Money has a younger sister, a very useful and officious servant in trade, which in the absence of her senior relation, is very assistant to her; frequently supplies her place for a time, answers all the ends of trade perfectly, and to all intents and purposes as well as money herself; only with one proviso ... if she be never so little disappointed, she grows sullen, sick and ill-natured, and will be gone for a great while together: her name in our language is called CREDIT ...
’Tis strange to think how absolute this lady is; how despotically she governs all her actions: if you court her, you lose her, or must buy her at unreasonable rates; and if you don’t discharge her to a tittle of your agreement, she is gone, and perhaps may never come again as long as you live ... Credit is too wary, too coy a lady to stay with any people upon mean conditions; if you will entertain this virgin, you must act upon the nice principles of honour and without any respect to parties – if this is not observed, credit will not come; no, though the Queen should call; though the Parliament should call, or though the whole Nation should call.
When Daniel Defoe, the world’s first great financial journalist, wrote these words in 1706, only a decade had passed since the establishment of modern credit-based capitalism, with the foundation of the Bank of England and the creation of the National Debt. He could scarcely have suspected how resonant his phrases would sound nearly three centuries later.
In the past eighteen months, many of the less developed countries of the world have been hit by a man-made disaster worse than any hurricane, drought or earthquake: they have been abandoned by coy and despotic Credit. Millions of shanty-dwellers from Mexico City to Djakarta who had caught their first tantalising glimpses of prosperity a few years ago, when Credit flirted with their nations, have been thrown back into unemployment and starvation; in Argentina, Nigeria and Poland, governments have fallen after being seduced by Credit; and even where the politicians who built their hopes on Credit have managed to hang on, as in Chile, Brazil and the Philippines, social structures are crumbling now that ‘Credit will not come.’
Much ink has already been spilt over the Third World Debt Crisis, which was officially inaugurated on 23 August 1982, when the Mexican Government admitted that it had run out of money to pay its debts of over eighty billion dollars – and which is still very much with us, as evidenced by last month’s sudden panic about the solvency of several leading American banks. But nobody has yet improved on Defoe’s description, 280 years ago, of the root causes of such credit-induced disasters:
No nation can show such mad doings in trade as we do. Debtors abuse creditors, and creditors starve and murder their debtors; Englishmen, who in all other cases are men of generosity, tenderness and more than common compassions, are to their debtors mere lunatics, madmen and tyrants.
Is it a mystery that nations should grow rich by war? That England can lose so many ships by pirating, and yet increase? Why do East India Company’s stock rise, when ships are taken? Mine adventures raise annuities, when funds fall; lose their vein of ore in the mine, and yet find it in the shares; let no man wonder at these paradoxes, since such strange things are practised every day among us.
If any Man requires an answer to such things as these, they may find it in this ejaculation – Great is the Power of Imagination!
Trade is a mystery, which will never be completely discovered or understood; it suffers convulsion fits, hysterical disorders, and most unaccountable emotions – sometimes it is acted by the evil spirt of general vogue; tomorrow it suffers violence from the storms and vapours of human fancy, operated by exotic projects, and then all runs counter, the motions are eccentric, unnatural and unaccountable – a sort of lunacy in trade attends all its circumstances, and no man can give a rational account of it.
It may not seem very enlightening simply to say that the Third World debt crisis is the latest manifestation of this lunacy in trade: but this approach gets closer than any other to the real meaning and historical significance of the extraordinary events which very nearly precipitated the collapse of the whole international banking system last year. For the human suffering in the slums of Sao Paolo or Santiago, as the Third World governments squeeze their people ever harder to extract the resources they need in order to honour their debts, is only a tragic contingency of this appalling crisis. It is unfortunately nothing new for creditors to ‘starve and murder their debtors’ in the Third World.
The real novelty is the awesome scale of the threat to the creditors in America and Europe. Some twenty developing and Communist countries now owe the Western world about eight hundred billion dollars in all. That is equivalent to roughly half the replacement value of all of the capital in Britain – houses, roads, factories, machines, bridges, double-decker buses, the lot. To put it another way, the share of this eight hundred billion dollars which is owed to the US banks would in theory be enough to break every bank in America (including household names like Chase Manhattan and Citibank) if the debts were evenly spread among them and had to be formally recognised as lost. And the fact is that they are lost, at least in the sense that nobody expects them to be repaid when due – or in the foreseeable future. The reason is simply that most of the money is gone: either literally up in smoke if it was used to pay for oil; or frittered away on corruption and imports of consumer luxuries; or smuggled illegally out of countries like Mexico and Argentina to be invested in the Miami property market; or spent immediately on paying interest to the banks for past loans. Nobody knows, or ever will know, the full story, but a few facts are certain. Most of the money, which started being channelled by the banks to the developing countries after the 1973 oil crisis, passed over the great majority of the poorest countries and went to a handful of governments which were willing and able to exploit to the limit the ‘general vogue’ for Third World loans. Some of this money was invested soundly; but none of the countries, with the possible exception of South Korea, can now even pay the interest on its debts, except by borrowing more and more from the banks – this year, next year and for many years beyond.
