-19 pandemic. What financial weapons is the US likely to use, and does China's de-dollarisation protect it from such attacks?
The book provides a detailed analysis of how the US has used its economic might to control international relations. The book is complicated, but essentially documents how after WWII the US held an unprecedented amount of the world's gold reserves (50%). These reserves were depleted with the incursion into Korea, and subsequent involvement in Viet Nam, requiring the US to abandon the "gold standard" for valuing world currencies. A failure that proved itself valuable, pushing the US to develop multiple strategies that today allow it to make other countries pay for its military dominance.
Welcome to the first event of the Oxford Economics Society for this academic year. I’m Oscar, the Co-President of our society, and I’m glad to welcome you back for another term of exciting discussions. Although we were hoping last term to be back in-person by January, due to the worsening Covid-19 situation in the UK our events this term are going to remain online, so that everyone at home can still participate.
A new year calls for new resolutions, and our society’s resolution for 2021 is to increase the diversity of economic topics discussed. To give you an idea, we’ll be hosting a presentation on Decolonising Economics and its role in Emerging Markets by Dr. Ingrid Kvangraven, the executive board member of Diversifying and Decolonising Economics. We’ll be hosting Prof. Randall Wray, a strong proponent of the much-discussed modern monetary theory, who was also as I just discovered, professor at the University of Missouri-Kansas City, like our guest today. We’ll also be hosting a presentation on the Young Scholars Initiative run by the Institute of New Economic Thinking at Oxford, a community some of you will definitely be interested in joining that brings together more than 15,000 young economists from around the world. Finally, we’ll be organizing a moderated discussion with the FT’s Chief Economics commentator Martin Wolf, and many other events of course.
To start us off, we are proud to host Michael Hudson, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, former balance-of-payments economist at Chase Manhattan, and an economic advisor to governments worldwide, including Iceland, Latvia and China, on finance and tax law. Now, nearly 50 years after the original publication of “Super Imperialism”, Professor Hudson will be discussing “Changes in Super Imperialism: The position of the USA & China in our Global Economic System”. How has the rise of China and the Covid-19 pandemic affected the USA’s capacity to control financial flows? How will the USA modify its behaviour as a result?
The talk will last 45 minutes, with 15 minutes of questions at the end. Make sure to send in your questions throughout the talk through our Pigeonhole page. The link should be in the description of this event. If you would like to re-watch our events, they’ll be posted to our YouTube channel afterwards.
Thank you for joining us, Professor Hudson…
It’s good to be here. Thank you for inviting me, especially since you mentioned people that I’ve known for a long time. Randall Wray, both of us are now at the Levy Institute and working in other places, and Martin Wolf I’ve been friends with.
The reason that I’m writing a new version of Super Imperialism is that I was asked to by China, and I thought, “As long as they want to bring out a new translation and basically an update of the book, I might as well do it in English too.” I bought the rights back from Pluto and in about two or three months I will be reissuing the English language edition. The context for de-dollarization today by China, Russia and other countries is basically “How do you make an alternative to an international financial order that really was designed from the beginning to benefit the United States in its own self-interest?”
This issue was discussed after WWI when the intergovernmental debt system broke down into Allied debts and German reparations. It was discussed again at the 1930s when the United States sort of scuttled the London Economic Conference of 1933, and it was especially discussed in 1945 in December, in parliament. In the House of Commons, the British parliamentarians were discussing, “Do we want to accept the terms of the British loan?” which ended up being 3.75 billion USD, written down from what Keynes had wanted, or “Do we want to go it alone?”
It was the Conservative pro-empire Members of Parliament that wanted to reject the loan. Churchill wanted at least to abstain, but there was no alternative. In 1945 and again in 1971 when America moved off gold, in every case the alternative seemed to be anarchy. The U.S. strategy was to say, either you accept U.S. rules that favored the United States – in the beginning creditor rules, but debtor rules after 1971, and essentially gave it control of the world economy – or you go it alone and risk anarchy.
Britain was not able to go it alone in 1945. I did not include the parliamentary discussion in the first version of Super Imperialism, but I’ve included that discussion in the new version, because Britain said very clearly: “The United States basically wants to absorb the British Empire and the Sterling area into the Dollar area on its own terms and leave us almost broke. What can we do about it?” Both parties said: “We see that the United States is treating us, its ally in WWII, as a defeated party.” They came right out and said that. “But we don’t have an alternative because we can’t go alone. We have to rely on the United States.”
Let me review what the U.S. strategy is, and what’s led to major changes over time. Dollar supremacy was established after World War I by America’s creditor position. Something very novel happened after. In every previous war, for instance the Napoleonic wars and the earlier wars England had been involved with, the allies had forgiven all of their mutual debts at the end of the war. There was something that the British called “shared sacrifice”, and the idea was “We’re going to have a clean slate after the war.”
This idea goes all the way back to Babylonia in the second millennium BC. Throughout history there was a debt cancellation. There was no carryover of war debts after victory was achieved, because the idea was that if you leave war debts in place, that’s going to bankrupt the allies that you had during the war. It’s also going to bankrupt the defeated countries, and leave them no choice except to fight back.
The laws of Hammurabi showed this. His whole dynasty showed this. My book on Forgive Them Their Debts is a whole history of debt cancellations. But the United States broke this practice after WWI and said: “The debts have to be paid.” The amazing thing is that Europe went along with it. It had a pro-creditor ideology. It believed in the sanctity of debt, and was not going to question that because there was a guiding assumption – which is erroneous – that all debts somehow can be paid if only countries will either devalue or transform their economy, or impose austerity.
Keynes had a long debate with the anti-German Jacques Rueff of France and the American-Swede Bertil Ohlin. Keynes explained that there was no way that debtor countries like the allies or Germany could pay their debts to the creditor unless the creditor is willing to buy their exports, to provide them with the foreign exchange to pay. That debate obviously he won in reality, but that assumption was rejected by the United States, and continues to be rejected by the International Monetary Fund today. The junk economics that was brought in after World War One to consolidate the American position was: “Of course you can pay: simply destroy your economy and let us take you over, and sell out all of your industry and raw materials out to us, and that will enable you to pay.” That’s what the Americans demanded. It’s what the creditor demand has always been. Essentially you have to be willing to destroy your economy in order to pay your debts.
Keynes said this was crazy and he was right, but Europe went along with it and said, “Yes, we are willing to destroy our economies; we are willing to create the resentment for World War II rather than question the assumption that all the debts have to be paid.”
What Keynes pointed out was that there was a distinction between the budget problem – in other words, taxing the economy to raise a domestic fiscal surplus in German Marks or British Sterling – and the transfer problem of paying foreign currency. What happened was that the Allies said, “If America is going to insist that we pay, we’re not going to wreck our economies. We’re going to make Germany pay reparations.”
As you all know, the result was to bankrupt Germany, causing a hyperinflation there that was only solved by Germany essentially borrowing the money from the United States. German municipalities would borrow the money in dollars for local spending, use the dollars to turn over to the Reichsbank to pay the Bank of England and the Bank of France, in turn to pay their dollar debts to the United States. That was a circular flow.
It could only be kept going by the Federal Reserve making interest rates very low here in the United States to promote an outflow of foreign investment to Germany. But those low interest rates also created a stock market boom that crashed in 1939. In the end, the Inter-Ally debts had to be canceled. There had to be a moratorium [on those debts], along with German reparations, as the system broke down in 1931. There was an attempt to reconstruct the economy at the London Economic Conference of 1933 but Roosevelt scuttled that and said, “We’re going to go it alone.”
The basic principle of American foreign policy is that no other country can tell us what to do. We can tell other countries what to do, but they cannot tell us what to do. So we will not join any agreement in which we don’t have a veto power that gives us control of the World Bank and the International Monetary Fund, or the veto power in the United Nations and any international organization that the United States will join. So the question is: how could this supremacy be established all over again as World War II came to a close?
In 1944 and 1945, America made plans for the postwar economy. Its guiding logic was that: “In order to have full employment in the United States we have to have an export-based industry. Now that we’ve destroyed Germany and Japan our major enemy is the United Kingdom.” It became very clear that America’s enemy immediately on the ending of World War II was not Russia or the Soviet Union, but England. It developed a strategy that was designed to essentially bankrupt England with the 1946 British Loan, to force England to accept to end Imperial Preference, to break up its empire, to make it free the about 10 billion pounds Sterling, to be used for spending not in England as blocked currency as the British Board of Trade expected, but in the United States. So England was stripped of all of the blocked currency, stripped of the currency area, stripped of its exclusive Sterling Area, and thereby the empire that became absorbed into the Dollar Area.
