Tag Archives: michael hudson

An Historical Warning For Proponents Of A Modern Debt Jubilee

30 May

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Australia’s own Professor Steve Keen — one of only 13 economists worldwide to predict the Global Financial Crisis beginning in the mid 2000’s, and explain why — is perhaps the foremost proponent of a Modern Debt Jubilee “for the public”, as a solution to the ongoing global debt crisis:

Michael Hudson’s sim­ple phrase that “Debts that can’t be repaid, won’t be repaid” sums up the eco­nomic dilemma of our times. This does not involve sanc­tion­ing “moral haz­ard”, since the real moral haz­ard was in the behav­iour of the finance sec­tor in cre­at­ing this debt in the first place. Most of this debt should never have been cre­ated, since all it did was fund dis­guised Ponzi Schemes that inflated asset val­ues with­out adding to society’s pro­duc­tiv­ity. Here the irresponsibility—and Moral Hazard—clearly lay with the lenders rather than the borrowers.

The only real ques­tion we face is not whether we should or should not repay this debt, but how are we going to go about not repay­ing it?

We should … find a means to reduce the pri­vate debt bur­den now, and reduce the length of time we spend in this dam­ag­ing process of delever­ag­ing. Pre-capitalist soci­eties insti­tuted the prac­tice of the Jubilee to escape from sim­i­lar traps (Hud­son 2000; Hud­son 2004), and debt defaults have been a reg­u­lar expe­ri­ence in the his­tory of cap­i­tal­ism too (Rein­hart and Rogoff 2008). So a prima facie alter­na­tive to 15 years of delever­ag­ing would be an old-fashioned debt Jubilee…

We … need a way to short-circuit the process of debt-deleveraging, while not destroy­ing the assets of both the bank­ing sec­tor and the mem­bers of the non-banking pub­lic who pur­chased ABSs. One fea­si­ble means to do this is a “Mod­ern Jubilee”, which could also be described as “Quan­ti­ta­tive Eas­ing for the public”.

Quan­ti­ta­tive Eas­ing was under­taken in the false belief that this would “kick start” the econ­omy by spurring bank lending.

Instead, its main effect was to dra­mat­i­cally increase the idle reserves of the bank­ing sec­tor while the broad money sup­ply stag­nated or fell, for the obvi­ous rea­sons that there is already too much pri­vate sec­tor debt, and nei­ther lenders nor the pub­lic want to take on more debt.

A Mod­ern Jubilee would cre­ate fiat money in the same way as with Quan­ti­ta­tive Eas­ing, but would direct that money to the bank accounts of the pub­lic with the require­ment that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injec­tion would have their debt reduced but not elim­i­nated, while at the other extreme, recip­i­ents with no debt would receive a cash injec­tion into their deposit accounts…

Alas, in wisely looking to the past for a guiding light to present action, proponents of a Modern Debt Jubilee appear to have glimpsed only a small part of the full historical picture. Indeed, it seems that they have failed to duly note the significance of what is the veritable mastodon in the room of recorded economic history.

This is somewhat inexplicable to this observer, particularly when one considers Professor Keen’s referencing of the research of his colleague, Professor Michael Hudson, in making the case for his modern jubilee proposal.

It would be well for all modern proponents of “wiping the slate clean” to heed the warning bell tolling from the depths of recorded history, the echoes of which ring out most clearly in Professor Hudson’s fascinating and exhaustive research study, How Interest Rates Were Set, 2500 BC to 1000 AD. The following excerpts are instructive, and most germane to our present inquiry (my emphasis added):

For economic historians, the Riddle of the Sphinx (if not the Holy Grail) has long been to explain how interest-bearing debts originated, and why interest rates differed from one society to the next. Interest rates are known to have been set in three primary civilizations at the outset of their commercial takeoff — Bronze Age Sumer, classical Greece and Rome…

Many economists theorize that interest rates reflect productivity and profit levels, subject to the risks of lending. A century ago, for instance, the German economic historian Wilhelm Roscher attributed the long decline in interest rates since antiquity to the “advance of civilization.”[1] He suggested that these rates declined because the riskiness of investment, for example, had been lessened by improvements in social stability, market efficiency and the security of credit. Also, shrinking profit margins and/or falling yields of cattle or crops would have reduced the ability of debtors to pay interest.

