Making of the Indebted State

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PAPER DELIVERED AT:

“Finance, Power and the Crisis”
Berlin, September 12-13, 2013

COST World Financial Crisis Conference

The Making of the Indebted State
Debt, Discipline and Democracy under the Neoliberal Condition
Jérôme E. Roos
FIRST DRAFT: PLEASE CONTACT BEFORE CITING

EUROPEAN UNIVERSITY INSTITUTE1

ABSTRACT: It is often said that money begets power, but if this is so, through what exact mechanisms does the “1 percent” exert its seemingly untrammeled political influence over the state? Drawing on recent interdisciplinary attempts to re-conceptualize money as debt and debt as a power relation, this paper aims to help uncover the disciplinary mechanism that enforces debtor compliance and ensures continued repayment. Most importantly, it argues that – much more than just buying political influence with their superior wealth – private bankers derive their main power from their control over capital flows and their capacity to create money out of thin air. Identifying two types of money (commodity money and credit money) and two associated forms of power (purchasing power and structural power), it tries to show how the neoliberal move towards privately created credit money has endowed global finance with unprecedented structural power, rendering states increasingly dependent on private banks to maintain the process of capital accumulation. The paper concludes that the making of the indebted state under neoliberalism has brought about an unraveling of state sovereignty and political representation, and hence poses a major challenge to traditional democratic processes.

The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt. ~ Karl Marx, Capital, Vol. I (1867:919)

Introduction: Thou Shalt Not Default! The debt must be repaid. Such is the gospel sung by the leaders of our world. Entire nations are now being subjected to a permanent state of sovereign debt bondage just to keep the money flowing towards their creditors. In an idle attempt to please the markets, others continue to stand fast in their dogmatic faith that enough (self-)flagellation will eventually bring redemption. With an army of
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FIRST DRAFT! Comments very welcome. Please contact author before citing: [email protected].

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technocrats waiting in the wings, elected leaders have found themselves forced out of office in investorled stampedes for the exits, while millions of ordinary people are being trampled in the process. As one recent epidemiological study shows, it is a violent and deadly logic: with dramatic increases in suicide rates, HIV infections and child mortality, the single-minded insistence on austerity has transformed today's debt crises into “veritable epidemics, ruining or extinguishing thousands of lives in a misguided attempt to balance budgets and shore up financial markets,” (Stuckler and Basu 2013). In the cradle of European democracy, under the watching gaze of the acropolis, civilization has been strangled to the point where children now go to school hungry and neo-Nazi stormtroopers run racist pogroms in broad daylight. But as Germany's Finance Minister reassuringly tells us: “everyone knows the problems of Greek society are to be found in Greece and not abroad.” The narrative of Schuld – which Nietzsche reminds us means both debt, guilt and blame – continues to give a moralistic twist to policy decisions that in the final analysis serve a simple and unambiguous purpose: to prevent losses for the big banks. It is no surprise, then, that recent years have brought about a resurgence of public and scholarly interest in the question of debt and the power of finance. The European anti-austerity protests and the Occupy Wall Street movement in particular have fueled debates over the myriad ways in which the rise of global finance has undermined democracy and fed into inequality. In these debates, it is often said that wealth begets power. In a Vanity Fair piece that directly inspired Occupy's “we are the 99%” slogan, Joseph Stiglitz (2011) wrote that “virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office.” Simon Johnson, former IMF chief economist, made a similar observation in an essay for The Atlantic entitled 'The Silent Coup' (2009), in which he argued that “the great wealth that the financial sector created and concentrated gave bankers enormous political weight.” It seems like a fairly uncontroversial proposition: money buys lobbyists, elections and politicians, so we need to take money out of politics, tax financial transactions, impose a ban on corporate campaign contributions, regulate the banks, keep a lid on executive pay, and redistribute income downward. But is that really all there is to it? Do the banks just “buy” political influence with their wealth, just as a construction worker buys a sandwich for lunch? Do the many differences between a banker and a worker simply boil down to the quantifiable notion of purchasing power? Or is there something more at play? This paper aims to contribute to the (re-)emerging scholarly debate on the power of finance capital by noting that there is more at play, namely the nature of money and the type of power it endows. Most analysts have so far limited themselves to a critique of the more visible forms of Wall Street's and Frankfurt's power: the bankers' direct control of government positions, their campaign contributions, their armies of lobbyists and advisors. What has been far less obvious to most is the 2

much less visible form of power that the banks derive from their privileged position as the principal creators of credit. In this paper, I aim to show why the main power of finance capital lies not just in its immense stock of wealth, but in its capacity to control capital flows and create money out of thin air. In making this argument, I build on Graeber's (2011) and Lazzarato's (2011) insight that money did not only originate in debt historically, but that it continues to originate in debt today, in the form of credit money created by private banks every time they make a loan to a customer or to the state. I note that such credit money creates a unique form of power (namely structural power) that cannot be reduced to the purchasing power derived from financial resources alone. Applying this insight to the political economy of sovereign debt, we can begin to see how the structural dependence of the state on capital provides private banks with the ability to set the limits within which these states have to operate. In this sense, what is so peculiar about the neoliberal condition is that it combines a monetary system that relies almost entirely on the private creation of money with a financial system that ensures near-perfect capital mobility. The combination of the two has led to a situation in which states have lost control over the creation and circulation of money, which in turn has shaped the structural context in which global finance is increasingly capable of disciplining debtor states through market mechanisms, simply by withholding credit and withdrawing outstanding investments. We can conclude that the making of the indebted state under the neoliberal condition has led to an unraveling of state sovereignty and political representation, thus presenting a major challenge to traditional democratic processes.

