There Is No Debt

The Third World “debt” is simply an accounting device

By George Monbiot. Published in the Guardian 20th July 2000

Between 1503 and 1660, 185,000 kilos of gold and 16 million kilos of silver were shipped from Latin America to Europe. The native American leader Guaicaipuro Cuautemoc argues that his people should see this transfer not as a war crime, but as “the first of several friendly loans, granted by America for Europe’s development”. Were they to charge compound interest on this loan, levied at the modest rate of 10 per cent, Europe would owe the indigenous people of Latin America a stack of gold and silver which exceeded the weight of the planet.

Curiously, this deficit is not scheduled for discussion at the G8 summit in Japan tomorrow. The debts whose forgiveness world leaders have been urged to consider are those which the impoverished nations of the South are deemed to owe the North. The seizures of land, labour, minerals and timber by colonists and corporations is a debt written off before it has even been accounted. The massive “climate change debt” the rich owe to the poor remains, officially, invisible.

These injustices are well-documented. But there is another aspect of the debt crisis which has scarcely been considered. Third World debt is a fraud. It is not a debt at all, but the artefact of a deformed accounting system.

In his startling new book Goodbye America!, the economist Michael Rowbotham shows that the debt is the inevitable outcome of the 1944 Bretton Woods conference. John Maynard Keynes, who led the British delegation, foresaw that unless international trade was radically overhauled, debt would become self-perpetuating. He proposed an “International Clearing Union” and a new currency, the bancor, in which international transactions would be conducted. Nations would be charged by the union for both overdrawn and surplus bancor accounts, encouraging creditors to spend their excess bancors in debtor countries, thus swiftly wiping out their deficit.

The United States, by contrast, was the world’s major creditor and wanted to keep it that way. Its delegation proposed that nations could borrow from an international bank which would penalise debtors, but not creditors. It insisted that gold, valued in dollars, be used to set exchange rates, ensuring that the dollar became the international banking standard. Having threatened to withhold its forthcoming war loan to Britain, the US won. It established, through the World Bank and the IMF, a global trading system which secured both a lasting US economic hegemony and the irredeemable indebtedness of poorer nations.

The problem has been compounded by the growth in “fractional reserve banking”: the process by which banks create money out of nothing by lending far more than they possess. As governments have all but ceased to issue real notes and coins, this magic money now accounts for some 95 per cent of total money supply in most developed nations. Indebtedness, in other words, has become the necessary concomitant of money creation. This means that the total debt the people of a nation owe can never be repaid. This is why, despite Gordon Brown’s brave efforts on Tuesday, our massive national debt repayments will only dent the cumulative total. This is why our great “property-owning democracy” has become mortgaged to the hilt.

It also explains why Third World debt has become unpayable. Forced to take loans from commercial banks, the debtor nations create the money which enables First World countries to sell them their surplus goods and services. The debt, Rowbotham argues, is the result not of corruption, incompetence or economic failure on the part of developing nations. It’s the inexorable and intentional product of a debt-based financial system. The “debt” is no more than a measurement of the banking system’s magical generation of money.

Interestingly, this could mean that the “debt crisis” is much easier to solve than world leaders imagine. As nearly all money arises from the issue of debt, then debt redemption is largely a matter of accountancy. Were banks allowed to cancel the debt bonds they hold, yet keep them on their books, they could balance their accounts without suffering any losses from their reserves. It’s a fiddle of course, but a fiddle of the kind which already keeps international banking afloat, as unrepayable debts are reported at their full theoretical value. And were the IMF and the World Bank to be replaced by a system of the kind Keynes proposed, the mistakes of the past 50 years could not be repeated.

One outstanding task would remain: forgiveness. That we should presume to “forgive” the Third World’s debts is laughable. Rather, the G8 leaders must beg the forgiveness of the Third World for the dreadful and deliberate mess they have made of the global economy.

Bookmark and Share