Following this approach, economic historians interpret the “kid” or “calf” words for interest (máš in Sumerian, tokos in Greek and fænus in Latin) as reflecting the growth of herds. But this begs the question of why such growth would have declined from Sumer through Greece and Rome. Already a century ago, Böhm-Bawerk rejected such “naive productivity explanations” of interest rates.[2]

We need not assume that interest rates were “economic” in the sense of being within the ability of most cultivators to pay. Abject need was the motive for agrarian debt. A key financial dynamic of ancient civilizations was precisely the problem of debt arrears (including unpaid tax collections) mounting up beyond the ability of many borrowers to pay. This is what led to the royal amargi, andurarum and misharum “Clean Slate” proclamations of Mesopotamia during 2400-1700 BC, cancelling agrarian debts…

Referring to the Levitical Jubilee Year, [Morris] Silver insists on “the counterproductive nature of the [Biblical] prophets’ economic ideas from a real world standpoint,” that is, the standpoint of modern laissez faire urging governments to refrain from interference with market forces. The modern assumption is that no matter what governments do to steer the economy, the market will undo such efforts.[12]

What were the Babylonians (and for that matter, the Judaeans and Israelites) thinking of? I think they knew something that modern economic theory does not acknowledge: if “market forces” are left to themselves, they lead to widening economic polarization and growing disequilibrium as financial claims on wealth and income tend inexorably to exceed the ability to pay (the Frederick Soddy principle). Interest rates exceeded profit and crop-surplus (“real rent”) rates.

One is reminded of Samuel Kramer’s complaint that Urukagina’s reforms were fruitless, for the usury and impoverishment problem simply began again.[13] Of course it did — and when the economy’s financial balance veered too far out of an equitable equilibrium, or simply when a new ruler ascended the throne, the debts were cancelled yet again. This was how the Sumerian and Babylonian debt overhead was prevented from growing too far out of bounds (a counterpart to the “overgrowth” of hubris in Greek social-economic thought).

One would think that — in the perhaps unlikely absence of an ideological and/or conceptual blind spot regarding the putative “time-value” of “money”; that is, the popularly-accepted post-Renaissance casuistic rationalisation for the charging of “interest” rates — the modern-day economic problem-solver should easily recognise the obvious lesson of history contained here.

Merely establishing a Modern Debt Jubilee cannot solve the global debt problem for the longue durée (“long term”). Any “wiping the slate clean”, or “debt reset”, would be an exercise in futility, in the absence of addressing the root cause of excessive debt.

It would not be unreasonable to suggest that the repeated failure of Sumerian/Babylonian “Clean Slate” proclamations to address the root problem causing indebtedness in the first place, offers a compelling explanation as to why the Biblical (Hebrew) prophets invoked the authority of God in explicitly commanding not only that all debts should be annulled every 7 years (the “Sabbatical” Year Jubilee), and that all property rights must be restored after 49 years (50th Year Jubilee), but also that usury in any form was a mortal sin, and thus outlawed within their society (e.g., “Thou shalt not lend upon usury to thy brother—usury of money, usury of victuals (food), usury of any thing that is lent upon usury.” – Deut 23:19).

Professor Hudson concludes (my emphasis added):

Usury became the major force polarizing ancient society as credit passed out of the hands of public institutions into those of private households. By classical Greek and Roman times, no palace rulers were left to cancel agrarian debts and otherwise keep creditor power in check. Thus, what seems to have begun as justifiable debt in third‑millennium Mesopotamia evolved into classical usury. Its corrosive dynamics polarized ancient society more than any other factor, destroying the archaic social balance between rich and poor, mercantile creditors and cultivators, despite the nominal decline in interest rates.