Re-conceptualizing Debt as a Power Relation In the beginning, there was debt. This is the core claim behind David Graeber's important 2011 book, Debt: The First 5,000 Years. Unlike the neoclassical economists who locate the origins of money in exchange, with cash gradually replacing the inefficiencies of barter, Graeber shows through an impressive range of anthropological and historical evidence that money actually originated as a means of keeping account of a whole range of social obligations. In other words, money originated in debt, initially as a way of recording and quantifying obligations and later as a way of paying them. Dispelling the “myth of barter”, Graeber urges us to move beyond the reification of money as a commodity and to re-conceptualize it as a social relation. In his words: “the value of a unit of currency is not the measure of the value of an object, but the measure of one's trust in other human beings,” (2011:47). One of the main themes Graeber takes on is the capacity of money to reduce these forms of trust to “a matter of impersonal arithmetic – and by doing so, to justify things that would otherwise seem outrageous or obscene,” like evicting a family with children from their home, or extracting hundreds of billions of euros from a country that already registers youth unemployment over 60 percent (2011:14). 3

Most importantly, the debtor-creditor relationship thus established is not strictly speaking one of equals. Even if the two enter into the market on the basis of formal equality, the moment the debtor takes on his loan the nature of the relationship between debtor and creditor reveals itself as a hierarchy: now the debtor is expected to repay a precise amount and the creditor is entitled to all sorts of punishment to enforce the repayment of that amount. As Graeber shows in vivid detail, morality and violence thus become closely wound up with the idea of indebtedness: “if history shows anything, it is that there's no better way to justify relations founded on violence, to make such relations seem moral, than by reframing them in the language of debt – above all, because it immediately makes it seem that it's the victim who's doing something wrong,” (2011:5). The power of the creditor is thus cemented by instilling grave feelings of guilt into the debtor's conscience, emotions that are often rooted in religious conceptions of right and wrong. But debtor compliance ultimately rests upon the ability of the creditor to enact violence (or of the state's willingness to act violently on the creditor's behalf) by enslaving the debtor, for instance, throwing him into debtors' prison, or even exacting a pound of flesh. Today, debtors' prisons, debt bondage and corporeal punishment may have been largely outlawed, but the violence of the state continues to lure behind anything from home foreclosures to wage garnishments. By re-conceptualizing debt as a power relation ultimately rooted in violence and morality, Graeber indirectly echoes the observations of Nietzsche, who in his Genealogy of Morals defined the debtor-creditor relation – drained in blood and steeped in moral judgment – as the archetype of all social relations. This differs markedly from the liberal view of economic exchange as a relationship between equals. “Exchange never comes first,” Maurizio Lazzarato writes in The Making of the Indebted Man (2011), a powerful philosophical treatise on the neoliberal condition. “Indeed, no economy functions based on economic exchange … The economy and society are organized according to power differentials, an imbalance of potentialities.” Of course this does not mean that there is no such thing as exchange, “but rather that it functions according to a logic not of equality but of disequilibrium and difference,” (2011:75). The problem is that this inequality is hidden from view: “the power of debt is described as if it were exercised neither through repression nor through ideology. The debtor is 'free', but his actions, his behavior, are confined to the limits defined by the debt he has entered into.” Lazzarato concludes that “the same is true as much for the individual as for a population or social group,” (2011:31). The same power relationship, in other words, plays out between states and banks.

Two Forms of Money, Two Faces of Power Building on these insights, Graeber follows various heterodox economists in identifying two different kinds of monetary regimes: those based on virtual credit money and those based on bullion 4

