The Debt System - book review

17 December 2019 by Phil Armstrong

The Debt System argues that international debt is a system of exploitation of poorer countries, which should be regarded as illegitimate, finds Phil Armstrong

This book tells a story of exploitation and the use of indebtedness by western powers to enrich themselves at the expense of other nations. The author focuses on four countries, Mexico, Tunisia, Egypt and Greece and recounts the impact of international indebtedness upon them in impressive detail. He links the stories by tracing commonalities between them and draws parallels between eras, focusing on the nineteenth and twentieth centuries.

The author shows how an acceptance of the sanctity of debt has been used as a highly effective justification for immoral action on the part of powerful capitalist nations enabling them to extract wealth from other countries whilst deflecting the blame for any negative consequences resulting from the international credit system from themselves to those who suffer from the effects of their actions.

The denouement of credit flow to peripheral countries (such as those listed above) follows a similar pattern. Loans are granted by banks in capitalist nations at high-interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
and exorbitant commissions are payable Payable A sum of money that one person (debtor) or group of people owes to another (creditor). . Usually, a relatively small amount of the loan actually reaches the borrowing state as the banks are able to siphon off significant sums for themselves. Should peripheral nations face difficulties in repayment (as is commonly the case), the governments of the nations where the banks are based stand behind them and are often prepared to take action, including the use of military force – claiming the so-called sanctity of debt as a justification for such intervention - to enforce debt repayments, even when circumstances make repayment extremely difficult for indebted states and are likely to result in impoverishment of local populations.

 A rigged system

In this way, the ‘debt system’ can be seen to be a rigged system: the political, financial and military power of the major capitalist states enables them to transfer wealth from peripheral nations to themselves. This view of debt is outlined by Graeber (2005). He argues that debt is used as a means to suppress and exploit; the requirement to repay sovereign debts is treated as a deep moral obligation which continues over time even when despotic governments are replaced with progressive administrations. Capitalism, in particular, acknowledges no ‘reset button’. Inequality will tend to grow, and surplus will flow from least to most powerful; debt is a tool (amongst others) to facilitate this transfer.

The book considers the circumstances under which debt might be considered illegitimate and thus could be justifiably repudiated. The author considers the work Alexander Sack, who outlines the concept of ‘odious debt’. [1]

Sack argues in favour of the rights of private creditors over states and that debt should continue to be honoured by democratic governments even if previously accessed by despotic regimes. Although Sack is not generous in his attitude to the welfare of poorer nations, nevertheless, he notes that circumstances do exist under which debt might be considered illegitimate. Debt might be considered ‘odious’ if the funds borrowed are not used in the interests of the population and if the creditors are aware of the (damaging) use to which the funds will be allocated.

The author considers that Sack’s view of ‘odious debt’ does not go far enough in a contemporary context; we need to consider the issues more deeply and go beyond it. For example, the author considers the role that international institutions such as the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
and World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

have taken, arguing that they have imposed conditions on debtor states which have damaged the quality of life of their citizens or even violated fundamental human rights. Toussaint cites the example of the approach of the so-called ‘Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

’(The European Commission, The European Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

and the International Monetary Fund) with regard to Greece in the aftermath of the global financial crisis.

 Debt repudiation and avoidance

The author then shows how debt repudiation does not necessarily lead to exclusion from international credit in the future. International bankers’ pursuit of profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. means they will soon be prepared to broker loans especially since the risks can be hedged. He cites the examples of Portugal, the United States, Costa Rica, Mexico, and the Soviet Union; all of whom repudiated international debts but were, nevertheless, able to access credit in the ensuing years.

The book achieves its objectives and perceptively highlights the nature of the debt system and how, over a long period of time, it has proved a highly effective means of redistributing wealth from poor to rich nations. However, it omits to distinguish carefully between different monetary regimes (metallic standards, fixed but adjustable exchange rates and floating exchange rates) and the differing constraints they place upon governments - especially those of so-called peripheral states.

Under floating exchange rates, a state with its own currency faces no monetary constraints in its own currency. [2] It spends by the ex nihilo issue of money and spending is logically and historically anterior to taxation and the sale of state debt. In such a situation the state faces real resource constraints rather than monetary. A state can purchase anything available in its own monetary space. However, if it lacks particular real resources it may feel it necessary to import them. If a foreign supplier has a desire to net save in domestic currency, the country will be able to import by running a current-account deficit. However, in the absence of such a desire on the part of the foreign sector, imports would need to be funded by export sales or borrowing in a foreign currency. Such a situation creates a significant real burden on the indebted nation. It would need to export real goods and services in order to satisfy its debt obligation.

However, when a state operates under a fixed-peg system or metallic standard such as the gold standard (as was commonplace in the nineteenth century) it faces particular monetary constraints that are absent when exchange rates float. Under a gold standard states’ ability to issue their currency to finance purchases is limited by its gold stocks- effectively it must offset its spending by taxation or borrowing. Interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates would necessarily be market-determined- that is, set at a rate to deter conversion to gold at a fixed rate. If a government desires to increase its purchases of goods and services domestically this might well necessitate increased taxation or borrowing. Expansionary fiscal and monetary policy would be effectively constrained by the hard peg. Again, if the desired goods and services were not available at home a government might need to borrow foreign currency to finance the purchases. If its own currency was on a metallic standard it may well need to reduce its own future net spending in order to repay the loan.

 Lessons of history

It may be that peripheral countries’ governments required imports for purposes which benefited the population or merely the ruling class or military. Given international debt would constitute a real burden when funded in foreign currency – as was usually the case in the nineteenth century and is often true today – it should be minimised. It is unavoidable in some cases, for example, when a nation desperately needs to import food, fuel or medicines - or vital resources to enhance growth and development. In this case, in a modern context, we would hope that the rich countries would be prepared to construct and oversee a system which minimises the future repayment burden. However, in the past - and also, sadly, today – governments borrowed to fund the conspicuous consumption of the ruling elite or to purchase weapons, especially (although not exclusively) in the case of dictatorships. The debt system founded upon capitalist bank lending then imposes a heavy burden on the populations of indebted nations which continues even when despotic powers are replaced by democratic governments.

The lesson of history is clear - a country should avoid borrowing in foreign currency wherever possible and avoid fixed exchange rates or metallic standards which limit their domestic policy space and constrain a government’s ability to use of fiscal and monetary policy to enhance public purpose.

An examination of the operation of the Eurozone and the ‘Troika’s’ treatment of Greece illustrates this point; capitalist exploitation is alive and well. As has been noted by Minsky, [3] capitalist finance is inherently unstable –stability breeds instability - and when crashes occur, they result from systemic financial failure in capitalist core countries but have potentially devastating effects on peripheral countries who suffer the consequences of dysfunctional finance in creditor nations.

I would argue that this work has much to commend it; it provides detailed analyses of the impact of indebtedness in several nations and a compelling explanation of the deep-seated mechanisms at work in the international credit system – a system which is designed to enhance the opportunity for exploitation of nations outside powerful capitalist sates. The author shows that, contrary to orthodox arguments, debt repudiation can be both justified and successfully carried out. I recommend the book wholeheartedly.


Éric Toussaint, The Debt System: A History of Sovereign Debts and their Repudiation (Haymarket Books 2019), x, 263pp. Available here:

Source: Counterfire


[1Alexander Nahum Sack (1890 -1955) formalised the notion of ‘odious debt.’

[2Mosler 2012; Armstrong 2015.

[3Hyman Minsky developed the financial fragility hypothesis; see Minsky (1992).



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