The power of creditors increased in the face of declining royal authority. Although the normal lending rate declined from Bronze Age Mesopotamia through classical Greece and Rome, creditors were able to render irreversible the forfeiture of land and personal freedom which debtors traditionally had been obliged to pledge as a condition for obtaining loans. In sum, what is first documented in Sumer is a revolutionary institution, revolutionary in that interest-bearing debt ended up by inciting populations to revolution at the end of antiquity, in the second and first centuries BC throughout the Romanized Mediterranean world.

Can the lesson of antiquity regarding debt cancellation, and the repeated need for it having arisen as a direct result of allowing the practice of usury (i.e., gains on lending), be any more clear?

Now, it would be a disservice to the estimable Professor Keen were your present author to neglect to draw readers’ attention to the fact that he (the good professor) does not advocate for a Modern Debt Jubilee in isolation from other measures. Indeed, “Taming the Finance Sector” is the second plank of his proposed solution. It includes suggestions for “Jubilee Shares”, and “The PILL” (or “Property Income Limited Leverage”).  Inquiring readers can delve into those details in Professor Keen’s Manifesto.

Not to put too fine a point on it — and with the deepest respect to Professor Keen — your present author remains avowedly sceptical as to the likely efficacy of these proposals.

Indeed, he would politely suggest that the good professor draws somewhat nearer to the realisation of a truly efficacious solution, in his briefly commenting on the proposals of others (my emphasis added):

There are many other pro­pos­als for reform­ing finance, most of which focus on chang­ing the nature of the mon­e­tary sys­tem itself. The best of these focus on insti­tut­ing a sys­tem that removes the capac­ity of the bank­ing sys­tem to cre­ate money via “Full Reserve Banking”.

“The best of these …”?

I would humbly beg to differ.

Firstly, an important, if rather obvious, clarification. The “monetary system” is not an independent life form. It should not be misunderstood as being a unique entity, one somehow separate and distinct from the human beings who act within and upon it. The monetary system is, and always has been, an artificial, conceptual, and very human construct. One shaped by very human motives. And that construct has, at various times and places across the span of recorded human history, existed in rather different forms and with rather different characteristics to those we observe today.

Secondly, I submit that Full Reserve Banking, while laudable, would not change “the nature” of the (present) monetary system itself.

Indeed, Professor Keen himself appears to sense this reality, albeit for the wrong reason (my emphasis added):

Banks profit by cre­at­ing debt, and they are always going to want to cre­ate more debt. This is sim­ply the nature of bank­ing.

Again, I beg to differ. As does the National Australia Bank (my emphasis added):

How Banks Work

…Their profit is the difference between what they pay in interest on your deposits and what you pay them in interest for the loan they made you.

It is not the nature of banking, but the nature of bankers, to seek out ways to make profits.

Bankers do not make profits by creating debt.

Bankers make profits, by practicing usury.

Or, to use the modern euphemism (since changing our words can conceal all manner of sins) – by “maximising” their “net interest income”.

Creating debt ex nihilo (“out of nothing”) — in the modern era, by mere digital bookkeeping entry — only affords bankers an additional power; to leverage the true root source of their profit-making.

Which is usury.

It is worth reminding ourselves of Professor Hudson’s summary observation on usury in ancient times:

The power of creditors increased in the face of declining royal authority.

This should give the thoughtful reader pause to reflect on, and reevaluate much of what we have been taught to believe concerning the past 500 years of “modern” Western “progress”.

Since the Renaissance (meaning “a revival of or renewed interest in something”) of the early 16th century — the days of the morally “liberal” King Henry VIII of England, and Giovanni di Lorenzo de’ Medici (son of Lorenzo the Magnificent, of the Medici banking family), better known as Pope Leo X of the European “Holy” Roman Empire — the authorities that were previously invoked against the practice of usury (i.e., God, Pope, King) for some 1,500 years, have declined.