(or commodity money). Both of these regimes are in turn associated with their own particular social, cultural and political forms. As Mason (2012) summarizes, “commodity money is typically associated with centralized states, slavery, law, bureaucracy, standing armies, abstract, dualistic religion, materialism, and individualism, while credit money is typically associated with dispersed, polycentric authority, weak states, a broader gradation of property-like rights, more dispersed forms of violence, and pantheistic, immanent religion.” While much of this is not immediately relevant to our discussion, one observation is particularly worth noting, namely the key distinction between the centralized states of bullion regimes and the dispersed, polycentric authority and weak states of credit money regimes. As we will see later on, this is precisely the difference we find between the state-based territorial imperialism of the classical gold standard era and the diffuse deterritorialized Empire of the neoliberal era (Hardt & Negri 2000). It bears emphasizing, however, that monetary regimes are never based purely in credit or purely in bullion: ever since the emergence of fractional reserve banking in the Renaissance, the total money supply in capitalist economies has always been constituted by some type of mix between credit money and commodity money (Triffin 1985). The difference is that, in the bullion regime, there is a monetary base of commodity money, like gold, that imposes a constraint on how much credit money can be created. In a pure credit regime, by contrast, the money supply is much more elastic, and – barring reserve requirements – can theoretically be expanded into infinity through the private creation of credit. Deleuze and Guattari were aware of this dual nature of money and identified it as the very basis of capitalist power relations. There is a crucial difference, they wrote, between “the formation of means of payment and the structure of financing, between the management of money and the financing of capitalist accumulation, between exchange money and credit money,” (1972:271). Lazzarato builds on this distinction and stresses that the power generated by credit money cannot be reduced to the purchasing power derived from accumulated wealth: “the power of money as financing structure does not derive from greater purchasing power. The capitalist's force does not depend on his being wealthier than a worker. His 'power derives from the fact that he controls and determines the direction of financing flows,' in other words, he disposes of time as decision, as choice, as the possibility of exploiting, subjugating, commanding, and managing other men,” (2011:84). Under capitalism, Lazzarato notes, money “is first of all debt-money, created ex nihilio, which has no material equivalent other than its power to destroy/create social relations,” (2011:35). The power of capital is thus “above all a power to command and prescribe exercised through the power of destruction/creation of money,” (Lazzarato 2011:73). This money is created out of thin air in the form of credit, and therein lies precisely the crux of the unequal power relationship: not everyone can create money – it can only be created by the state (as fiat money or through the hoarding of bullion) and by finance capital (as credit money). In the credit money regime of the neoliberal economy, capital derives 5

its power over people and states “foremost because it controls the financing flow; it controls time, choice, and decision. Money as capital has a power of destruction/creation that money as purchasing power does not,” (Lazzarato 2011:85). As a result, “the specificity of capitalist power does not derive from the mere accumulation of purchasing power but from the capacity to reconfigure power relations” through the capitalists' control over the future (2011:86). Being in debt, after all, means that one's future is conditioned a priori by the exigencies of repayment. This insight forces us to reconceptualize the very idea of finance and its role in the global political economy. Finance is no longer a perversion of so-called productive capitalism, set apart from the “real” economy as a club of wealthy parasites who create no value; rather it is central to the power dynamics that sustain the system: Debt and finance, far from being pathologies of capitalism, far from expressions of certain people's greed, constitute strategic mechanisms orienting investments … The financial and banking systems are at the center of a politics of destruction/creation in which economics and politics have become inextricable. If we want to understand how powers are reconfigured by the debt economy, we must first of all establish the links between economics and politics. (Lazzarato 2011:24/73)

Structural Dependence of the State on Capital To establish these links between economics and politics, we need to take a step back and turn to the relationship between capital and the state more generally. In the Marxist debate on the nature of the capitalist state in the 1970s, Holloway and Picciotto (1979) pointed out that the systemic logic of capital accumulation produces a set of economic pressures that structurally constrain the amount of things any state can do, regardless of who runs the government at any given time. The state, after all, evolved in symbiosis with capitalist markets, leaving its DNA thoroughly imprinted with the internal contradictions of capital accumulation. As Holloway succinctly puts it, “the state is integrated into a web of capitalist social relations, which it cannot escape from,” (2002:14). Most importantly, as the ongoing crisis of global capitalism has made abundantly clear, the fate of the state is intimately wound up with the survival of the financial system. In Holloway's words: “one thing that has become clear in the crisis [is] the degree to which the state is integrated into the movement of money … It becomes more and more clear that the state is bound to do everything possible to satisfy the money markets and in that sense to guarantee the accumulation of capital,” (Roos 2013). Without the continued circulation of capital – in other words: without the banks lending money – state and economy both risk collapse. There is a simple reason for this. Not only is the state structurally dependent on capital to fund its own expenditures, but it also relies on the process of capital accumulation to keep key socioeconomic indicators – like growth, employment and prices – stable and trending upwards (Przeworski and Wallerstein 1988). Should the process of accumulation be interrupted and growth suddenly grind 6

to a halt, unemployment and poverty levels would soar. The social displacement and political pressures wrought by such economic collapse would risk destabilizing the state itself, or at the very least undermine the privileged position of those controlling it, providing politicians of all political stripes with a constant incentive – indeed, a permanent systemic imperative – to keep capital flowing around the economy by maintaining adequate levels of private investment and growth (Harvey 2010). This structural dependence on capital pushes the state, willingly or unwillingly, into the linchpin position of a de facto guarantor of the process of capital accumulation. Therefore, Przeworski was right to point out that, “as long as the process of accumulation is private, the entire society is dependent upon maintaining private profits and upon the actions of capitalists allocating these profits,” (1980:55-56). This, in turn, means that traditional forms of instrumental power – like lobbying, campaign finance and the staffing of key government positions – may be interesting surface indicators of capital's political influence, but the importance of these power resources can only be so pervasive precisely because they are backed up by an automatic disciplinary mechanism that greatly limits the full scope of state action to begin with. As Lindblom put it, the systemic need to maintain adequate levels of investment basically turns the market into a prison: a system of automated punishment in which “simply minding one’s own business is the formula for an extraordinary system for repressing change,” (1982:237). Stuck in this deterritorial prison, even the most democratic or revolutionary state will eventually find itself reproducing this fundamental capitalist dynamic. As Fred Block observed, “it appears that even when the business community is not able to influence the state in the traditional ways, policy outcomes tend to be favorable to business concerns.” He therefore concludes that “there are 'structural' factors that operate at a different level from the exercise of personal influence,” (1987:8). These structural factors ensure that, “even with a change in government personnel, the power of business would continue to have a large influence over governmental policies,” (Block 1987:9). The specificity of capitalist power, then, lies in its nature as structural power. Structural power can be defined as “the power to shape and determine the structures of the global political economy” within which states and non-owners of capital have to operate. In a word, it “confers the power to decide how things shall be done, the power to shape frameworks within which states relate to each other, relate to people, or relate to corporate enterprises,” (Strange 1998:25). Structural power, then, is very different from what scholars in the field of International Political Economy refer to as relational or instrumental power, which requires intentional action on the part of its bearer. Structural power, by contrast, is operative even when its bearer cannot be shown to exercise direct influence over others – it works in the background as a shaping of frameworks, a setting of rules, a limiting of opportunities. Crucially, structural power relations do not endow equal privileges; rather they distribute asymmetric privileges as a result of which some social forces gain a systematic advantage over others. Structural 7