In theory, therefore, most of the biggest banks in America and Europe have committed 100 per cent or more of their shareholders’ capital to loans which are never likely to be recovered. To put it more bluntly, they are theoretically broke. In practice, of course, the banks have been saved, and were bound to be saved, by the timely intervention of devoutly anti-interventionist governments, led by the Reagan Administration and closely followed by Mrs Thatcher and Chancellor Helmut Kohl. But apart from the obvious Schadenfreude his ideological opponents may derive from scenes like that of President Reagan scurrying around Capitol Hill to drum up support for the International Monetary Fund – an institution he had spent a lifetime denouncing as an organ of crypto-communist world government – why should the Third World debt crisis be remembered by history, even after the debts are forgotten or (far less likely) repaid?
Consider those quotations from Defoe. For most of the past two hundred years, since the publication of Adam Smith’s Wealth of Nations, a serious financial authority (which Defoe was in his time) who suggested that credit markets were ruled basically by irrationality, whimsy and chaos would himself be regarded as suffering from ‘a sort of lunacy’. Yet the events of the past ten years in the international banking business make Defoe’s belief that credit is a branch of psychopathology at least as plausible as Adam Smith’s faith in the harmonising powers of the Invisible Hand.
The most crucial (and piquant) irony of the debt crisis is that it arrived just as the Invisible Hand was making its biggest comeback in fifty years. In this age of Reaganomics and Thatcherism, when the ‘new realism’ of the market was winning acceptance even among the British trade-union movement, to say nothing of the revisionists of Peking and Moscow or the Social Democratic mould-breakers of Lime-house and Islington, a horrifying discovery was made: the most theoretically perfect, most technologically refined and most economically important market in the world, the international money market based in the City of London, turned out not to be a market at all. It was a casino. And what a casino! Most of the players appeared to be drug addicts, illusionists or willing dupes. Defoe, it seemed, was right: any serious study of finance had to address the social psychology of fantasies, delusions and morbid brain fevers. Consider the following remark made by Anthony Harris, chief leader-writer of the Financial Times, in the issue of 10 February last year: ‘Brazil, Mexico and Argentina are close to collapse, and bank shares are rising ... Bankers have been cast in a play of illusion mounted by the governments and monetary authorities of the developed world.’ How, except by reference to Defoe, can one explain why Citibank, to take a typical example, had loans equal to 125 per cent of its capital out to Brazil and Mexico – so that if these two governments alone declared themselves unable or unwilling to meet their commitments, the world’s leading international financial institution would technically be bankrupt? How, except as a result of some kind of delusion, can it have come about that not a single banker knew the magnitude of Brazil’s total debts until after the government had run out of money? Or that bankers still talk casually about confiscating Argentine grain and Brazilian aeroplanes if the governments of these countries fail to pay their debts, when the banks’ own lawyers can tell them that they can do no such thing under American, British or international law? Or that bankers still regularly reassure each other that ‘a country never goes bust,’ despite the fact that it is precisely the countries which are now in trouble – Brazil, Mexico, Chile, Rumania, Poland – which defaulted on their (very much smaller) debts in the Twenties and Thirties, ultimately paying their creditors the tiniest fractions of what they owed?
One certainly could not account for such bizarre behaviour by listening to politicians’ litanies about ‘the magic of the market’, by studying academic economic models, or even by reading such serious and detailed studies of the debt crisis as the ones by Cline or Dale and Mattione. One could, however, begin to understand what had happened by talking to the practitioners themselves – and talking to them not as a theoretician, seeking post hoc rationalisations, but as a journalist looking for juicy yarns. This is why a racy, readable, gossipy book like The World’s Money by Michael Moffitt (himself an adviser to Shearson American Express, a subsidiary of one of the big lenders) is worth a whole stack of official reports, particularly to policy-makers, who have to deal constantly with markets but often have no idea of what they really feel like. One of the layman’s most dangerous misapprehensions about bankers, as about many ‘experts’, is that they are dull, secretive, and unfathomably wise about whatever it is they are doing. What a book like Moffitt’s reveals is that they are actually rather witty, very candid – and frequently don’t know what they are doing at all.
