Yves here. The book Agnotology described how societies become more stupid. Sometimes it is by design. A major case study was propagandizing against emerging information that smoking causes cancer. But the authors also described other loss of knowledge, such as pre-modern birth control techniques. Michael Hudson sets forth they another example of agnotology below: how earlier thinkers had a better grasp of the economic impact of war debts than mainstream economists do today.
By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is The Destiny of Civilization.
For the past few years I’ve been writing a history of debt and its political context from the Crusades to World War I. I’m now writing the chapter on how much more realistic the 18th century economic critics of debt financing were than today’s mainstream neoliberals who encourage countries to finance their chronic trade dependency and balance-of-payments deficits by borrowing, as IMF orthodoxy urges. These early political economists warned that borrowing from foreigners would lead to a loss of national sovereignty to creditors. Borrowing at home would create a financial class that not only would gain control of public tax policy and the legal system. The scope of their analysis was politically and socially broader than today’s economic tunnel vision.
One writer in particular, Malachy Postlethwayt, described how the exponential growth of interest-bearing debt not only stifles economies but endows a cosmopolitan financial oligarchy that steadily gains power over highly indebted states. In contrast to the teachings of today’s trickle-down orthodoxy, it was recognized that the emerging financial oligarchy did not spend its receipt of interest in creating new means of production to help the economy carry its debt, but spent it on making yet more loans or indulging in luxury spending and conspicuous consumption instead of investing in productive capital formation and employment.
The second half of the 18th century saw a generation of writers criticize the burden that war debts imposed on the economy. They calculated how much future wars were likely to cost and the interest charge on the resulting debts, and described the need for Britain to stay out of debt to prevent it from polarizing between the Moneyed Interest and the rest of society.
Of particular concern was how high taxes could be raised to pay creditors without slowing the economy and impairing the export trade by which Britain obtained international hard money. Acknowledging that money was the sinews of war, they wrote that the way to draw it into Britain’s economy was to run a trade surplus. That required preventing Britain’s export prices from being pushed up by taxes levied primarily to pay interest on war debts.
Malachy Postlethwayt spelled out the problem as follows in 1757: Suppose Britain were to fight a war every ten or twelve years, and suppose further that each war would add £30 million to the national debt. Within the space of just three wars, in thirty to thirty-five years, the national debt would swell to £170 million. At a modest 3% interest rate this would require annual interest charges of £5.1 million, of which a third (£1.7 million) might be financed by new taxes levied on British land and trade. “And will not, at length, that source of Wealth be dried up, from whence the Public Creditors derive their very Annuity? In consequence whereof, will not the Payment of their Interest become precarious, as well as that of their Principal?”[1] Creditor demands for payment would be self-defeating if their financial demands prevented debtor economies from paying.
Already in 1739. Mathew Decker’s Essay on the Causes of the Decline of the Foreign Trade attributed the deterioration in British trade to the fact that its taxes and tariffs to carry the public debt added a financial element to national costs. Interest was a cost of production like a tax superimposed to pay creditors, many of them Dutch. “Foreigners can rival us [by] the prodigious artificial Value we thereby put upon our Goods to the hindrance of their Sale abroad.” Covering these financial and the resulting fiscal costs raised the rents and hence market prices that landholders had to charge. Decker thus pointed to “the fictitious Value they make in the Rents the Land-holder now receives, compared with the real Value a Free-Trade would make.”[2]
This line of reasoning suggested a downward spiral: Wars could only be financed by running into debt, because populations would not support wars if they had to pay immediately the taxes needed to defray their full costs on a pay-as-you-go basis. But the commercial consequences of war debts would burden the economy and slow its economic growth, ultimately driving the nation bankrupt.
In Great-Britain’s True System, Postlethwayt calculated the degree to which taxes to service public debts increased production costs while draining resources that otherwise would have been available for private investment: “the Sum-Total of these Taxes is at least 31 per Cent. of the annual Expense of the whole People of England. Now, where is the Nation with which we can enter into a Competition of Commerce on equal Terms.” The problem, he added, was that “The TAXES, which are levied to pay the Interest of these Debts, are a Check upon Industry, heighten the Price of Labor, and are an Oppression on the poorer Sort.”
As he elaborated this idea: “The public Debt occasions an Annuity to be drawn out of the Profit and Consumption of every Individual. Before such Debt took Place, everybody possessed their whole Gains. There was no Exchange Alley,” that is, the stock and bond market where debts and shares in companies with monopoly rights were traded.
If the present public Debt instead of being encreased, was paid off, the Profits of the Manufacturers, Tradesmen and Merchants, &c. would be all their own. They would be exempted from paying at least 100 per Cent. out of their joint Gain … with that Advantage we should be able to undersell our Neighbours; Our People would of Course multiply; Our Poor would find ample Employment; even the aged and infirm might then earn enough to live upon; new Arts and new Manufactures would be introduced, and the old ones brought to greater Perfection.[3]
But if war spending continued, higher taxes to service its debts would increase production costs and hence export prices. That would impair the balance of trade and bullion would flow out, leaving the economy to stagnate without the money needed to support industry and to defend the realm in coming wars.