power thus allows its bearer “to change the range of choices open to others, without apparently putting pressure directly on them to take one decision or to make one choice rather than others,” (Strange 1988:31). As a result, it imposes “a bias on the freedom of choice,” fostering a relationship of dependence between dominant and subjected actors in the global political economy (Strange 1994:31). Because it creates dependence and thereby alters the narrow self-interest of those subjected to its whim, the invisible hand of capital's structural power is much more difficult to detect than the lashing whip of a slave driver – even if the objective power relation is nevertheless just as real. The visible violence is simply displaced into the structure of social relations, and the logic of domination survives. For Susan Strange, who wrote prolifically on the power of finance, the financial structure “is the prime issue of international politics and economics,” for it is here that the control of credit, and therefore control over the purchasing power of all states and households in the world economy, ultimately resides (1998:18). Defining the financial structure as the ensemble of “the way credit is created, and the monetary system through which relative values of the different monies in which credit is dominated are set,” Strange rightfully put the debtor-creditor relation at the heart of her critique of the global political economy (Lawton 2000:32). Credit, Strange observed, “is literally the lifeblood of a developed economy.” The systemic imperative to keep credit circulating through the system therefore leads to a situation in which the private control over credit creation and the direction of capital flows becomes the main source of political power (Strange 1988:91). By withholding credit – or by simply threatening to do so – global finance can extract major state concessions in its favor. As a result, all of society is eventually forced to “dance to the fast or slow rhythms of financial markets,” and ultimately all states “run up against the limits set by international finance,” (Strange 1998:180).

Sovereign Debt: The Stroke of an Enchanter's Wand These limits immediately become apparent when we turn to the origins of the capitalist system. Graeber rightly traces these origins back not to the enclosures of Middle England or the factories of Manchester but rather to the emergence of modern finance in the Italian city states 2. Modern finance, with its interest-bearing loans, fractional reserve banking and complex financial innovations arose precisely from the symbiosis between the modern states and the early banks . The ascent of the Bardi, Peruzzi and Medici banks of Florence, for instance, was largely a product of the Republic's endless wars with the other Italian city states and its consequent dependence on a constant flow of money to
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As Graeber puts it, “the story of the origins of capitalism, then, is not the story of the gradual destruction of traditional communities by the impersonal power of the market. It is, rather, the story of how an economy of credit was converted into an economy of interest; of the gradual transformation of moral networks by the intrusion of the impersonal – and often vindicative – power of the state,” (2011:332).

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be able to pay its mercenaries. The fact that they could provide much-needed credit in turn gave the bankers increasing leverage over the state, to the point that the Medici eventually came to dominate the Florentine government in person. The power of these bankers was therefore not just a product of the immense wealth they accumulated over time, nor of their direct control over government, but precisely the inverse: their wealth and their control over government were products of their immense power as the principal creators of credit – a structural form of power upon which the state grew so dependent that it simply had to appease the bankers and eventually incorporate them into government. The structural power of capital and the symbiotic relationship between finance and the state thus arose in a very direct way from the emergence of sovereign debt. As Marx reminds us: National debts, i.e., the alienation of the state … marked with its stamp the capitalistic era. … The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter’s wand, it endows barren money with the power of breeding and thus turns it into capital. … [T]he national debt has given rise to joint-stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy. (1867:919) Moreover, the national debt gave rise not only to modern finance, the stock exchange and bankocracy, but also to international capital markets. As Marx already remarked, “with the national debt arose an international credit system,” (1867:919). Thus the Italian banks began to lend to rulers the continent over, funding major imperial campaigns from the crusades to the conquista. But while this money fueled new imperial expansions, there was a major difference with the empires of previous eras. While in the Axial Age money had always been a “tool of empire”, subjugated to the power and desires of the ruler as a mere “political instrument” in his hands, Graeber remarks how “under the newly emerging capitalist order, the logic of money was granted autonomy; political and military power were then gradually reorganized around it,” (2011:320-1). Subjected to a newly emerging form of market discipline, “even kings were not entirely free agents.” Charles V of Spain, for instance, had accrued vast debts in order to fund the conquest of the Americas, and when his son Philip II tried to default on some of these loans in order to save money for his own war campaigns, “all his creditors, from the Genoese bank of St. George to the German Fuggers and Welsers, closed ranks to insist that he would receive no further loans until he started honoring his commitments,” (Graeber 2011:320). This episode probably marks one of the first times in history that an international creditors' cartel effectively managed to wield its structural power over a sovereign debtor in a foreign country, disciplining the world's most powerful monarch through the simple act of refusing to extend further credit 3.