The parliamentarians and members of the House of Lords said, “We know that we’re bankrupting Britain, but the alternative is to go it alone, and we can’t really make an alternative.” Keynes said, “Of course you could create your own currency and trading area with India, Canada and other countries, but that would involve a great shrinking.”
At the time they believed still that there had to be some means of settling international payments on creditor terms with gold. The United States had most of the gold in 1945. The British understood very clearly that what seemed to be the gold exchange standard – for countries that settled their balance of payments deficits in gold – was really the Dollar standard, because the dollar was defined in terms of gold. What seemed to be a gold standard was actually the Dollar standard, and in fact the arrangements that America created in 1945 were so one-sided that by 1950 it had drawn another five billion dollars’ worth of monetary gold into the United States out of Europe. There was a refugee flight of gold in the 1930s that was followed by a post-war flight out of Europe. British banks and the wealthiest classes began to move their money to the United States.
By the time of the Korean War in 1950 and 1951, America’s balance-of-payments deficit changed abruptly. From 1951 through the 1960s and 1970s, the entire U.S. balance of payments deficit was military. At first this deficit was welcomed by Europe and by other countries because finally the United States was providing the rest of the world with dollars that it needed to grow. The dollar outflows became the basis of Europe’s central bank reserves along with gold. Some of the dollars were cashed into gold especially by France, and by Germany even more.
The U.S. balance-of-payments deficit was entirely due to America’s military spending. The U.S. private sector was exactly in balance. All of the deficits were on government account, and were entirely military. American foreign aid actually made money in balance-of-payments terms. In the 1960s when I was working at the Chase Manhattan Bank, every Friday the Federal Reserve would publish statistics on the gold cover. All of the paper currency in the United States had to be backed 25 percent by gold. Every Friday we would look at what is the gold cover – how much over the 25 percent does America have in free gold to sell, to settle the military deficit from spending in Southeast Asia, in the Vietnam War and other military operations throughout the world.
It was obvious already in the mid-60s that the United States at some point would run out of gold if it continued its military spending. That led Chase Manhattan’s Chairman of the Board George Champion to oppose the Vietnam War, saying it was fiscally irresponsible. It was the business community and the right-wing in the United States that opposed America’s foreign war, not the labor movement. The labor movement was for the war because it was causing an inflation and helping wages rise. The golden age of American labor was the 1960s and 1970s, resulting from the balance of payments deficit. It was the business community that opposed the war – but not David Rockefeller when he took over from George Champion. Rockefeller wanted to “do the right thing.” He sort of followed what the Treasury asked Chase to do and the other Wall Street leaders followed suit.
Already in the mid-60s the United States faced the problem of how to avoid its balance-of-payments deficit. The solution was to make America the haven for criminal capital in the world. Somebody from the State Department joined Chase Manhattan, and asked Chase to set up enclave affiliates in the Caribbean to essentially attract the criminal capital of the world. As they explained it to me: “We want to be the new Switzerland.” They said the most liquid people in the world are the criminal class, the drug dealers. “We want the drug dealer money; we want the criminal money because it’s liquid. They have nowhere to go. Let’s make America safe for the flight capitalists, for the kleptocrats, for the crooked heads of states of the world for putting their money. Don’t have them put them in Switzerland to push up the Swiss currency. Have them put it in the branches of Wall Street banks that then would take this money in the Caribbean tax evasion and offshore banking center enclaves and then send the money to the head offices.”
The Federal Reserve every three months would publish statistics on head office bank liabilities to their branches in the Caribbean and Panama and Liberia and other countries that were used as tax avoidance centers. We were following that quite closely. Despite trying such stratagems, the United States went off gold in August 1971. At the time it worried about what on earth was going to happen. “Are we going to lose the creditor position that has enabled us to dictate the trade rules and the financial rules and political diplomacy of the world when they went off gold?”
In 1972, a year after the United States went off gold, my Super Imperialism was published. Its theme was that American diplomacy was in an even stronger position now that its deficit was not having to be paid with gold. What were other countries to do? How were foreign central banks going to hold their international reserves? There was only one currency that they could hold, and that was the U.S. dollar. So the fear by Wall Street and the U.S. Government that the dollar would be devalued as a result of its military spending didn’t materialize, because foreign central banks were in a quandary: If they did not recycle the dollars that they received from the America’s balance of payments deficit, their currencies would rise and that would hurt their export interests.
From the American point of view, central banks recycled dollars into Treasury bond holdings, because foreign central banks at that time could only invest in official government securities; they were not creating sovereign wealth funds. America’s balance-of-payments deficits thus financed its domestic budget deficits.
The response to my book on Super Imperialism was not primarily from the Left but from the U.S. Government, especially the Defense Department. I went to work for the Hudson Institute with Herman Kahn, and immediately we got a contract from the Defense Department to explain to them how Super Imperialism was working. I didn’t want to call the book Super Imperialism. I wanted to call it Monetary Imperialism, but the publisher thought differently. Most of the copies were sold in Washington to the Defense Department, the State Department and the CIA, and Herman Khan brought me numerous times down to the White House to discuss this. The Americans made it very clear that – for instance when OPEC quadrupled its oil prices in 1973 and 1974, after America quadrupled its grain prices – Kissinger and the State Department and Treasury told them that they could charge whatever they wanted for the oil, but whatever they charged they had to recycle into U.S. financial markets, mainly into government bonds. They also could buy U.S. stocks and U.S. corporate bonds, but couldn’t buy majority ownership of any big American industry. American had to be in control of its industry. The Arab countries were told “you can buy all the stocks you want through the stock market”. I think one of the Saudi Arabian kings bought a million shares of every company on the Dow Jones Industrial Average.
So you had a recycling. The more dollars Americans spent abroad on its military deficit, the more money flowed into the bond market to finance America’s budget deficit. What the American government had achieved by its creditor status before 1971, it achieved by its debtor status after 1971. Once again, it told the rest of the world: “What’s the alternative? The alternative is anarchy.” Essentially it used that threat. President Johnson insisted that Europe give America special trade favoritism, special advantages, and the rest of the world felt that it had to go along to survive.
At the time there was a discussion concerning the advantages of gold. Herman Khan was a monetary right-winger, and believed that gold should be reintroduced into the international monetary system. He and I went down and gave a presentation to the U.S. Treasury, saying, “Gold is a peaceful metal because it’s a constraint on the balance of payments. If countries had to pay their balance-of-payments deficit in gold, they would not be able to afford the balance-of-payments costs of going to war.” That was pretty much accepted and that was why the United States basically responded, “That’s why we’re not going back to gold. We want to be able to go to war and we want the only alternative to hold central bank reserve to be the United States Dollar.”
The United States also arranged the World Bank and the International Monetary Fund to favor the U.S. economy. In the World Bank it would only make foreign currency loans to other countries. It sent out missions to foreign countries to say “What does the country need?” and almost every mission said “What Latin America, Africa and the Near East need is not foreign currency. They need domestic currency for agricultural development.” You had a latifundia problem in Latin America. The United Nations came out with two wonderful reports on the need for land reform throughout the Third World in order to grow domestic food. But the World Bank was set against other countries becoming food independent. The most important heads of the World Bank were former Secretaries of Defense like McNamara and John McCloy. You can look through who the heads were. The Americans said that any foreign country wanting to grow its own food instead of depending on U.S. grain exports was counted as an Act of War and would be overthrown. That was the explicit reason why the United States established military dictatorships and client oligarchies in Latin America.
The World Bank did promote plantation agriculture but the plantation agriculture was for tropical export crops to compete with other exporting countries, to lower the price of export crops, of tropical crops that could not be grown in the United States. These countries were not supposed to grow their own food supply.