A reader of Moffitt’s book would realise that there is no calumny – or even, in a sense, controversy – in comparing the banking fraternity to ‘drug addicts’, referring to the City of London as a ‘casino’ or wondering at the ‘bizarre behaviour’ displayed by bankers. Indeed, all these terms are used quite casually by Dr Albert Wojnilower, director and chief economist of the First Boston Corporation, one of Wall Street’s most respected and influential investment banks. The banking industry is imbued with ‘the narcotic addiction of borrowing and the related phenomena of gambling and asset price speculation’, says Dr Wojnilower in Moffitt’s book. ‘The freeing of financial markets to pursue their casino instincts heightens the odds of crises,’ he continues. ‘With few bounds left on short-term price changes, floating rates in the key banking sector, new futures markets and large international crowds of participants ... bizarre financial behaviour is to be expected.’ And while Dr Wojnilower is known affectionately in Wall Street as Dr Death because for years he has been a voice in the wilderness warning against the dangers of over-lending and speculation, language like his has now become commonplace in the banking community, as can be gleaned from a casual reading of any issue of Institutional Investor or Euro-money.
A reader of Moffitt would also be reminded of the vital role which debt played in toppling Edward Gierek’s government in Poland and of the undisguised relief among some bankers when Solidarity was suppressed in its turn. He would learn in outline why the debt volcano began to form after the 1973 energy crisis and how the process became relentless by the early Eighties, as banks lent more and more money simply in order to enable the debtors to pay the interest on their existing loans. And he would understand why alarm about the debt crisis was greater in the State Department than in the US Treasury, for the IMF ‘has overthrown more governments than Marx and Lenin combined’, as one observer quoted in the book remarks. In short, the reader will get something approaching a first-hand feel of how a truly unfettered market in international money has transformed investors into gamblers, bankers into bookmakers and potentially stabilising, constructive economic institutions into new and explosive sources of instability, mass-hysteria and risk.
Is this the end of the story? Are we simply to marvel at the ‘power of the imagination’ which allows commerce and economic growth to rise upon such shaky foundations until the ‘convulsion fits, hysterical disorders and most unaccountable emotions’ of the markets finally get out of control? And if governments have learned to cope with such untoward occurrences, as they appear to have done this time around, is there any reason to look for deeper lessons or meanings in the Third World debt crisis? The only financial journalist indubitably greater than Defoe – Karl Marx – would have had no trouble answering these questions, for there is a dialectically rational method in the bankers’ collective madness. In 1973 the world economy was confronted with an unprecedented problem: how to ‘recycle’ roughly sixty billion dollars of new funds extracted by OPEC from the rest of the world after the fivefold increase in oil prices. Although this money now belonged to the oil exporters, they could not spend it immediately themselves and were prepared to lend it, at interest, to other countries which could then use it to pay for their oil imports. In the long run this lending gave OPEC a lien on some of the capital in the borrowing countries, but in the short run it allowed the borrowers to keep up domestic consumption and investment, even though they were now paying an extra sixty billion dollars a year for their oil. Everybody agreed by 1974 that such recycling was essential to prevent the truly disastrous economic slump which would inevitably ensue if OPEC simply sat on its surpluses, while the rest of the world slashed its consumption and investment in order to scrape together the funds to pay for their oil. There was profound disagreement, however, about how this recycling was to be carried out: should it be done by governments and supra-national institutions like the IMF and the World Bank, or could it be left to the free play of international market forces? It is obvious which option was ideologically preferable to most of the Western nations, to say nothing of the commercial bankers and fund managers who actually took charge of the recycling.
There was, however, more to it than ideology or the bankers’ natural desire to make a turn on OPEC’s forced lending. The rise of OPEC also seemed to mark a fundamental shift in the balance of power between the Third and the First Worlds. In 1974, the demands for a New International Economic Order, which were to receive their most celebrated expression some years later in the report of the Brandt Commission, looked as if they might have to be taken seriously for the first time. Back in 1964, when the first conference of the UN Commission on Trade and Development (Unctad) formulated the Third World’s call for global negotiations on an international redistribution of wealth and economic power, the idea of the New International Economic Order was simply derided in the industrialised countries as ‘a demand for everything from those who have nothing’. By early 1976, the US and other Western countries had agreed to major increases in the availability of IMF credit to the Third World, approved the principle of offering unconditional (though limited) IMF assistance to countries suffering from sudden drops in their export earnings and expanded substantially the aid on offer through the World Bank. Within the next few years, most industrialised countries also endorsed in principle a target set by the UN which would involve gradually increasing their aid to 0.7 per cent of national income and agreed to the vaguely-defined ‘global negotiations’ which Unctad had demanded.