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Of course, this structural power was by no means fully formed: Charles V himself had defaulted many times, and the powerful Bardi and Peruzzi banks of Florence both collapsed when Edward II of England simply repudiated his debts – although Graeber emphasizes that these kind of dramatic bankruptcies were very rare even then.

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The Privatization of Money under Neoliberalism Today, this market discipline imposed by the structural power of finance is being perfected into what Thomas Friedman has approvingly called the “golden straitjacket” of neoliberal globalization. Ever since the re-emergence of global finance following the collapse of the Bretton Woods regime in the mid-1970s and the turn to neoliberalism from the 1980s onwards, the monetary system has increasingly come to rely on the private creation of virtual credit money. This move towards a debtbased economy has in turn led to a dramatic reconfiguration of global power relations, especially between finance and the state and between owners of capital and non-owners of capital. As Lazzarato argues, “debt constitutes the most deterritorialized and the most general power relation through which the neoliberal power bloc institutes its class struggle,” (2011:89). It does so first and foremost by reconfiguring state power, “neutralizing and undermining its regal prerogatives, monetary sovereignty, that is, the power of destruction/creation of money,” (2011:96). With the privatization of money, the banks have effectively managed to complete the shift towards the pure credit money system that was initiated by the early Renaissance banks (although the shift is still not complete). As Schularik and Taylor (2009) found after building up a new database of the money supply over time, commodity money and credit money “maintained a roughly stable relationship to each other and to the size of the overall economy” for the entire period between 1870 to 1944. Since 1970, however, credit money “started to decouple from broad money and grew rapidly, via a combination of increased leverage and augmented funding via the non-monetary liabilities of banks,” (cited in Häring & Douglas 2012). The observation that money is created out of thin air by private banks when they extend credit to their customers or the state tends to elicit skepticism from those who do not already know, or those who continue to adhere to the more orthodox commodity money theory. The fact remains, however, that the vast majority of the current money supply exists as privately created credit money 4. A Bank of England research paper, for instance, states that “by far the largest role in creating broad money is played by the banking sector… When banks make loans they create additional deposits for those that have borrowed the money,” (Bank of England 2007:377). In its report to the British government, the Independent Commission on Banking, called into life following the 2008 financial crash, stated that “even before the crisis banks enjoyed various kinds of state support, including the effective right to create money,” (2011:98). Paul Tucker, Deputy Governor of the Bank of England, notes how “banks extend credit by simply increasing the borrowing customer's current account … That is, banks extend credit by creating money,” (2007:9). A report by the German Bundesbank similarly states that “commercial banks create money through the extension of bank credit,” (2011:72). While many conservative economists still claim that the ability of banks to create credit is limited by their need to
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Credit goes to the Positive Money foundation for aggregating the evidence that follows.

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keep deposits, even the Bank of International Settlements disputes this claim, admitting that “under a fiat money standard and liberalized financial system, there is no exogenous constraint on the supply of credit except through regulatory capital requirements,” (Disyatat 2010:2). These requirements have gradually been loosened and in some cases even abolished over the course of the past thirty years. An IMF research paper by a former banker and Fund economist explains (Benes and Kumhof 2012:9): Under the present system banks do not have to wait for depositors to appear and make funds available before they can on-lend, or intermediate, those funds. Rather, they create their own funds, deposits, in the act of lending. This fact can be verified in the description of the money creation system in many central bank statements, and it is obvious to anybody who has ever lent money and created the resulting book entries. Vitor Constancio, Vice President of the ECB, confirmed this in a recent speech (2011): It is argued by some that financial institutions would be free to instantly transform their loans from the central bank into credit to the non-financial sector. This fits into the old theoretical view about the credit multiplier according to which the sequence of money creation goes from the primary liquidity created by central banks to total money supply created by banks via their credit decisions. In reality the sequence works more in the opposite direction with banks taking first their credit decisions and then looking for the necessary funding and reserves of central bank money. The conclusion is straightforward: private banks create money out of thin air. This money takes the form of debt, which we already established to be a power relation. The power of the banks, then, resides in their ability to create money by extending credit, and to thereby establish its power over those who take on the liability; a power endowed to them by the very structure of the monetary system. The rise of credit money under neoliberalism has therefore dramatically reconfigured the relationship between finance and the state, providing private banks with an immense source of structural power which remains gravely underestimated by economists and political scientists alike, mostly as a result of their lack of interest in or understanding of the proper functioning of the monetary system. The bottom line, Lazzarato notes, is that “finance has appropriated most of the functions of bank money to such an extent that central bank policies are strongly determined by the financial sector's demand for liquidity,” (2011:97). The tail of finance, then, is increasingly wagging the financial watchdog of the state – and the principal mechanism through which it does so is through debt: Bank money, money that exists mostly on a computer screen, is issued by private banks based on a debt – a debt that then becomes its intrinsic nature such that it is also called “debt-money” or “credit money”. It is not attached to any material standard, nor does it refer to any substance except for the debt relation itself. In this way, with bank money, not only does one produce debt, but money itself is “debt” and no more than a power relation between creditor and debtor. (Lazzarato 2011:97) As a result, we can conclude that the so-called “independence” of the central bank from the treasury “is in reality a mask for its dependence on the markets,” (Lazzarato 2011:98). This monetary reality contrasts sharply with the embedded liberalism of the Bretton Woods regime (1948-'71). The fact that currencies were non-convertible under the dollar-gold standard, combined with strict capital 11