The World Bank became a huge market for American firms to build dams etc. I was told that the World Bank person in charge of designing dams had been a chronic bed-wetter as a child, sort of acting it all out. It also got countries into debt, and once countries were in debt they were forced into the International Monetary Fund, which said basically” “In order to pay your debts, you have to engage in a vicious class war against labor”. You have to lower wages because it’s the only variable in world trade. There’s a common world trade [price] in raw materials: All countries pay the same price for copper, machinery, and other materials. There’s a common world price for oil; there’s a common world price for capital goods. The one variable in foreign trade is the price of labor. So the IMF said, “You’ve got to prevent unionization, you’ve got to prevent any kind of pro-labor reform. Your only way of paying debts is to polarize your economy and impoverish your labor force.”
That is exactly what the opponents of Keynes had urged in the 1920s, and you saw the result in Germany. The same thing was imposed on the Third World countries. That is why, until a few years ago, all the countries of the world tried to get free of the IMF’s “conditionalities,” the terms on which the IMF would lend money. You should essentially think of the IMF as a small office in the basement of the Pentagon, deciding what countries to support, and what countries are following policies that the United States does not want and therefore wants to wreck. That explains why the IMF will give loans to completely non-creditworthy countries such as Argentina under the dictators, or the Ukraine with no visible means of paying off the debt.
The loans to Ukraine, the loans to Greece recently that ended up bankrupting it, the loans yet again to Argentina have demoralized the IMF staff. They complained that every forecast they make shows that the debts can’t be paid, but the IMF continues to make them anyway. The IMF has become a pariah among competent financial analysts throughout the world. The United States is still trying to force countries into the IMF as a means of controlling them, saying “Either you engage in a pro-American war against labor and [engage in] neoliberalism, or the alternative is wreckage.”
Ironically what’s changing all this is the United States’ cold war against Russia and China. The United States has begun to impose sanctions on the Russian and other post-Soviet economies, and on China. This is driving them into a position where their only defense is to do what Britain could not do in 1945: to create an alternative economic order with its own rules. So for the last five years or so China, Russia and other countries are discussing how to de-dollarize their economy.
What do they want to do? They say: “The first thing we have to do is we don’t want to hold our international reserves in loans to the U.S. Government, because that finances the United States military deficit, building its 800 military bases all around us, to try to threaten us militarily. If we withdraw from this international financial system based on the U.S. dollar free-lunch, then dollars can’t be spent ad infinitum without any constraint on military policies that we don’t agree with – right-wing and anti-labor policies that we don’t agree with. So we’re going to take the lead in creating a new grouping – China, Russia, Iran, the Shanghai Cooperation Organization members basically – to do this.”
They’re trying to do what the world began to talk about doing in 1933 at the London Economic Conference: “How do we make a fair system?” When Keynes outlined his plans for Bretton Woods in 1944, his alternative was the Bancor. He said there should be a central bank that can make loans, creating fiat money to enable deficit countries to pay. So that if they ran a balance-of-payments deficit, they wouldn’t have to impose austerity. Austerity and anti-labor policies never enable a country to pay debts. It makes them less able to pay, and even more dependent on creditor countries. So the Chinese and Russians are discussing today “How do we create a currency, a central bank that will help us actually develop? We’ll use international reserves to promote the industrialization and the upgrading of labor and public infrastructure investment, instead of the U.S. demand to privatize infrastructure development and sell it off to foreign rent-seekers.”
What China and Russia found out very quickly is what initially seemed to be an economic rivalry between America and China and other countries was not really an anti-China rivalry as such. It’s a conflict of economic systems. The conflict is between neoliberalism – a financialized world order that wants to privatize all infrastructure and create monopoly rents for transportation, education, healthcare, like what occurs in the United States – and having these basic investments in the public domain, to be subsidized and their services provided at minimum cost. The question at issue is what kind of economy the world is going to have. Will it be a neoliberal economy, a privatized economy – Reaganized, Thatcherized and financialized, organized by central planning in Wall Street – or is the government going to plan?
China and Russia do not want a centrally planned economy anywhere near as centralized as the United States is promoting with Wall Street. In the United States the center of economic planning has been shifted from Washington to Wall Street financial institutions. Banks create credit not to create new means of production, not to build new factories and plant and equipment, but essentially to extend credit against assets already in place. Eighty percent of bank loans in the United States and in England are mortgage loans for real estate, against real estate that’s already in place. I think three percent of mortgage loans are for new construction as long as these loans are already collateralized with promises to buy apartments etc.
So the question is what kind of financial system are you going to have to back up a central banking system and credit creation? Is credit going to be a public infrastructure enterprise as it is in China, where the banks of China are able to decide who is going to get the loans. A public bank is not going to make corporate takeover loans or loans to corporate raiders. It’s going to make loans to actually increase the tangible economy, not to take it over and turn public infrastructure – the education system, healthcare, transportation and communications – into rent extraction.
We’re having today finally a revival of the kind of debate that classical economics was all about in the 19th century – Adam Smith, John Stuart Mill, down through Marx and Alfred Marshall. At issue was how to minimize unearned income as economic rent. At that time, the main form of economic rent they were trying to minimize was land rent. The idea was to get rid of the hereditary landlord class, which was treated as a form of overhead. In today’s economy the main rentiers are financial. There’s not a landlord class anymore, because two-thirds of Americans own their own home (on credit, to be sure). Home ownership rates are higher in continental Europe and England. You don’t have a hereditary landlord class living off land rent. What you do have is a financial class that’s emerged after World War I in a way that they have become the new central planners. It’s a new concentration of wealth, engaging in a new kind of economic war, not only against labor but against government as well, to appropriate the public domain by financializing it. This is done by getting governments into debt and having them sell off the public infrastructure. That’s happening in America at the state and local level, for indebted cities and states like New York.
How do China and Russia avoid their economies becoming financialized? How do they avoid a financialized economy from becoming a high-cost economy and losing their international trade advantage? What’s at stake in de-dollarization is how to create an alternative to a financialized, dollarized economy, one that is going to try to minimize the cost of living and minimize the cost of doing business, instead of a high-cost economy as is occurring in the United States.
The answer they have is that to some extent there’s going to be gold as a means of settlement. But most of all China, Russia, Iran, and other countries are going to mutually hold each other’s trading currencies. They’re replacing dollars with gold and with each other’s currencies. That essentially is the response that the world could have taken after World War One and didn’t, and could have taken after World War II if it had followed Keynes’s policies. Finally, with the help of Donald Trump isolating China and Russia, U.S. diplomacy is creating an independent bloc and helping them do what was unthinkable in the past.
Great, thank you very much. We’ve got some questions coming in.
To start off, yesterday Joe Biden was inaugurated, making him the 46th President of the United States. What are your expectations regarding his stance on China? We’ve heard him talk a lot about democracy as a guiding foreign-policy principle to distinguish between what is good and what is bad for the U.S. Which measures are likely to be used to advance the USA’s interests: will it be tariffs, sanctions or could we even see a military buildup and embargoes?
The question is, what are the U.S. interests? Again and again in the 1920s, the 1930s and today, the U.S. Government interests were the opposite of U.S. industrial interests, opposite of U.S. economic interests. Just because the Biden administration has an emotional hatred of Russia does not mean that it’s in the U.S. interest. The Biden administration said, “On second thought we’re not going to join the Iran agreements because we’re going to talk to Israel first,” and Blinken, his neocon Secretary of State, said that we won’t do anything without Israel’s approval regarding Iran. Biden also said that the United States will not do anything about solving the world problem of global warming that the oil industry doesn’t like, because basically what’s called the “interest of the United States” is that of his political campaign contributors. So almost his first act was to approve more oil drilling. Here we have the Supreme Court’s Citizens United ruling that lets campaign contributors dominate U.S. policy, not the voters. The American voters were not given a choice in this election. Biden did not do well in the early primaries and Kamala Harris got only one percent of the primary vote.
Polls show that what American voters want is basically a Bernie Sanders type policy. They want what you have in Europe. They want public healthcare, universal healthcare. They don’t want to have to pay 18 percent of America’s GDP for medical insurance and medical expenses, because there’s no way that American industry can compete in markets and American labor be employed in export industries, having health care monopolies protected by successive administrations.
The American public didn’t want the Obama administration to evict 10 million American families, and it looks like the Biden administration is going to outdo Obama. Biden basically says, “We’re going to evict another 10 million American families. What Obama did I can do more.” Many families have not been able to pay the rent or even pay the mortgage if they’ve been unemployed or if their income is reduced because of the Coronavirus. There’s going to be a huge wave of evictions in the United States that will be even larger than the Obama evictions.
