Éric Toussaint - The Debt System: A History of Sovereign Debts and their Repudiation

Preface

Patrick Saurin

ric Toussaint has an acute and thorough knowledge of public debt issues, thanks not only to his theoretical research work but also to his involvement in the field (notably in Ecuador and Greece). As he takes us through world history from the nineteenth century to the twenty-first, we notice that this painstakingly documented examination gives a version of historical events at odds with the mainstream discourse developed by those in power, those same people whose crimes are exposed in these pages.

As he patiently follows the thread of public debts, the author sheds new light on the eventful history of nations, on their complex relationships, and above all on their underlying logic. NorthSouth relationships illustrate a process that is consubstantial to the capitalist system and its determination to develop, extend, and dominate. Public debts are an essential cog in the structure of capitalism. The debt system as a tool to subdue and dominate is capitalisms economic architecture, as it were. Examples are many: Tunisia, Egypt, Portugal, Cuba, Costa Rica, Mexico, Russia, and Greece (today and in the past) illustrate and support the authors analysis. With a thoroughly documented approach, based on a source criticism that is a model of its kind, he unfolds a detailed and impressive analysis of the odious debt doctrine, the basis of which was laid out by Alexander Nahum Sack. This gives ric Toussaint the opportunity to recall the essential role of the Committee for the Abolition of Illegitimate Debt (CADTM) in better defining the notion of odious debt.

From one chapter to the next, we encounter little-known moments in history, as bewildering as they are true. We meet the historic actors: Toussaint allows us to eavesdrop on the conversation that took place when Emiliano Zapata and Pancho Villa met in Mexico City on December 4, 1914. He takes us into the hotel room of Walter Rathenau, then German minister of foreign affairs, on April 16, 1922, when the members of the German delegation to the Genoa negotiations were awakened at one oclock in the morning by the members of the Russian delegation to negotiate, in pajamas, a separate agreement. The agreement that was signed on the same day is known as the Treaty of Rapallo. Archival documents, official reports on meetings between delegations, and press articles are among the first-hand material used by the author to reopen these cases, not only to question the misleading narratives of the orthodoxy but also to propose a new and carefully documented version of what really happened.

Beyond their narrative dimension, all these elements draw a strikingly faithful picture of the vocation and features of what has come to be called the debt system. While public debts serve as a prism to reflect the actual relationships between states, between capitalist finance and populations, between social classes, the author rightly points out at the end of his study:

Repudiation of illegitimate debts is not enough. To be of real use to society, repudiation must be part of a coherent set of political, economic, cultural, and social measures that can enable the country to evolve toward a society free of the different forms of oppression and exploitation.

The struggle to do away with odious, illegitimate, illegal, and unsustainable debts must be part and parcel of our necessary fight against the various forms of domination that are the very essence of capitalism. ric Toussaints work is an essential contribution to this everyday struggle.

Chapter 1

How the South Paid for the Norths Crises and for Its Own Subjugation

T he debt crises in the peripheral countries and the crises of the central capitalist countries are joint means of subordinating states to their creditors will. What follows is a historical perspective on debt crises in countries of the periphery in the nineteenth and twentieth centuries. From Latin America to China, Greece, Tunisia, Egypt, and the Ottoman Empire, the ruling classes in the global North have used debt as a means of accumulating wealth and as a weapon of domination over debtor countries.

External debt as a means of domination and subordination

Throughout the nineteenth century, domination through external debt was a significant part of the imperialist policies of the major capitalist powers; it continues to plague the twenty-first century in new forms. As a fledgling nation during the period 18201830, Greece capitulated to the dictates of creditor powers (especially Britain and France). Though Haiti was liberated from France during the French Revolution and proclaimed its independence in 1804, debt again enslaved it to France in 1825. stepped up its disintegration. In the nineteenth century, creditors forced China to grant territorial concessions and to fully open up its market. The heavily indebted tsarist Russia might also have become the prey of creditor powers had the October Revolution not led to the unilateral debt repudiation of 1918.

During the second half of the nineteenth century, certain peripheral powers

In contrast, while China surged ahead with its impressive development until the 1830s to become a leading economic power,

The Latin American countries went into debt as soon as they became independent

Starting in the 1820s, the governments of Latin American countries embarked on a borrowing spree after emerging from wars of independence. European bankers were enthusiastically seeking opportunities to lend to these new states and make big profits. At first the loans backed the war effort to ensure and consolidate independence. During the 1820s, the external debt was in the form of debt securities issued by governments through brokers or bankers in London. From the 1830s, the lure of high yields attracted French bankers, who became very active competitors to the London Stock Exchange. Over the following decades, other financial centersFrankfurt, Berlin, Antwerp, Amsterdam, Milan, Vienna, and othersjoined the party. The bankers risks were limited since any suspension of payment affected only the bondholders. Had the bankers lent directly to the states, the situation would have been different. However, when the bankers themselves acquired securities they later attempted to sell, they faced difficulties when payment was suspended. Moreover, the bankers freely manipulated the bearer securities market and made huge profits.

As a rule the bonds were sold at a price that was lower than their nominal value. Moreover, the bankers who were issuing the loans often pocketed a commission. Lets imagine a country that tried to borrow funds by issuing securities having a face value of 100. These securities were likely to be sold at below their face valuefor example, for 80. The bank issuing the securities deducted a commission, for example, 15. Thus, the debtor country, having issued a security that had a face value of 100, in fact received only 65. But the interest owed to the holder of the security was calculated on the basis of the face value. This means that if the interest rate was 6 percent, the debtor country would pay a coupon of 6 each year to the security holder. For the holder, this is a good deal; since he or she only paid 80, the actual return is 7.5 percent. For the debtor state, which only received 65 after the banks commission had been deducted, this practice quickly became unsustainable.

Recourse to external debt became counterproductive for the countries concerned, especially since these loans favored the creditors immensely. Payments were often suspended, and the creditor countries repeatedly resorted to military interventions to impose repayment. All the debt restructurings served the interests of the creditors and the big powers behind them, who pushed the debtor countries into a vicious circle of debt, dependence, and development of underdevelopment, to cite the economist Andre Gunder Frank.