controls and tight financial regulations, forced banks to invest nationally rather than internationally. This repressed the emergence of big banks and the formation of international credit markets, in the process creating systematically high demand for government debt among domestic investors, thus lowering interest rates and allowing the state to spend extensively on programs of infra-structural development and social redistribution. The lack of a credible 'exit threat' by capital also allowed central banks to effectively control the money supply and labor to demand ever higher wages, which – in combination with expansionary fiscal policies – fed into inflation and thus led to a negative average real interest rate over the 1947-'82 period (Reinhart & Sbrancia 2011). These negative real interest rates meant that finance was in effect involuntarily subsidizing government for most of these 35 years. With the gold standard limiting the total money supply and with the international circulation of capital greatly constrained, states retained control over money creation and thus over finance capital. By contrast, the turn towards neoliberalism – marked most importantly by the abandonment of the dollar-gold standard, the liberalization of the capital account and the deregulation of finance – caused governments to lose control over the money supply and become increasingly dependent on finance to keep growth rates at adequate levels. Lazzarato writes that “the deepening national debt is one of the principal results of neoliberal policies,” (2011:18-9). Debt, then, has become the pivot around which the entire neoliberal project has come to revolve, exposing itself as the flip side of wage stagnation and the restructuring of the welfare state. David Harvey, for instance, has observed that “the gap between what labour was earning and what it could spend was covered by the rise of the credit card industry and increasing indebtedness,” (2010:17). The rise in sovereign debt, meanwhile, reflects higher interest rates and reduced state income from capital taxation. The result, Foster and Magdoff (2009) show, has been a monumental increase in indebtedness: total US debt – including government, corporate and household debt – totaled 125% of GDP in the 1970s, then shot up to 200% in the mid1980s, only to skyrocket up to 350% by 2005. Thus, Lazzarato writes, “debt is not an impediment to growth. Indeed, it represents the economic and subjective engine of the modern-day economy. Debt creation, that is, the creation and development of the power relation between creditors and debtors, has been conceived and programmed as the strategic heart of neoliberal politics,” (2011:25).

Enforcing Debtor Discipline: From Gunboats to Spreadsheets But if debt levels have risen so dramatically over the course of the past three decades, how has finance managed to ensure that these debts are actually repaid? In the first wave of globalization during the classical gold standard era (1870-1913), financiers in the leading capitalist states appealed to their governments to intervene militarily in order to safeguard their debt contracts. Mitchener & Weidenmier 12

(2005) have found that defaulting countries in this period faced a 40 percent chance of being invaded, subjected to gunboat diplomacy, or having foreign control imposed on their domestic finances under threat of a naval blockage. In an ironic sign of the times, even the Hague Peace Conference of 1906 recognized the legitimacy of the use of force in settling sovereign debt disputes (Mauro, Sussman & Yafeh 2006). It was in this climate of belligerent imperialist finance that Rosa Luxemburg wrote that, “though foreign loans are indispensable for the emancipation of rising capitalist states, they are yet the surest ties by which the old capitalist states maintain their influence, exercise financial control and exert pressure on the customs, foreign and commercial policy of the young capitalist states,” (1913:421). Still, even with gunboats this era was rocked by frequent defaults and repudiations (Reinhart & Rogoff 2009). In fact, Ocampo (2013a) has remarked that until the 1930s the imposition of unilateral debt moratoriums was considered “normal and part of the rules of the game.” Whereas during the Great Depression virtually every Latin American country – with the notable exception of Argentina – deliberately defaulted, by 1982 a new norm seemed to have emerged: the debt must be repaid, whatever the social, political or economic costs for the debtor (Eichengreen and Portes 1989). So why do leaders today abide by this costly norm, even if their countries are no longer at risk of being invaded? While a definite answer to such a big question would require much more empirical work than can be presented in a short paper like this, the key to the puzzle appears to lie in the unprecedented structural power of global finance. The instrumental violence of gunboat diplomacy seems to have made way for the structural violence of market discipline. As Larry Elliot (2011), economics editor of The Guardian, appropriately put it, “the gunboats have been replaced with spreadsheets.” These spreadsheets contain all the information a government needs to know about who controls whom in the global political economy today: budget deficits highlight the state's structural dependence on finance capital; a higher spread indicates the banks' disapproval of government policies; capital flight hints at a selffulfilling prophecy that the debt will not be repaid; tax hikes and budget cuts reveal the extent to which external forces have come to control spending priorities and thus socio-economic outcomes; the influx of billions of euros in bailout loans reflects the fear of foreign officials that the banks might have to take losses; and so on. The spreadsheet is thus not a source of power in itself: just like the gunboat was merely a military extension of the instrumental power of the imperial state, so the spreadsheet is the numerical condensation of the structural power of global finance into a set of assumptions, observations and expectations about how the indebted state is to proceed by canceling its “social contract” and giving up its future to be able to stay current on its debt contracts with foreign bankers. The principal enforcement mechanism of debtor discipline under neoliberalism, then, is market discipline – or, more specifically, the ability of finance capital to create or destroy money and withhold and withdraw credit. In one of his last essays, Gilles Deleuze already observed that “the operation of 13