The Obama evictions were targeted mainly against Black and Hispanics, who were the victims of the junk mortgage loans. Biden has made a point of appointing many Black women and men to administer positions as a cover story for the fact that his policies are going to be just as viciously anti-Black and anti-minority and anti-Hispanic as the Obama administration’s were. They found that as long as you can have identity politics front and center you can do whatever you want economically to crush the people that you pretend to be representing in identity politics.
Nobody can see really any way in which the American economy can recover. The stock market can recover because the Federal Reserve credit and quantitative easing has been going into supporting stocks and bonds, including junk bonds. Sheila Bair wrote a Wall Street Journal editorial on that. But the underlying economy is shrinking rapidly while the stock market’s going up. That’s what the American economists call a K-shaped recovery – up for the One Percent, down for the 99 Percent.
I’m going to ask one more question on the China topic and then talk a bit more about historical things you mentioned. China has been building up a network of support and trade deals to drive its expansion. You mentioned some of the policies. It’s also been growing its presence in the U.N. system and even putting together alternative international organizations like the Asian Infrastructure Investment Bank. Is there a line that the U.S. would not tolerate China crossing, after which the U.S. would start devoting much larger resources and spending to contain China, or is the U.S. already at full power?
The United States is muscle-bound. Despite its huge military budget it can’t field an army. It has a foreign legion. ISIS, for instance, is part of its foreign legion. The European NATO is part of its foreign legion. But there’s no way American can ever have a land war again, so you can never invade and conquer a country with a military army. All America has is the Atom bomb, and that’s muscle bound. It cannot go to wage any kind of war except atomic war. There’s nothing in between.
I think Russia and China know that, and Russia at least has taken steps to protect itself and said, “If the United States wants atomic war, we’ll be wiped out but it’ll be wiped out too, and Europe will be wiped out.” I think probably the first exchange would be to wipe out England and Europe, to say “We don’t want to go to war with you and really blow up the world, America. Let’s just show you what we can do. Let’s blow up England and Europe so at least you won’t have your colonies there.” If America persisted, it would be the end of the world. Will America really do that? There was worry that Donald Trump would do that so he could go down in history as the man who destroyed civilization, but I don’t think other people are going to do that.
Moving now into some of the historical things you mentioned, for example in the 19th century the most powerful European empire was the British Empire. I am trying to see if there’s a parallel between the UK and the American. Did the UK establish such currency dominance similar to the one the U.S. has today? Did it use similar methods to the U.S. to establish its dominance, for example creating international organizations in which it had an institutional advantage, or for example through the control of key energy deposits?
England thought that it was establishing currency dominance with the Sterling area. In other words it would spend money abroad and other countries would save their money in Sterling. All during the 1930s the surpluses earned by India and by other members of the Sterling area were basically kept in London, paid to England. But then England ran a deficit with the United States so ultimately the benefit of England’s Sterling area, the financial benefit, was all spent to the United States already in the 1930s. You can look up the balance of payments articles on that.
In 1945, as I mentioned, England thought, “We have 10 billion Pounds of all the savings of Argentina and India, countries that have been providing the raw materials for the World War that we fought, World War II. Now there is going to be a demand for English exports and we can recover by employing our labor to make exports.” But the terms of America’s British Loan said: “No, you have to open up the Sterling area and let these countries cancel their contracts with England.” England had long four-year and five-year capital purchase contracts from India, Argentina. “They can cancel them all and buy from the United States”. England went along with that. So the attempt to create a currency area was smashed by the United States.
Ever since the 19th century America looked at England as the great rival, not the Soviet Union. The Cold War in the 19th century was against England. The fight for protectionism in the United States went so far as to create state colleges and universities that would teach an alternative to Anglo-centered free-trade economics and Anglophile moral philosophy. There was a feeling in the late 19th century of America creating a new civilization and it would not be the religious-based, unscientific civilization of Europe. It would be a new secular civilization. That feeling of a new civilization in America is what led Americans to think, “We will never let other countries tell us what to do because they’re part of the decadent old world and we’re the new world. We’re going to make our own rules.”
You also discussed Bretton Woods. Would it be beneficial to recreate, very hypothetically, a system similar to the Bretton Woods one today? I think a key question that underlies that is, “Does the country that runs such a system reap a benefit from running it or are they just constrained?” Will there be an interest for China to set up such a system?
They realize that they cannot set up any system in which the United States is a member because the United States will insist on veto power. If it has veto power, then they can’t do the kind of economic system that I described. Bretton Woods was designed one-sidedly to give all the benefit to the United States, and to make other countries dependent on the U.S. economy, on U.S. exports – largely of agriculture, but also industry – and also on the U.S. dollar. Obviously, that’s not going to be done. The agreement that is being developed on an ad hoc spontaneous basis between China, Russia and neighboring countries is their own system of international payments that will be based on mutual benefit, of holding of each other’s currencies, of preventing any payment surplus country – and it could be China – any payment surplus country ending up with so much credit in a creditor position vis-a-vis debtors. The new system will not impoverish the debtors.
The IMF system was designed to impoverish debtors. The purpose of the IMF was to make other countries so poor and dependent on the United States so they could never be militarily independent. In the discussion of the British loan for instance, in the 1930s the discussion in the London Economic Conference was, “Yes, we’re bankrupting Europe, but if we give Europe enough money to avoid austerity, they’re just going to spend the money on the military.” That was said by the Americans in the State Department and the White House again and again, especially by Raymond Moley who was basically in charge of President Roosevelt’s foreign policy towards Europe.
The question is: how do you create an international financial system designed to promote prosperity, not austerity? The Bretton Woods perspective is for austerity for everybody except the United States, which will have a free ride forever. The question that I’m involved with in the work I’m doing in China and with other countries is how to create a system based on prosperity instead of austerity, with mutual support between creditors and debtors, without the kind of financial antagonism that has been built into the international financial system ever since World War I. Financial reform involves tax reform as well: how do we end up taxing economic rent instead of letting the rentiers take over society. That is what classical economics is all about: how do we revive it?
Final question: these austerity and anti-labor policies which the IMF imposes on countries of the global South seem to be well known practices from before the IMF was created, from what you’ve discussed. Did the IMF invent anything new? In addition, in the 19th century, was predatory lending something common, or was direct invasion always the go-to method for subjugating a territory?
The 19th century was really the golden age of industrial capitalism. Countries wanted to invest to make a profit. They didn’t want to invest in dismantling an existing industry, because there wasn’t much industry to dismantle. They wanted to make profit by creating industry. There was a lot of investment in infrastructure, and it almost always lost money. For instance, there was recently a criticism of China saying, “Doesn’t China know that the Panama Canal went bankrupt again and again, and that all the investments in canals and the railroads all went broke again and again?” Of course China knows that. The idea is that you make investment not to make a profit on basic large infrastructure. The 19th century was basically inter-state lending, inter-governmental lending, public sector lending. That’s where the money was made. The late 20th century was one of financialization, dismantling the industry that was already in place, not lending to create industry to make a profit. It’s asset-stripping, not profit-seeking
Thank you very much for joining us today. Our next event will be on February 4th and we look forward to seeing you all then. Thank you very much Prof. Hudson.
Michael Hudson is Professor of Economics at the University of Missouri-Kansas, former balance of payment economist at Chase Manhattan, political consultant, and has written on many topics relating to the history of debt and the international financial system.
Remarks from the Systematic Crises Triggered the Current Pandemic & Progressive Way-Outs teleconference
Remarks given at the 1st ASECU Teleconference ‘Systematic Crises Triggered the Current Pandemic & Progressive Way-Outs, May 8, 2020.
Well, I think you’re quite right in organizing the conference to point out that today’s pandemic crisis hastens and intensifies the internal contradictions that have been building up. Many of these contradictions are going to be blamed simply on the virus. But there is an underlying problem that the virus is exposing and turning into a crisis. That underlying problem is the debts that have been building up for the last few decades.
We are in a situation much like a war. There are winners and there are losers in a war. In this case the winner is the aggressor – the financial sector. Its demands for payment have set the stage for today’s economic breakdown. This has been the case throughout history. Finance always has been the great destabilizing factor. Right now, you’re having businesses – retail stores, restaurants, hotels, airlines and other businesses that are being closed down or operating at only a small capacity far below break-even levels. These businesses are not able to pay their stipulated rents or mortgage debt service. Their landlords are not able to pay their banks.
