National and International Conference on Central Banks, the Financial System and Economic Development

6 December 2023 by Eric Toussaint , Pablo Laixhay


Éric Toussaint was invited to open the second day of the National and international conference on central banks, the financial system and economic development, held in Bogota on 23 and 24 November 2023 with the active participation of the National Federation of trade unions in the Columbian banking sector (FENASIBANCOL) and of the National Union of workers in the banking sector (UNEB). His 45-minute talk in front of about one hundred trade unionists of the banking sector in Columbia, Chile, Brazil, Bolivia, Argentina, Uruguay, Paraguay, Costa Rica, Salvador and Peru focused on the part played by central banks in the face of multi-faceted crises.

The following text summarizes his speech under four headings.



 Objectives of central banks in the service of their nations

There is a close connection between senior executives of major commercial banks and governors of central banks, which means that the latter favour the particular interests of major shareholders of private banks

Central banks should play a key role in a country’s social and economic development. This involves “monetizing the debt” by buying sovereign debt Sovereign debt Government debts or debts guaranteed by the government. or sovereign agency bonds directly from the State to finance public policies. It also involves supporting public credit institutions by financing small entities, small businesses, cooperatives and other actors in the country’s economic life. To achieve this, it is essential for trade unions among others to oppose the harmful neo-liberal dogma of the autonomy of central banks from executive and legislative power, which serves only to legitimize their subordination to Capital. Central banks must be accountable of their initiatives towards elected governments and citizens, not towards shareholders in major banks and big business. There is nowadays a close connection between senior executives of major commercial banks and governors of central banks, which means that the latter favour the particular interests of major shareholders of private banks and assist them over crises and to avoid failures, often unconditionally. This complicity must be severed.

 International socio-economic situation

From 2019 to 2022, worldwide, 95 million more people fell into extreme poverty

It is impossible to understand the part played by central banks without analyzing the development of the international situation. Two recent reports from international financial institutions stress that the course it has taken is cause for serious concern. On one hand, according to the latest World Bank World Bank
WB
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.

report, from 2019 to 2022, worldwide, 95 million more people fell into extreme poverty. On the other hand, according to 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.

http://imf.org
World Economic Outlook published in April 2023, in 2008, 80 years were reckoned to be needed to halve the difference in per capita income between countries of the South and countries of the North. Updated calculation now suggests that 130 years are needed to make the same progress. Those two facts underline the widening gaps of inequalities between North and South, between the capitalist classes and the working classes, between the so-called ’developing’ countries and the so-called ’developed’ countries, and the failure of these two institutions which were supposed to eliminate poverty and improve world economic stability.

 Present situation and multiple crises

The global capitalist system has entered a new general crisis. We can talk of a many-faceted capitalist crisis:

  • the health crisis, aggravated by the neo-liberal policies imposed by financial institutions, which have sought to subvert public health systems for decades;
  • the ecological and climate crisis, which primarily affects the countries of the South and the most vulnerable countries;
  • the crisis of armed conflicts (in Ukraine, Israel/Palestine, Yemen, Sudan, eastern Democratic Republic of Congo, etc.) linked to the geopolitical, geostrategic and economic interests of the imperialist powers;
  • the international trade crisis involving widespread sanctions, which is fragmenting a capitalism based on the fluidity of exchanges;
  • the crisis in the political legitimacy of institutions and democracies being challenged by the advances of extreme right-wing movements based on the bankruptcy and failures of democracies in Argentina, Holland, Italy, the United States and in many other parts of the world. This crisis is leading to a harsher and increasingly authoritarian way of exerting power, marginalizing legislative power and concentrating executive power. The example of French democracy is revealing;
  • the crisis of global capitalism with ever decreasing growth rates. Even Germany, the world’s 4th largest economy, is now in economic recession.

  Beginning of a new debt crisis

Finally, the current situation and the combination of these different crises are leading us towards a new sovereign debt crisis that will affect both Northern and Southern countries, although the latter will be harder hit. The historical dimension of the debt crisis is particularly important given that it is part of a series of crises. Indeed, there have been several major debt crises (5) over the last two centuries.

See also: Deeper than ever, the crisis leaves capitalism out of breath

First, in 1826. Countries on the periphery, such as Simon Bolivar’s Gran Colombia, had became heavily indebted to the banks of London, the dominant imperialist center at the time, in order to finance their struggles for independence. They thus entered a new cycle of subordination and dependence on creditors, and were forced to sell their resources to repay their loans. Following the London banking crisis of 1825 and the sudden halt to capital flows from the center to the periphery, these countries went into default and faced armed intervention by the imperialist powers, seeking to impose repayments. This cycle of capital flows, then economic difficulties leading to default eventually causing imperialist pressure was repeated several times during the 19th century.

Then, the Wall Street crash of 1929 and the general crisis of 1933 brought capital flows to a standstill once again, and led to a new series of payment defaults and debt crises in Latin American countries. Paradoxically - or not - these countries benefited from the suspension of payments to invest the capital saved in import substitution policies, generating a wave of industrialization and economic growth in the region between 1930 and 1960.

Once again, from the 1960s onwards, the countries of Latin America entered a new phase of massive indebtedness, driven in particular by the IMF and the WB. This phase came to a screeching halt in the 1980s when commodity prices plummeted on the international markets and, at the same time, the FED FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/
decided to unilaterally increase the 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.
on which the loans of the countries of the South were indexed. Consequences are all too familiar: IMF interventions, widespread structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
policies, de-nationalizations, break-up of the welfare states, waves of liberalization, decades of development lost, and so on.

Two-thirds of low-income countries are over-indebted and 54 countries in the South are currently in financial distress

Understanding these debt cycles and debt crises is particularly important for understanding the current situation. Today, the countries of the South are more indebted than ever. Two-thirds of low-income countries are over-indebted and 54 countries in the South are currently in financial distress. The IMF boasts an unprecedented lending capacity, with an increase in its funds of 650 billion dollars and interventions in 96 countries since 2020. Its interventions are always accompanied by measures such as de-nationalizations, cuts in public spending, liberalization of economies.

It is against this backdrop that the countries of the South have been hit by a number of external shocks over the last three years:

Unsurprisingly, this series of shocks fore-bodes a new debt crisis, which will hit countries dependent on imports of fossil fuels and cereals all the harder. Neither will the countries of the North, which are far more indebted as a percentage of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
than the countries of the South, escape this situation, their populations may well face severe austerity measures - as we have already seen in Greece and Cyprus in the 2010s - as well as upsurges from far-right movements exploiting the impoverishment of the middle and working classes to gain power and impose populist, racist, anti-immigration policies.

The challenge is therefore colossal, and central banks have a crucial role to play. There is an urgent need to liberate them from the control of large commercial, industrial and financial capital and put them back into the service of the populations and the general interest. Their missions urgently need to be reviewed to enable massive public investment and to tackle the climate and social crises. These investments are essential if we are to avoid or mitigate the catastrophe. To achieve this, radical structural changes are needed, as well as the introduction of various measures such as the socialisation of private banks - i.e. the transformation of private banks into public services under public control - the imposition of public interest missions on the major insurance companies, the creation of wealth registers to identify the wealth of the richest, the introduction of redistributive measures in favour of social justice policies, etc.

Confrontations with big finance are inevitable and necessary if we are to implement progressive, anti-capitalist, eco-socialist and feminist policies.


Translated by Mike Krolikowski and Christine Pagnoulle.

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012, etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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