General · 6th December 2012
The long history of money and finance offers unique and important insights that are unavailable in any narrow slice of time. Consider, for example, the ideas provided by Professor Michael Hudson in Surviving Progress, a video documentary inspired by Ronald Wright's impressive book and Massey Lecture series, A Short History of Progress. As an economist and financial specialist with an academic's scholarly perspective and practical experience as an advisor to international banking, Professor Hudson has some insights worth considering.
One of his key insights can be stated quite simply. “Every society for the last 4,000 years,” he says, “has found that its debt grows more rapidly than people can pay.” This burden of ever-increasing debt is ultimately owed to a financial oligarchy, about 10 percent of a society that inevitably rises in economic stature and power to control most wealth. This suggests two important questions. Why should this process occur so consistently? And what are the consequences?
The first question is probably answered by Darwinian economics. Some people with more financial skills than others — or with more initial assets, opportunity or power — will eventually become more affluent than those with lesser capabilities. By manipulating the economic structure to their advantage and by gaining political influence, they hold increasing amounts of debt and gather increasing amounts of wealth.
The second question — about consequences — is vividly answered by David Korten, an economist, author, and former professor at the Harvard Business School. “It's a game that ultimately self-destructs,” he says in another video documentary, The Big Fix. “As a few people control more and more of the real resources and the means of production, it creates enormous instability, it creates extreme inequality that destabilizes the whole society and moves in the direction of increasing violence. The endgame is total financial, economic, social, environmental and political collapse.”
Previous civilizations were aware of these effects, according to Professor Hudson. They averted such “collapse” by periodically cancelling all debt, resetting the economic game to zero and beginning afresh. This was a common practice in the old civilizations of Sumer, Babylonia and Egypt, likely because they discovered that debt cancellation was preferable to the chaotic alternative. The term in the old Jewish tradition for ritually forgiving of all debt every 50 years is the origin of the English word “jubilee”.
The first civilization to not periodically forgive debt, according to Professor Hudson, was the Romans. Their egalitarian culture ended with oligarchs in control of vast quantities of land and wealth. The narrow and self-interested ownership of debt by a small number of avaricious individuals mitigated against forgiveness. Wealth concentrated more power with the wealthy, further entrenching the notion that “a debt is a debt” and must be paid. And so it was. But the forcible collection of this debt turned towns, cities and countries into economic “deserts”, according to Professor Hudson. Temples were stripped of gold, business and farming structures were bankrupted, communities could not maintain their infrastructure, civil servants could not be paid, taxes were debilitating, slavery flourished, soils were depleted, resources were pillaged, and wars were initiated to collect debt. The result was an enactment of David Korten's endgame scenario of total collapse. Western Europe needed nearly 1,000 years for the fertility of the soil to rebuild, for civil order to return, and for the institutions of social stability to re-establish.
Professor Hudson fears that we might be returning to this precarious Roman condition today — with the added worry that the impact will no longer be local or regional but global. The banks and financial institutions are international — with interests that interconnect with transnational corporations. They loan money and issue debt to needy countries, and insist on repayment. This, of course, is their business. But it is too often a cunning, unforgiving and brutal system that maximizes profits with ruthless enthusiasm. Since the effects are usually foreign, the financial institutions bear little political cost for the social mayhem they create.
Professor Hudson speaks from experience. As a one-time financial advisor to global financial institutions, he recounts how poor countries were enticed to borrow for the promises of modernization. Loans and interest rates were then tailored to fit the maximum possible repayment capacity of their earnings. When economic growth failed to occur in the unfair marketplace into which they were lured, they were loaned more money. As debt exceeded their ability to pay and default was inevitable, then natural resources became the collateral that debt-holders could collect in lieu of cash. As one example, Professor Hudson notes that Brazil's wholesale destruction of the Amazon, beginning in 1982, can be linked directly to the economic effects of the Wall Street and London financial sector. The strategy is to use credit to acquire the public domain of countries — their forests, water, oil and minerals. “Asset stripping” is the technical financial term that describes this process, he says.
As an academic and scholar with the real-world financial experience that has nurtured his cynical edge, Professor Hudson reminds us we need to think of two definitions of progress. The first is the one most people use. This is the progression of production and living standards that provide more food and comfort for a society. The second is the definition used by the financial sector. This is the conversion of economic growth into wealth for themselves, a process of “financial extraction” that takes place by means of credit.
The destructive effect of the “financial extraction” that took place in Rome, plunged Europe into centuries of the so-called Dark Ages, a pitfall that was adroitly avoided in previous civilizations by the periodical forgiveness of debt. People like Professor Hudson and David Korten worry that we are repeating the mistakes of Rome, a disconcerting and dangerous process most discernible to those with the perspective of history.