Workers have been laid off, and they’re unable to pay their landlords or creditors. So they are falling more deeply into debt. Entire states and the cities, like New York State and New York City, are being squeezed. In addition to having to pay local unemployment insurance, they have to maintain basic infrastructure and social services. But their d tax revenues ae plunging as a result of fewer sales taxes and income taxes. So the pandemic is creating a fiscal crisis as part of the overall debt and real-estate crisis.
The question is, how do we get out of it? What is happening is what legal contracts call an Act of God. What do you do when economic activity is disrupted and the flow of payments that people have every month – their debt service, their rents or their mortgage, or their credit cards and other basic ongoing expenses. What do you do when they can’t be paid? I think that this crisis is laying the problem bare. It is a problem that’s occurred in Western civilization for the last 2,000 years. But what is so striking is how much more adroitly ancient civilizations handled this problem. They did so in a completely different way from how other civilizations have handled things.
I have written quite a bit about Bronze Age archaeology in the ancient Near East. That is where the Act of God stipulation originated. It appears in the Laws of Hammurabi c. 1750 BC. The problem that the Babylonians had to deal with was what to do when there is a flood, a drought, warfare or a pandemic. What should be the rules when, suddenly out of nowhere, cultivators and the citizenry on the land are rendered unable to grow and harvest crops, out of which to pay the debts that they have run up during the year and are falling due. They owe the taxes, sharecropping or other rent that could not be paid.
Hammurabi was quite specific about how to handle this situation. Paragraph 48 of his Laws said that there would be a debt and a tax amnesty when the weather god, Adad, created a flood or otherwise prevented debts and other obligations from being paid. If the storm god floods the lands, the debts and rents don’t have to be paid. A fresh start was made under conditions of balance for the next crop season.
The basic problem was similar to that today: How does a society restore continuity and save itself from disruption creating a permanent loss and distortion of existing wealth and income relationships? What Hammurabi and every other Babylonian, Sumerian ruler and other Near Eastern rulers did between about 2,500 BC and the 1st century BC was to proclaim amnesties in such circumstances. If they hadn’t done that, cultivators would not have been able to pay their creditors and they would have fallen into bondage. They would have owed their labour and crops to their creditors.
This would have caused a serious fiscal problem for rulers. If victims of a crop failure or other economic interruption had to pay their creditors with their labour and crop surplus, this labor and crop tax wouldn’t be available to pay the palace its normal claims for taxes and corvée labour duties to build infrastructure or even serve in the army. Social balance and continuity would have been destroyed – from within. So when Hammurabi and every ruler of his dynasty proclaimed a clean slate cancelling the debts and rent arrears that had mounted up unpaid, proclaiming a return to the normal situation prevented a creditor oligarchy from emerging and seeking its own interest as distinct from that of the palace.
All this changed in Roman times. Classical antiquity protected the financial and rentier elites. Cicero and the other Roman leaders said that all the debts had to be paid, even (or indeed, precisely because!) this led to the enslavement of poorer Romans and Greeks. Rome’s creditor oligarchy used every crisis as an opportunity to grab the land of the smallholders, to force the population into bondage and to get control of their land.
We’re seeing the same basic dynamic occur throughout the post-Roman Western world. Creditors are now already planning to buy up distressed real estate from landlords that default as their rents are not paid. There is going to be a huge bankruptcy sale. Large private capital funds have already announced their intention to begin buying out the retail stores that have gone bankrupt, along with their real estate.
Individuals who are unable to pay their debts, workers who’ve been laid off, are told to borrow from their pension funds or social security accounts. That means that they won’t be receiving the retirement income they need to live. Likewise, the states and the cities that Jeffrey Sachs mentioned also are facing a debt crisis with their bondholders. Mitch McConnell, the Republican Senate head, said that Democratic states like New York, New Jersey and California should cover their shortfall by taking the pension funds that they’ve set up for public employees. The financial sector’s intention is to use this crisis to wipe out the pension funds and transfer the savings of the wage-earners to pay bondholders and other creditors. The promises that state and local governments made for pension in exchange for not asking for higher wages are to be wiped out.
The debts that have been built up are being used as a financial warfare tactic. It is more efficient than military warfare. Debt has been used to strip away the assets of middle-class people, of home owners, of employee pension funds, to suck their savings and property up to the top of the economic pyramid. The pandemic crisis has created a battlefield. Its rules have been written by the financial sector and their lobbyists as an opportunity for the largest property and financial grab since the Great Depression.
The result will be that much of the American and European economies are going to end up looking like the Greek economy five years ago, when it was unable to pay its euro-debts. You can look at Greece as the future of the United States, catalysed by the coronavirus pandemic.
Thank you, thanks a lot. Michael, it’s your turn and allow me, before you start, because there was an extra question addressed to you, but also to the rest, included perhaps in the previous questions: who are the big winners, in economic terms, after current developments?
I’ll talk about the questions in reverse order, beginning with the idea that there may be an inflation to help pay off the debts.
Just the opposite: What we are facing now is an era of debt deflation. It’s the worst debt deflation since the Great Depression. I’ve already described how there are going to be major defaults in real estate, especially for commercial real estate, for stores and all the other businesses that are going without income while their rents have accrued. If we are going to have a close-down for at least three more months, with no income for stores, entertainment, motion-picture houses and museums, paying three months’ back rent is not viable. There’s no way in which stores, or many wage-earners, can earn enough to pay the rent out of normal work and business. So, they’re going to go out of business.
There is going to be a wave of bankruptcy, and that will be followed by fire sales of real estate. Unemployment is going to lead to lower wage levels, and there also will be cutbacks in public spending for social services, transportation and other normal programs. Privatisation sell-offs will occur, much like Margaret Thatcher’s in England. this is now going to be imposed upon Europe. It’s possible that the Eurozone will break up if it does not change its rules and create the euro-money to enable Italy and Spain to get by. But at present the Eurozone rules are that all the money, all of the credit that is needed to grow in Europe, should be borrowed from banks at interest.
Banks can create this money on their keyboards electronically. The government could do the same, but relinquishes this privilege to the privatized banking sector. As Modern Monetary Theory explains, a central bank can simply print the money that is needed to fuel economic growth. But the financial sector has captured the hearts and minds of central bankers, from Europe to the United States.
The problem is these banks don’t lend money to create means of production or livelihood. They don’t lend money to build factories. Banks lend money against assets already in existence, mainly real estate, houses, buildings, and also companies – and to corporate raiders to buy other companies on credit. So, the effect of this bank lending has been to inflate the price of real estate, because a house or a building is worth whatever a bank will lend against it.
The financial sector has become less and less productive, and more predatory. It has prevented European governments from having a central bank that directs deficit spending into the real economy. Only the banks and financial sector, the elite One Percent, are supported, as in the United States. Ten trillion dollars ’s put into the economy, mainly into the stock and financial markets, the bond market and the real estate market, but not into production.
The Eurozone does not do that. This means that the governments of Europe are not really democratic. Europe is governed by the European Central Bank. It works for its customers, the commercial banks. And the commercial bankers say: “We want to starve the economy of credit, so that we, the commercial bankers, can create the money to lend to our customers, and charge interest and financial fees. Our own financial speculation that all the growth, the surplus that Europe produces, should be turned over to the financial sector.” That’s what the Europeans have voted for. In effect they vote for lower wages, cutbacks in public services and shorter pensions. These living standards are threatened by the way in which the financial dimension of the coronavirus crisis is being managed.
You’re seeing a disparity between Italy and the Mediterranean countries and northern Europe. Countries need credit in order to recover. But the Eurozone refuses to provide the credit that is needed to get through the coronavirus suspension of economic activity and its aftermath of unpaid debts, rents and other obligations. The Eurozone is treating Italy, Greece, Portugal and Spain just like President Trump here in America is treating the Democratic states like New York, New Jersey and California. The effect is to create a deflationary crisis. That makes it impossible to pay the backlog of debts and rents.