Meanwhile, however, infinitely more important events were taking place in the international financial markets, but amid the heady rhetoric about a New International Economic Order, they were ignored by North and South alike. It would be absurdly simplistic to suggest, as demagogues have begun to do in many of the indebted countries, that the rush of bankers to Third World capitals from 1974 was a fiendish plot, first to buy off and then to emasculate the rising political activism of the developing countries. The fact is, however, that this is precisely what happened, particularly after the second oil crisis in 1979-80, when the tried and tested system of petrodollar recycling through commercial banks was again called into play, with an even more feverish gusto. Thus, while it is absurd for anybody who truly understands either the day-to-day functioning or the dialectical unfolding of competitive capitalism to rail against ‘conspiracies’ among bankers, governments and international bureaucrats, it is entirely realistic to view the Third World lending boom as yet another instance of the remarkable systemic resilience of capitalism in defending itself against fundamental challenge. For, eschewing again the conspiracy theory of history, it can be seen that the fundamental challenge which provoked the lending boom was more subtle than the modest accretion of economic power to the Third World which resulted from the triumph of OPEC. This could easily be – and was in fact – accommodated through the kind of piecemeal concessions seen in the late Seventies. The real challenge presented by OPEC lay not so much in its new-found wealth but in the question of who would be in charge of its recycling and investment: the possibility that new international institutions might be constructed to solve the recycling problem in an orderly manner was in itself a greater threat to the system than the challenge of OPEC which such institutions might be designed to meet.
It was this threat that made it inevitable that the recycling would be done by the commercial banks, despite the obvious risks of such a course – which Johannes Witteveen, then the managing director of the IMF, was the first to warn against. For if an institutionalised mechanism for transferring unprecedented amounts of money from one part of the world to another had been allowed to come into existence in 1974 or 1979-80, it would almost certainly have turned into a permanent feature of the global economy. Such an institution might have been useful in the Seventies and early Eighties for reallocating surplus funds in a more rational and equitable manner (and the demonologists of the far left are quite wrong to contend that the possibility of greater fairness was in itself a reason why wicked capitalists resisted the idea of organised recycling). The trouble was that a permanent global recycling institution, or an IMF with enormously increased resources and powers, while rational in the short term, would have gradually begun to endanger the very structure of international capitalism. The overt admission that free markets could not work efficiently and equitably on a global scale would have set in motion a long-run decay in both the ideology and the institutional reality of international laissez-faire – the same process which, at the national level, transformed the monolithic structure of 19th-century capitalism beyond recognition after the abandonment of laissez-faire models in domestic economic management during the Thirties and Forties.
A world in which a political institution, even one as conservative as the IMF, plays a pivotal role in the allocation of investment and savings, is a world in which the ‘iron laws’ of economics will increasingly be tempered by political and moral considerations. A world in which vast funds are recycled to poor countries because they need oil is a world in which vast funds could eventually be recycled to poor countries because they are poor. In national economies where governments have acknowledged the desirability of spending public money and running deficits to stimulate production and investment, demands for redistributive taxes and social-security systems have proved impossible to resist. Would this not be equally true of a global economy in which the concept of economic management by political bodies acquired a tangible institutional form? And if such redistributive social systems have gradually altered the balance of power between capital and labour at the national level, what would be their effect on a global scale?
It was to dodge questions like these that the Western industrialised nations allowed the Invisible Hand to unleash an ‘evil spirit of general vogue’ for Third World lending among the international banking fraternity. As always, however, the avoidance of one contradiction led eventually to another. The debt crisis is yet another triumphant confirmation of this fundamental Marxist insight. But it is also a reminder of the extraordinary – and seemingly ever-growing – capacity of the world capitalist system to adapt to one contradiction after another; or to transform itself gradually, through crises which are traumatic but never fatal, into something quite different from the briefly successful laissez-faire model of Adam Smith whose demise Marx correctly foresaw.
In the past fifty years international bankers have played a vital part in keeping the world safe for laissez-faire capitalism, even after national governments in one country after another drifted towards social democracy, interventionism and dirigisme of different kinds. But this time the bankers blew it. Instead of restoring faith in market forces, they have shown that the Invisible Hand may be no better than the most irrational UN talking-shop at allocating world-wide resources. Instead of keeping the politics out of capitalism, they have put the world’s most important market right at the centre of political attention and mortgaged its future to governments of every description. On one side, the banks’ very survival now depends on the ability of Western governments and of the IMF to co-ordinate their activities into ‘rescue packages’. Even if the debt crisis can be handled without further steps being taken to institutionalise the relations between the banks and the IMF (and this is by no means certain), the rescue packages have already turned international banks into more or less explicit agents of governments and supra-national bodies. What is worse, the stability of the whole international financial and trading system hangs on the whim of any populist government in Brazil or Mexico or Argentina. Should one regime simply repudiate its debts, a cascade of others would surely follow. No doubt Western governments would be able to weather that storm as well, but only by further trimming the sails of the international free-market system. As Antonio Delfim Netto, Brazil’s bumptious Planning Minister, who is today at the top of every international banker’s hate list, used to say when he came to London to negotiate yet another loan in the heady days of the lending boom: ‘If I owe the banks a million, I am in their pocket; but if I owe them a billion, they are in my pocket.’ Great is the Power of Imagination! For Brazil today owes the banks one hundred billion dollars.