The conflicting class interests at play were described baldly by Sir John Barnard in 1737: “To speak properly, the Publick Funds divide the Nation into two Ranks of Men, of which one are Creditors and the other Debtors. The Creditors are the Three Great Corporations and others, made up of Natives and Foreigners; the Debtors are the Landholders, the Merchants, the Shopkeepers and all the Ranks and Degrees of Men throughout the Kingdom.”[4]
Other contemporary writers recognized that in the end, foreign debts could not be paid. They either would have to be cancelled, as French and English kings had been doing ever since the 14th century, or all the country’s property would pass into the hands of foreign creditors and domestic financial oligarchies.
In his 1750 essay “Of Money,” David Hume estimated that Britain’s fundholders numbered about seventeen thousand persons, just a fraction of the total population.[5] Seizing upon this calculation, Postlethwayt complained that “Since our Debts have taken Place, not near one Tenth of the Land of England is possessed by the Posterity or Heirs of those who possessed it at the Revolution.”[6] National debts also favored a cosmopolitan financial oligarchy, an alliance that threatened to overshadow Europe’s traditional rivalries and to become its new economic and political authority, much as the imperial papacy had been in the 12th and 13th centuries. “As Foreigners possess a Share of our national Funds, they render the Public in a Manner tributary to them, and may in Time occasion the Transport of our People, and our Industry.”
Postlethwayt’s warning was that the drain of money to pay interest would create a shortage of credit in Britain, especially if this debt service were remitted abroad to Dutch investors. In contrast to the quantity theory of money held by David Hume and most modern economists (holding that less money would reduce prices proportionally), Postlethwayt pointed out that the scarcity of money actually would raise most commodity prices, by interrupting economic activity, causing production shortages and economic distress, making private-sector credit more risky and thus increasing borrowing costs.
James Steuart was even more blunt in 1767. However, he acknowledged, “if we suppose governments to go on increasing, every year, the sum of their debts upon perpetual annuities, and appropriating, in proportion, every branch of revenue for the payment of them; the consequence will be, in the first place, to transport, in favour of the creditors, the whole income of the state, of which government will retain the administration.”[7] Britain’s financialized prosperity thus had the politically transformative effect that Postlethwayt had deplored: “this property is transferred to a new set of men, who were once the monied interest, and who afterwards acquire the lands, and consolidate this additional circulation; does not this chain of consequences represent a kind of circle, returning into itself?” The monied aristocracy became the new aristocracy, displacing the old landed nobility. The problem was how to prevent putting “the whole property of the state in constant circulation, from one class of men to another,” from landowners and the population at large to creditors.
This perception was free of the modern idea that automatic adjustment mechanisms enable foreign debts to be paid by price adjustments making the exports of debtor countries more competitive as a result of deflation and economic austerity. There was no faith in such adjustment mechanisms when it came to foreign debts.
By the time Adam Smith wrote the Wealth of Nations in 1776, he concluded that the only way to avoid economic collapse was to stay out of the wars and projects of empire that led Britain into foreign debt in the first place. He defined a free market as one free of debt, especially foreign debt (as well as free from rent, including the monopoly rent of companies like the East India Company, established by government as a means of making rents to pay down its war debts).
Today’s histories of economic thought simply pick up the narrative after this flowering of critiques of debt were replaced by the pro-creditor logic of David Ricardo and other bank spokespersons trying to assure populations that debts would not create any problems of more than a transitory and self-curing character.
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[1] Malachy Postlethwayt, Great-Britain’s True System (London, 1757):2 and 12.
[2] Mathew Decker, Essay on the Causes of the Decline of the Foreign Trade (London, 1744 [1739]):preface. The kindred terms “fictitious costs” and “fictitious capital” (for the capitalization of such rentier payments into asset prices) became common in the late 19thcentury to refer to economic rent – interest, land rent or monopoly rent causing market prices to exceed intrinsic cost-value. Countries free of having to pay such rentier income in the form of would be able to underprice exports from rent-ridden economies.
[3] Postlethwayt, Great-Britain’s True System:165 and 52-53.
[4] John Barnard, Reasons for the Representatives of the People of Great Britain to take Advantage of the Present Rate of Interest for the More Speedy Lessening the National Debt (London, 1737), quoted in Wilson, England’s Apprenticeship:318. The three great corporations were still the Bank of England, the East India Company, and the South Sea Company.
[5] Hume, “On Money,” cited in Postlethwayt, Great Britain’s True System:213-215).
[6] Postlethwayt, Great-Britain’s True System:17-18 and 213-215.
[7] James Steuart, An Inquiry into the Principles of Political Oeconomy (London, 1767):349-351.