We may see a power grab creating something much like feudalism. In the United States it’s suggested that for student loans, or for loans to wage-earners collateralized by the debtor promising to pay 10%, 20%, 25% of everything they earn for the rest of their life. This is like a tax, but it’s really a form of debt peonage. It’s a payment much like medieval serfs had to turn over their economic surplus to their landlords. Well, now the wage-earners, small business and even big business in America and in Europe are going to have to turn over even more of their earnings to the financial sector in order to survive.
This may seem a crazy way to organize society, but it is how Western civilization has been structured on the basis of protecting creditor rights, not debtor solvency and overall social balance and continuity. Unlike non-Western societies, unlike even China today, credit in Europe and America is privatized. The supply of credit, like money, should be a public utility. Just like public health should be a public utility. Just like roads and communication should be a public utility. Europe has let it be privatized in an aggressive, predatory way.
As long as governments subordinate the will of democratic voters to whatever the central banks tell you, you are not a democracy. Jeffrey earlier mentioned what Aristotle thought. Aristotle explained a kind of eternal political triangle. He said that many constitutions appeared to be democratic, but they’re, actually, oligarchic. That’s because democracies tend to evolve into an oligarchy. The oligarchy makes itself hereditary into an aristocratic ruling class. Finally, thank heavens, some of the wealthy aristocrats fight among themselves and they try – like Cleisthenes did in Athens as early as 406 BC – to take the masses into their camp, and become democratic and order to mobilize support in the citizens against the other aristocrats. Then you have a democratic revolution, but democracy once again develops into oligarchy. That’s the eternal political triangle that Aristotle described.
And that’s what you have in Europe. It’s not a democracy anymore; it’s an oligarchy making itself into the same kind of hereditary aristocracy that occurred in classical antiquity. Many of you hoped that Europe had overthrown the aristocracy after World War I when you did indeed get rid of the kings and royalty. But you opened the way for a new kind of oligarchy turning itself into a hereditary aristocracy, that of finance. That’s the task before you to solve. The only thing I can say is that, perhaps, this crisis has indeed catalysed this basic internal contradiction and will create a response that deals with the pandemic by cancelling debts and de-privatizing the banking sector.
Photo by Laura Seaman on Unsplash
The end of America’s unchallenged global economic dominance has arrived sooner than expected, thanks to the very same Neocons who gave the world the Iraq, Syria and the dirty wars in Latin America. Just as the Vietnam War drove the United States off gold by 1971, its sponsorship and funding of violent regime change wars against Venezuela and Syria – and threatening other countries with sanctions if they do not join this crusade – is now driving European and other nations to create their alternative financial institutions.
This break has been building for quite some time, and was bound to occur. But who would have thought that Donald Trump would become the catalytic agent? No left-wing party, no socialist, anarchist or foreign nationalist leader anywhere in the world could have achieved what he is doing to break up the American Empire. The Deep State is reacting with shock at how this right-wing real estate grifter has been able to drive other countries to defend themselves by dismantling the U.S.-centered world order. To rub it in, he is using Bush and Reagan-era Neocon arsonists, John Bolton and now Elliott Abrams, to fan the flames in Venezuela. It is almost like a black political comedy. The world of international diplomacy is being turned inside-out. A world where there is no longer even a pretense that we might adhere to international norms, let alone laws or treaties.
The Neocons who Trump has appointed are accomplishing what seemed unthinkable not long ago: Driving China and Russia together – the great nightmare of Henry Kissinger and Zbigniew Brzezinski. They also are driving Germany and other European countries into the Eurasian orbit, the “Heartland” nightmare of Halford Mackinder a century ago.
The root cause is clear: After the crescendo of pretenses and deceptions over Iraq, Libya and Syria, along with our absolution of the lawless regime of Saudi Arabia, foreign political leaders are coming to recognize what world-wide public opinion polls reported even before the Iraq/Iran-Contra boys turned their attention to the world’s largest oil reserves in Venezuela: The United States is now the greatest threat to peace on the planet.
Calling the U.S. coup being sponsored in Venezuela a defense of democracy reveals the Doublethink underlying U.S. foreign policy. It defines “democracy” to mean supporting U.S. foreign policy, pursuing neoliberal privatization of public infrastructure, dismantling government regulation and following the direction of U.S.-dominated global institutions, from the IMF and World Bank to NATO. For decades, the resulting foreign wars, domestic austerity programs and military interventions have brought more violence, not democracy.
In the Devil’s Dictionary that U.S. diplomats are taught to use as their “Elements of Style” guidelines for Doublethink, a “democratic” country is one that follows U.S. leadership and opens its economy to U.S. investment, and IMF- and World Bank-sponsored privatization. The Ukraine is deemed democratic, along with Saudi Arabia, Israel and other countries that act as U.S. financial and military protectorates and are willing to treat America’s enemies as theirs too.
A point had to come where this policy collided with the self-interest of other nations, finally breaking through the public relations rhetoric of empire. Other countries are proceeding to de-dollarize and replace what U.S. diplomacy calls “internationalism” (meaning U.S. nationalism imposed on the rest of the world) with their own national self-interest.
This trajectory could be seen 50 years ago (I described it in Super Imperialism  and Global Fracture .) It had to happen. But nobody thought that the end would come in quite the way that it is happening. History has turned into comedy, or at least irony as its dialectical path unfolds.
A veteran of Wall Street who now serves as Distinguished Research Professor of Economics at the University of Missouri, Kansas City, Professor Hudson has an intriguing CV that entails working with bodies ranging from the White House to the Vatican.
. . . And Forgive Them Their Debts has had a long gestation: he has been writing a history of debt since 1980. More recently, he has been inspired by his concern that, in the wake of 2008, “any lessons were forgotten pretty quickly.”
“It was obvious to me that, if you are going to avoid a massive foreclosure movement, and if you are going to avoid imposing austerity on debtor countries, you have to write down the debts, and most people — especially on the Left — said ‘Well, this is impossible’,” Professor Hudson tells me from his office in New York. “I began to look through history . . . at how different societies have handled their debt problem, and how they have written down the debts.’”
Studying the Bronze Age, he discovered that “for thousands of years in Sumer and Babylonia, and all the rest of the Near East, every new ruler taking the throne would write down the debts, and, instead of creating a crisis, it prevented a crisis from happening and preserved stability.”
This history has been neglected, he says. Today, our leaders believe that “stability is making everybody pay the debts that they promised to pay, regardless of their ability to do so.”
THE cover picture on Professor Hudson’s book shows Jesus throwing the money-lenders from the temple. It is his view that Christ was crucified because of his economic views.
He points to Luke 4 and Christ’s very first sermon, “unrolling the scroll of Isaiah, saying that he had come to proclaim the Year of the Lord, meaning the debt cancellation. . . . He said that the Pharisees and the rabbinical school of Hillel had hijacked Judaism and made it into a creditor-orientated religion.”OTHER STORIESHow to fix the broken economic systemRegulation alone is not enough, says Hector Sants — and there is a crucial part for the Churches to play
Professor Hudson echoes academic work by theologians such as Dr Lyndon Drakeb, who argues that Jesus’s use of the word “debt” in “forgive us our debts” would have been jarring to his contemporaries if he had meant only “sins” (as it is often translated), and that Jesus directly argued against the so-called prosbul clause which was used to avoid the Torah’s call for periodic debt-forgiveness.
“Jesus wanted to restore the original law, and Luke says that, after he gave his sermon and announced that he had come to promote this debt cancellation, people got very angry at him, and the Pharisees decided they had to kill him, just as creditors were killing debtor advocates all over the ancient world at his time.”
Many people today “don’t understand the linguistics of debt and sin”, he says. “Again and again, Jesus denounces the creditors: they were the sinners, not the debtors. That’s the most important message that he had.”
JESUS’s debt advocacy was presaged in the Old Testament, Professor Hudson argues.
“The prophets, especially Isaiah, warned that if you let the creditors foreclose on the land of debtors, you are going to have large land-ownings created, and . . . if you can’t pay debt and have to serve as a bond servant, there are going to be runaways and capital flight and depopulation.”