markets is now the instrument of social control and forms the imprudent breed of our masters,” (1992:6). The concerted move towards the privatization of money, in combination with the liberalization of capital accounts and the deregulation of finance, has led to a situation in which state managers have become increasingly dependent on finance capital to secure their own political survival. The economist Maurice Obstfeld, for instance, has noted that “the main benefit that capitalists obtain from capital account liberalization is that it disciplines national governments.” In a word, “unsound policies” (from the perspective of finance) immediately trigger capital flight and higher interest rates. “In theory,” Obstfeld notes, “a government's fear of these effects should make rash behavior less attractive,” (1998). Of course, as has become clear from the IMF and ECB spread-sheets presented to the governments of Greece, Portugal and Ireland, such “rash behavior” includes anything from investing in schools, hospitals and roads to alleviating unemployment or giving the people themselves a say in the country's future. After all, the priority is clear: the debt must be repaid. That said, it needs to be noted that the structural power of finance capital can never be absolute and is always conditional upon a number of factors. Most importantly, creditors must be capable of acting in concert – as a creditors' cartel – while isolating the debtors as individual cases of malfeasance. This strategy of cartelization and atomization serves a triple purpose. First of all, it helps to sustain the Schuld narrative that puts the blame for the debt crisis squarely on the shoulders of the indebted states themselves, thereby alleviating creditors of any moral responsibility to share in the costs of adjustment. Second, it makes the threat of capital market exclusion believable and thus convinces the indebted state that its creditors mean business: a refusal to repay would immediately block access to further credit. Third, and perhaps most important, it prevents the formation of a debtors' cartel that could threaten the creditors with mass repudiation to extract concessions. In addition to these factors, the structural power of capital is conditional upon a lack of access to other sources of funds. If the indebted state runs a primary budget surplus, for instance, or if it has strategic allies or opportunistic investors who are willing to extend credit where the creditors' cartel would not, the threat of capital market exclusion suddenly sounds a lot less threatening. This is what appears to have happened in Argentina after 2001, when the government was faced with a spontaneous popular insurrection on the one hand, and a degree of self-reliance in food and capital (along with eventual aid from Hugo Chávez) on the other. A further contextual factor that has fed the structural power of finance capital is the very structure of international lending. As observers of the 1980s debt crisis have noted, one of the main differences with the crisis of the 1930s was the turn from bond finance to syndicated bank loans (e.g., Ocampo 2013b; Eichengreen & Portes 1989). In bond finance, the debt is owed to a dispersed panoply of (usually small) investors that face a major collective action problem in organizing a united creditor front. In the syndicated bank lending of the 1970s, by contrast, all loans were contracted by so-called 14

syndicate leaders – usually the big Wall Street banks – which coordinated groups of lenders to extend credit to foreign governments. The result was that the very structure of lending eased the coordination between private creditors and the formation of a creditors' cartel to represent them politically. Very early on, as the contours of the neoliberal condition were only just beginning to emerge, one particularly astute observer already identified the consequences of this: One of the most intriguing features of individual debt problems is the way in which the structure of international finance and the procedures of creditors combine to minimize the impact of crises on other debt. Acting in concert, lenders have compelled debt service when borrowers could pay and quietly reorganized obligations when they could not. In so doing, they have deterred defaults on financially sound loans while insulating their worldwide assets from crises that have occurred. There is, in other words, a political structure that undergirds international debt. Economic sanctions back its commercial security. (Lipson 1981:615) These economic sanctions, as we saw before, take the form of a collective refusal to extend further credit to a defaulting government. Lipson argued that “this political structure for collective action ensures that no state will default unless it is insolvent or is willing to accept a radical rupture with the capitalist world economy.” The global network of international banks and private investors is thus “jointly capable of consolidating debt in emergencies and severely punishing those who default lightly,” (1981:629). In a context in which states, especially peripheral ones, have become increasingly dependent on private and international sources of financing, the ability to withhold such financing becomes a major source of structural power. In this respect, Argentina's 2001 default once again is the exception that proves the rule, as the main source of loans to the country came in the form of bond finance, just like in the 1930s, meaning that the creditors were many small and dispersed investors who struggled to coordinate an effective response (Blustein 2005:98). In the ongoing European debt crisis, by contrast, bond finance once again played an important role but the structure of lending more closely resembled the bank loans of the 1980s, with the big French and German banks taking responsibility for a very large share of bond purchases, thus leading to a high debt concentration in the big financial institutions. Skeptics are often quick to point out that the globalization of financial markets today is not necessarily more extreme than the globalization of financial markets under the classical gold standard era, but such observations – while factually correct – ultimately miss the point. What is different about the neoliberal condition is that high capital mobility now goes hand-in-hand with the supreme rule of privately created credit money5, and that the structure of international lending allows much more easily for the political coordination of financiers into creditors' cartels. In other words, while money is free to flow around the globe at the speed of light (in our era of computerized high-frequency trading, lasers send buy-and-sell orders down intercontinental optical fibres at 26 terabits per second, just to save a
5

Tommaso Padoa-Schioppa, ex-member of the ECB executive board, once observed that in the early 20th century almost all retail payments were made in central bank money. With time, however “this monopoly came to be shared with commercial banks, when deposits and their transfers via checks and giros became widely accepted,” (2000).