Indeed, in a manner remarkably akin to that in which the white blood cells of our physical body’s natural immune system are seen to mutate and instead become the cancerous cells of leukaemia, those (human) authorities that had long been invoked in order to restrict and repel the power of usurious “creditors”, instead turned to rot the Western body politic, from the inside out.

Beginning with the reigns of England’s Henry VIII and Europe’s Leo X, after nearly two millennia of philosophical, divine, monarchical, and legal prohibition, the “nature” of Western banking (money-lending) became legally usurious.

In light of the historical evidences, it is your present author’s view, that were the wise urgings and proclamations of Plato, Aristotle, Cato, Cicero, Seneca, Plutarch, Buddha, Moses, Vashishtha, Jesus, Mohammed, Aquinas, Luther, and many more to be heeded today, and were the old Western laws banning usury in all its forms to be reinstated, then the core incentive for bankers to create excessive debt in the first place — for usurious profit/gain, or “net interest income” — could once again be effectively brought to heel.

In the absence of same, any advocacy for partial revival of ancient Biblical economic prescriptions, is doomed to come to naught.

ADDENDUM

Further to Professor Hudson’s research, readers who may be even superficially acquainted with the unequivocally economic reference to “Mystery, Babylon” in the Apocalypse (“Revelation”) of St. John’s epochal 18th chapter, will find the following revelation concerning the geographic origins of usury rather telling (my emphasis added):

Only recently has it been recognized that the charging of interest is not a universally spontaneous phenomenon, but was invented in Sumer — yet another Sumerian “first,” as Samuel Kramer would have said. No Early Bronze Age evidence for interest‑bearing debt has been found in the Indus civilization or the Hittite kingdom. The Hittite debt cancellation edict of Tudhaliya IV refer to wergild-type compensation owed for personal injury, not interest-bearing debt.[27] The fact that no archaic Egyptian debt records exist might possibly be the result of destruction of the papyrus writing medium, but regions that used clay tablets for public administration, such as Crete and Mycenaean Greece during 1600‑1200 BC likewise have left no hint of commercial credit, no pooling of money by partnerships, and — most telling of all — no agrarian debt cancellations. Egypt’s sed festivals, unlike their Mesopotamian counterparts, did not allude to debts. The absence of such debt records outside of Mesopotamia prior to the first millennium BC thus does not seem simply to reflect the absence of written documentation. It is the very essence of such debt to be documented.

Where the charging of interest appears earliest outside Mesopotamia — as in Assyria’s Asia Minor trade colonies — a comparative analysis of public and sacred laws shows these to derive from southern Mesopotamian practice. In any case, the role of debt was quite circumscribed outside of Mesopotamia, even in commercial economies such as Ugarit, the city‑state with the closest ties to the Aegean during 1400-1200 BC. As for Europe’s less centralized, tribally organized economies, the historian Tacitus noted as late as the first century of our era that the Germans, whose debts were mainly of the wergild type for legal restitution of damages, were not acquainted with loans at interest.[28] This probably can be taken as applying to European tribal communities generally. It follows that the origins of interest are to be understood in terms of Sumerian economic institutions.

If the Mesopotamian term for interest, máš, was not a literal reference to payment in young animals but a metaphor for the numerical accrual of interest, the next question to be addressed is whether this usage was reinvented spontaneously by classical Greece and Italy or was borrowed from the Near East.

I have argued elsewhere that the idea of interest-bearing debt was brought to Greece and Italy by Phoenician or Syrian merchants, probably in the 8th century BC.[44] For if the practice of charging interest and other commercial procedures were not pristine indigenous developments in Greece and Italy, the calf metaphor for interest likewise is unlikely to be inherent and universal. I believe that the semantic imagery of interest was adopted from the same Near Eastern sources that pioneered in charging interest on debts.

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