To say that Michael Hudson’s new book And Forgive Them Their Debts: Lending, Foreclosure, and Redemption from Bronze Age Finance to the Jubilee Year (ISLET 2018) is profound is an understatement on the order of saying that the Mariana Trench is deep. To grasp his central argument is so alien to our modern way of thinking about civilization and barbarism that Hudson quite matter-of-factly agreed with me that the book is, to the extent that it will be understood, “earth-shattering” in both intent and effect. Over the past three decades, gleaned (under the auspices of Harvard’s Peabody Museum) and then synthesized the scholarship of American and British and French and German and Soviet assyriologists (spelled with a lower-case a to denote collectively all who study the various civilizations of ancient Mesopotamia, which include Sumer, the Akkadian Empire, Ebla, Babylonia, et al., as well as Assyria with a capital A). Hudson demonstrates that we, twenty-first century globalists, have been morally blinded by a dark legacy of some twenty-eight centuries of decontextualized history. This has left us, for all practical purposes, utterly ignorant of the corrective civilizational model that is needed to save ourselves from tottering into bleak neo-feudal barbarism.
This corrective model actually existed and flourished in the economic functioning of Mesopotamian societies during the third and second millennia B.C. It can be termed Clean Slate amnesty, a term Hudson uses to embrace the essential function of what was called amargi and níg-si-sá in Sumerian, andurārum and mīšarum in Akkadian (the language of Babylonia), šudūtu and kirenzi in Hurrian, para tarnumar in Hittite, and deror (דְּרוֹר) in Hebrew: It is the necessary and periodic erasure of the debts of small farmers — necessary because such farmers are, in any society in which interest on loans is calculated, inevitably subject to being impoverished, then stripped of their property, and finally reduced to servitude (including the sexual servitude of daughters and wives) by their creditors, creditors. The latter inevitably seek to effect the terminal polarization of society into an oligarchy of predatory creditors cannibalizing a sinking underclass mired in irreversible debt peonage. Hudson writes: “That is what creditors really wanted: Not merely the interest as such, but the collateral — whatever economic assets debtors possessed, from their labor to their property, ending up with their lives” (p. 50).
And such polarization is, by Hudson’s definition, barbarism. For what is the most basic condition of civilization, Hudson asks, other than societal organization that effects lasting “balance” by keeping “everybody above the break-even level”?
There is only one way to learn economics, and that is to read Michael Hudson’s books. It is not an easy task. You will need a glossary of terms. In some of Hudson’s books, if memory serves, he provides a glossary, and his recent book “J Is for Junk Economics” defines the classical economic terms that he uses. You will also need patience, because Hudson sometimes forgets in his explanations that the rest of us don’t know what he knows.
The economics taught today is known as neoliberal. This economics differs fundamentally from classical economics that Hudson represents. For example, classical economics stresses taxing economic rent instead of labor and real investment, while neo-liberal economics does the opposite.
An economic rent is unearned income that accrues to an owner from an increase in value that he did nothing to produce. For example, a new road is built at public expense that opens land to development and raises its value, or a transportation system is constructed in a city that raises the value of nearby properties. These increases in values are economic rents. Classical economists would tax away the increase in values in order to pay for the road or transportation system.
Neoliberal economists redefined all income as earned. This enables the financial system to capitalize economic rents into mortgages that pay interest. The higher property values created by the road or transportation system boost the mortgage value of the properties. The financialization of the economy is the process of drawing income away from the purchases of goods and services into interest and fees to financial entities such as banks. Indebtedness and debt accumulate, drawing more income into their service until there is no purchasing power left to drive the economy.
For example, formerly in the US lenders would provide a home mortgage whose service required up to 25% of the family’s monthly income. That left 75% of the family’s income for other purchases. Today lenders will provide mortgages that eat up half of the monthly income in mortgage service, leaving only 50% of family income for other purchases. In other words, a financialized economy is one that diverts purchasing power away from productive enterprise into debt service.
Hudson shows that international trade and foreign debt also comprise a financialization process, only this time a country’s entire resources are capitalized into a mortgage. The West sells a country a development plan and a loan to pay for it. When the debt cannot be serviced, the country is forced to impose austerity on the population by cutbacks in education, health care, public support systems, and government employment and also to privatize public assets such as mineral rights, land, water systems and ports in order to raise the capital with which to pay off the loan. Effectively, the country passes into foreign ownership. This now happens even to European Community members such as Greece and Portugal.
Another defect of neoliberal economics is the doctrine’s denial that resources are finite and their exhaustion a heavy cost not born by those who exploit the resources. Many local and regional civilizations have collapsed from exhaustion of the surrounding resources. Entire books have been written about this, but it is not part of neoliberal economics. Supplement study of Hudson with study of ecological economists such as Herman Daly.
The neglect of external costs is a crippling failure of neoliberal economics. An external cost is a cost imposed on a party that does not share in the income from the activity that creates the cost. I recently wrote about the external costs of real estate speculators. https://www.paulcraigroberts.org/2018/04/26/capitalism-works-capitalists/ Fracking, mining, oil and gas exploration, pipelines, industries, manufacturing, waste disposal, and so on have heavy external costs associated with the activities.
Neoliberal economists treat external costs as a non-problem, because they theorize that the costs can be compensated, but they seldom are. Oil spills result in companies having to pay cleanup costs and compensation to those who suffered economically from the oil spill, but most external costs go unaddressed. If external costs had to be compensated, in many cases the costs would exceed the value of the projects. How, for example, do you compensate for a polluted river? If you think that is hard, how would the short-sighted destroyers of the Amazon rain forest go about compensating the rest of the world for the destruction of species and for the destructive climate changes that they are setting in motion? Herman Daly has pointed out that as Gross Domestic Product accounting does not take account of external costs and resource exhaustion, we have no idea if the value of output is greater than all of the costs associated with its production. The Soviet economy collapsed, because the value of outputs was less than the value of inputs.
Plato and Aristotle described a grand pattern of history. In their minds, this pattern was eternally recurrent. Looking over three centuries of Greek experience, Aristotle found a perpetual triangular sequence of democracy turning into oligarchy, whose members made themselves into a hereditary aristocracy – and then some families sought to take the demos into their own camp by sponsoring democracy, which in turn led to wealthy families replacing it with an oligarchy, and so on.
The medieval Islamic philosopher Ibn Khaldun saw history as a rise and fall. Societies rose to prosperity and power when leaders mobilized the ethic of mutual aid to gain broad support as a communal spirit raised all members. But prosperity tended to breed selfishness, especially in ruling dynasties, which Ibn Khaldun thought had a life cycle of only about 120 years. By the 19th century, Scottish Enlightenment philosophers elaborated this rise-and-fall theory, applying it to regimes whose success bred arrogance and oligarchy.
Marx saw the long sweep of history as following a steady upward secular trend, from the ancient slavery-and-usury mode of production through feudalism to industrial capitalism. And not only Marx but nearly all 19th-century classical economists assumed that socialism in one form or another would be the stage following industrial capitalism in this upward technological and economic trajectory.
Instead, Western industrial capitalism turned into finance capitalism. In Aristotelian terms the shift was from proto-democracy to oligarchy. Instead of freeing industrial capitalism from landlords, natural resource owners and monopolists, Western banks and bondholders joined forces with them, seeing them as major customers for as much interest-bearing credit as would absorb the economic rent that governments would refrain from taxing. Their success has enabled banks and bondholders to replace landlords as the major rentier class. Antithetical to socialism, this retrogression towards feudal rentier privilege let real estate, financial interests and monopolists exploit the economy by creating an expanding debt wedge.
Marx’s Theories of Surplus Value (German Mehrwert), his history of classical political economy, poked fun at David Ricardo’s warning of economic Armageddon if economies let landlords siphon off of all industrial profits to pay land rent. Profits and hence capital investment would grind to a halt. But as matters have turned out, Ricardo’s rentier Armageddon is being created by his own banking class. Corporate profits are being devoured by interest payments for corporate takeover debts and related financial charges to reward bondholders and raiders, and by financial engineering using stock buybacks and higher dividend payouts to create “capital” gains at the expense of tangible capital formation. Profits also are reduced by firms having to pay higher wages to cover the cost of debt-financed housing, education and other basic expenses for workers.
This financial dynamic has hijacked industrial capitalism. It is leading economies to polarize and ultimately collapse under the weight of their debt burden. That is the inherent dynamic of finance capitalism. The debt overhead leads to a financial crisis that becomes an opportunity to impose emergency rule to replace democratic lawmaking. So contrary to Hayek’s anti-government “free enterprise” warnings, “slippery slope” to totalitarianism is not by socialist reforms limiting the rentier class’s extraction of economic rent and interest, but just the opposite: the failure of society to check the rentier extraction of income vesting a hereditary autocracy whose financial and rent-seeking business plan impoverishes the economy at large.