15

few milliseconds on a transaction), it is really the nature of this money as credit and the way in which the debtors thus created are automatically disciplined, that sets the current era apart from all previous ones. It is precisely the combination of high capital mobility and private money creation that endows finance capital with its unprecedented structural power – even if this power can never be absolute. There is thus a very clear contrast between the first wave of globalization, with its gold standard and commodity money, and the current wave of globalization, with its free-floating currencies and credit money. In the first, the centralized powers of the territorially-delimited imperialist state were still necessary to complement the growing power of finance. In the second, the structural power of finance – or its ability to create and destroy money and thereby dispense with the futures of entire nations – has become so pervasive that the bankers no longer need to rely on wealth or overt coercion to achieve their desired outcomes. In this deterritorialized Empire, the violence of gunboats and standing armies has been displaced into the structure of the global political economy and internalized into the financial priorities of the indebted state as a result of market discipline (Hardt & Negri 2000). This, far more than a misplaced Calvinist sense of Schuld, seems to be the real reason why the debt must be repaid.

Conclusion: A Major Challenge to Democracy Needless to say, these observations have major implications for the quality of democracy. If it is really true that national governments have lost their control over money creation and are structurally dependent on finance to keep money flowing through the economy, and if it is indeed true that finance, far from being an anomaly or pathology of “healthy” capitalism, is in fact the beating heart of an economic system of which credit is the very lifeblood, then what are the odds that meaningful financial reform will ever come off the ground through established political processes? If the problem is not just the bankers' immense wealth, which could be taxed away, or their subversion of democratic processes through campaign finance, which could be overcome by “taking money out of politics” (as presidential candidate Barack Obama incidentally promised), then what hopes can we realistically have that our problems can ever be resolved within the narrow limits prescribed by electoral politics and representative democracy? If the analysis provided above holds even a grain of truth, the inevitable conclusion must be that the resurgence of global finance and the making of the indebted state under neoliberalism have led to a dramatic unraveling of national sovereignty and political representation, and hence pose a major challenge to traditional democratic processes. Thus, when Simon Johnson (2011) writes that “big banks represent the ultimate in concentrated economic power in today’s economies,” and when he argues that this has led to a subversion of US 16

democracy, we may applaud the basic insight but we cannot fail to take into account the structural sources of this concentrated economic power and its roots in the very logic of the capitalist system. It is just not that bankers derive their power from their wealth or their control over government; they derive their wealth and their control over government from their power as the principal creators of credit. At the heart of our predicament therefore lies the dominant money-form and the way in which this money is capable of flowing across borders without any limitations whatsoever. The problem, in other words, lies in the monetary and financial structure: in the way money is created, interest and exchange rates are set, and credit is extended and guaranteed. Unless we are willing to confront the need for structural change beyond the capitalist logic of accumulation, any talk of “reclaiming our democracy” ultimately rings a little hollow. Democracy, or the rule of the people, cannot work if the people have no way to exercise control over the creation of money and the setting of financial priorities – in other words, if they cannot control the social forces that control them. Keynes already identified this danger and called for the “euthanasia of the rentier” to save capitalism from the capitalists. But if finance is the beating heart of the capitalist system, and privately created credit its very lifeblood, clamoring for the euthanasia of the rentier would be like asking state managers to commit systemic suicide. It is extremely unlikely that any national politician would ever gather the strength, courage or ability to pursue such a strategy. It is also very unlikely that he or she would survive in office for more than a term after trying. Perhaps, then, the time of the nation state is now really over. Still, liberal cosmopolitans should not hold out too much hope that global governance or even a world federalist solution would do any better. To the extent that any transnational institutions have been developed in response to the endless debt crises wrought by neoliberal finance, they have been designed purely with creditor interests in mind. Bankers, politicians and technocrats continue to openly praise the IMF as a “disciplinary mechanism” for recalcitrant debtors that helps make up for the shortcomings and internal contradictions of market discipline, but they have so far managed to shoot down, delay or weaken any serious proposals for a global bankruptcy scheme, a financial transaction tax or systematic debt cancellation for heavily indebted states. At this point, finance capital is simply unwilling to compromise and liberal democracy is incapable of forcing it to. If anything, the violent crackdown on mostly peaceful protesters calling for real democracy in Athens, Frankfurt and New York reveals where the state's allegiance really lies: with the financial markets and the big banks that dominate them. In this view, there is only one conclusion: global capitalism and real democracy are incompatible. One of the two will have to go.

17

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