Greece’s debt crisis has all but abolished its democracy as foreign creditors have taken control, superseding the authority of elected officials. From New York City’s bankruptcy to Puerto Rico’s insolvency and Third World debtors subjected to IMF “austerity programs,” national bankruptcies shift control to centralized financial planners in what Naomi Klein has called Crisis Capitalism. Planning ends up centralized not in the hands of elected government but in financial centers, which become the de facto government.
England and America set their economic path on this road under Margaret Thatcher and Ronald Reagan by 1980. They were followed by even more pro-financial privatization leaders in Tony Blair’s New Labour Party and Bill Clinton’s New Democrats seeking to roll back a century of classical reforms and policies that gradually were moving capitalism toward socialism. Instead, these countries are suffering a rollback to neofeudalism, whose neo-rentier economic and political ideology has become mainstream throughout the West. Despite seeing that this policy has led to North America and Europe losing their former economic lead, the financial power elite is simply taking its money and running
Michael: Well, from the very beginning, after working on Wall Street, I realized something that should be mathematically obvious. The debts now today are too large to be paid without bankrupting society and polarizing it, in much the way that has occurred again and again in history. It occurred in Rome, it occurred earlier in Sparta. You have a constant historical movement here. So my focus primarily was to trace the history of debt cancellations. What I realized is that when Luke 4 reports the first speech of Jesus, when he goes to the temple and gives his first sermon, he unrolls the Scroll of Isaiah, and says he has come to proclaim the Jubilee year …. The word he used, and that Isaiah used, the deror, was this Babylonian, Near Eastern long tradition that was common throughout the whole Near East. Now most of the Biblical translations miss this point. They were translated in the 17th and 16th century, when people didn’t know cuneiform, so they had no idea what these words meant and what the background of the Jubilee year was. And 50 years ago, there was almost a universal idea that the Jubilee year was something idealistic, utopian, and could never actually be applied in practice. But we know that in Babylonia, Sumer and Near Eastern regions, it was applied in practice.
Not only do we have the royal proclamations, we have the lawsuits by debtors saying “This creditor didn’t forgive me the debt,” and the judgments for that. Each member of Hammurabi’s dynasty after him ending up with this great grandson Ammi-Saduqa had more and more detailed anderarum acts, debt cancellations, to close all the loopholes that creditors tried to resort to. So what Jesus was referring to was a very tangible fight. In his time, this was the fight throughout Greece, it was the fight throughout the whole ancient world – the fight to promote debt cancellation. The Dead Sea Scrolls show this. For instance, Melchizedek 12 is a huge midrash of all of the Biblical citations of the Jubilee year, tying them together. And we now understand that the Dead Sea Scrolls were not a sectarian Essene product, but they were basically the library of the Temple of Jerusalem, that was sent and put in these caves for safekeeping during the civil wars. So what Jesus was referring to was what was the class war between creditors and debtors that swept throughout the whole period, including Rome itself. This has not been clear to most people who think they’re taking a literal version of the Bible. It’s very funny that the people who call themselves fundamentalist Christians will have dioramas of dinosaurs and human beings all sharing the same landscape, literally. But what they ignore is, if you take the Bible literally, it’s the fight in almost all of the early books of the Old Testament, the Jewish Bible, all about the fight over indebtedness and debt cancellation.
Michael Hudson: Christianity began as a protest movement, but it was a protest movement that was very conservative. We know from the Dead Sea Scrolls – essentially the library of the Temple of Jerusalem hidden to protect it from the Romans – that what Jesus wanted to do was just what he announced in the first sermon that he gave. It is reported in Luke, Chapter 4. He said “I’ve come to proclaim the year of the Lord,” meaning the Jubilee Year. He unrolled the scroll of the Prophet Isaiah that described the Jubilee Year.
He said that the rabbis who opposed to be cancelling debts – the Pharisees, a conservative group of rabbis led most notably by Hillel – had developed a special clause that was similar to what the Babylonian creditors had tried to do. It was called the prosbul clause. A debtor who needed money would have to sign a waiver saying, “I agree not to avail myself of the rights that the Bible promises me in the Jubilee Year. So if the debts are cancelled, I waive my rights and the creditor can foreclose anyway.”
Jesus explained in his sermon that this was against the Mosaic Law – the law of Leviticus, chapter 25. It was in fact against everything the Old Testament talks about. (My book has the relevant Dead Sea scrolls.) But rabbinical Judaism was being taken over by pro-creditor Pharisees. Luke quotes Jesus as describing them as being avid for money, and working for the creditor class.
At that time the great social fight not only in Judea but also in Greece and Rome was between debtors and creditors. There was a region-wide civil war. There were assassinations of Roman pro-debtor advocates such as the Gracchi brothers in 133 BC. A century of civil war followed, in which even Julius Caesar, who enacted a modest debt reform, was killed. Sparta’s King’s Agis and Cleomenes were killed for cancelling the debts. There were armed uprisings throughout Greece and Asia Minor over this.
This was a universal fight. But somehow, the economic message of Jesus has been taken out of context. It is as if what he was talking about was otherworldly. But he was talking about something very worldly – the debt issue. Jesus wanted to restore the debt cancellation as it was supposed to be according to Leviticus 25.
You are advocating a revival of classical economics. What did the classical economists understand by a free economy?
They all defined a free economy as one that is free from land rent, free from unearned income. Many also said that a free economy had to be free from private banking. They advocated full taxation of economic rent. Today’s idea of free market economics is the diametric opposite. In an Orwellian doublethink language, a free market now means an economy free for rent extractors, free for predators to make money, and essentially free for financial and corporate crime. The Obama Administration de-criminalized fraud. This has attracted the biggest criminals – and the wealthiest families – to the banking sector, because that’s where the money is. Crooks want to rob banks, and the best way to rob a bank is to own one. So criminals become bankers. You can look at Iceland, at HSBC, or at Citibank and Wells-Fargo in the news today. Their repeated lawbreaking and criminal activities have been shown tob e endemic in the US. But nobody goes to jail. You can steal as much money as you want, and you’ll never go to jail if you’re a banker and pay off the political parties with campaign contribution. It’s much like drug dealers paying off crooked police forces. So crime is pouring into the financial system.
I think this is what’s going to cause a return to classical economics – the realization that you need government banks. Of course, government banks also can be corrupted, so you need some kind of checks and balances. What you need is an honest legal system. If you don’t have a legal system that throws crooks in jail, your economy is going to be transformed into something unpleasant. That’s what is happening today. I think that most Europeans don’t want to acknowledge that that’s what happened in America (USA). There is such an admiration of America that there is a hesitancy to see that it has been taken over by financial predators (a.k.a. “the market”).
We always hear that oligarchies are in the east, in Russia, but hardly anyone is calling America an oligarchy… although alternative media says that it’s just a few families that rule the country.
Michael Hudson is the author of Killing the Host (published in e-format by CounterPunch Books and in print by Islet). His new book is J is For Junk Economics. He can be reached at email@example.com
Although money and banking textbooks say that all interest (and fees) are a compensation for risk, any banker who actually takes a risk is quickly fired. Banks don’t take risks. That’s what the governments are for. (Socializing the risk, privatizing the profits.) Anticipating that the U.S. economy may be unable to recover under the weight of the junk mortgages and other bad debts that the Obama administration left on the books in 2008, banks insisted that the government guarantee all student debt. They also insisted that the government guarantees the financial gold-mine buried in such indebtedness: the late fees that accumulate. So whether students actually succeed in becoming wage-earners or not, the banks will receive payments in today’s emerging fictitious “as if” economy. The government will pay the banks “as if” there is actually a recovery.
“You can make all the loans to students you want. You can lend them as much money for any education, even for junk education, for junk colleges, or for-profit colleges like Trump’s college, and we know that the students are going to default, but we’re going to guarantee your loans and we’ll guarantee a higher rate of interest than you can make on any other loan, because we know these loans are risky. We know they won’t pay, but the government will take all the risk and we’ll pay you as if you were taking the risk and as if you were making a real loan, thinking you’d get repaid.”