When President Joe Biden says that the US never denounced any debt obligation it’s a lie to convince people that there is no alternative to a bad bi-partisan agreement

Debt ceiling: Radio Silence Concerning United States President Franklin Roosevelt’s Repudiation of Debts

28 May by Eric Toussaint

During your education, did you learn that during the 1930s the government of the USA unceremoniously repudiated a central provision of debt contracts that represented phenomenal sums? Do any history books analyze that act? Historical narratives are fashioned by mainstream thought, whose aim is to induce the belief that governments like that of the USA respect the sacred character of contracts, in particular those involving debts and property. However that belief is far from reality. The repudiation of the gold clause in debt contracts in the name of public order, of the general interest and of necessity is an important episode in “contemporary” history. Yet it is an episode that has been kept quiet, including in the USA itself. The unilateral repudiation of debt contracts, in whole or in part, to which various governments have resorted over the past two centuries is currently a highly important topic, at a time when more and more countries are approaching a new major debt crisis.

On 19 April 1933, six weeks after the start of his term as president, the Democrat Franklin D. Roosevelt announced that the United States would no longer repay its debts in gold

On 19 April 1933, six weeks after the start of his term as president, the Democrat Franklin Roosevelt announced that the United States would no longer repay its debts in gold, but rather in paper money – in dollars in the form of banknotes.

This decision was of very great importance, since many loan contracts stipulated that creditors could require that debts be repaid either in gold or in dollars at the rate of 20 dollars for a troy ounce of gold.

Loan contracts containing the provision (a “gold clause”) represented a colossal sum for the time: USD 120 billion, including 20 billion in debts contracted by the public authorities and 100 billion in private-sector debt. That sum was greatly in excess of the market wealth produced in one year in the USA (according to Sebastian Edwards, debt contracts containing a gold clause represented 180% of the 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.
of the United States at the time [1]).

The annulment of repayment in gold was accompanied by a measure by which the government prohibited ownership of gold in an amount exceeding USD 100 and required all companies and all persons residing in the USA to sell their gold to the Federal Reserve 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/
. The government exchanged the gold for banknotes.

Por U.S. Government Printing Office — http://www.goldline.com/images/conf-order.pdf, domínio público, https://commons.wikimedia.org/w/index.php?curid=11370129

This decision made by President Roosevelt was approved by the US Congress in June 1933, and the abandonment of the gold clause in debt securities became law. The minority of Congress members from his party and the Republican party who opposed the decision loudly protested that it amounted to nothing more or less than a repudiation of debts and contracts. Lewis Douglas, Director of the Budget and one of Roosevelt’s closest advisers and collaborators, had tried to oppose the decision and had declared at a crisis cabinet meeting called by Roosevelt that the decision meant nothing less than “the end of Western civilisation” (Edwards, p. 58). Sebastian Edwards, a neoliberal economist, whose book cited above and published in 2018 is entirely devoted to this decision by the Roosevelt administration, titles the book’s Chapter 6 “A Transfer of Wealth to the Debtor Class” – a title whose meaning is quite explicit (Edwards, p. 57).

The minority of Congress members from Roosevelt’s party and the Republican party who opposed the decision loudly protested that it amounted to nothing more or less than a repudiation of debts and contracts

After having annulled the gold clause that had been part of all debt contracts, the US President announced a 69% devaluation Devaluation A lowering of the exchange rate of one currency as regards others. of the dollar against gold (an ounce of gold would now be worth USD 35, [2] whereas it had been worth USD 20.67 previously). This meant that the United States itself and private borrowers who had “issued” or signed acknowledgements of debt including the gold clause would now not repay their debts in gold, but rather in strongly devalued paper money.

In February 1935, the Supreme Court ruled on the constitutionality of the decision to cancel the gold clause made by Congress and the President.

A fundamental element of the government’s legal argument before the Supreme Court was that in 1933, Congress was faced with an urgent need for “immediate action” to end the Depression. The action in question, which included devaluation of the dollar against gold, could only be effective if the gold clause was eliminated from both past and future contracts. Had the clauses relating to gold been kept, according to the government, it would have meant insolvency at the national level. That is why Congress – still according to the government –, faced with a deep recession, banking collapse and monetary panic, adopted the Joint Resolution which annulled all gold clauses. According to the government, such action was necessary if the country was to be saved.

Jurists who opposed the cancellation of the gold clause maintained that it amounted to expropriation without compensation. (Edwards p. 152)

Jurists favourable to cancellation of the gold clause maintained that holders of debt securities must assume the risks they had taken in purchasing those securities (Edwards, p. 151).“[...]the Roosevelt administration lawyers forcefully made the point that the gold clause was ‘contrary to public policy,’ a legal term that implies that certain actions, regulations, or contracts are harmful and injure the public and citizens at large. According to the government, the gold clause was ‘inconsistent with our present monetary system.’” (Edwards, p. 140)

See: When States Start with a “Clean Slate” and Repudiate Debts: Whose Turn Now?

In the end, by a vote of eight to one, the Supreme Court ruled that abrogation of the gold clause was indeed unconstitutional! But by a vote of five to four, it ruled that no damages to bondholders had resulted. Thus in terms of its actual application, repudiation of the gold clause, including retroactively affecting all debt securities, was confirmed.

After having annulled the gold clause that had been part of all debt contracts, the US President announced a devaluation of 69% of the dollar against gold. This meant that the United States itself and private borrowers who had “issued” or signed acknowledgements of debt including the gold clause would no longer repay their debts in gold, but rather in strongly devalued paper money.

Expressed very simply, if application of the law abrogating the gold clause had been annulled by the Supreme Court, each debtor (including the State) would have had to repay USD 1.69 for every dollar owed since, as mentioned, it had been decided that each ounce of gold was now worth USD 35 instead of USD 20.67.

James Clark McReynolds, one of the four dissenting judges, stated publicly to justify his opposition to the Supreme Court’s acceptance of the annulment of the gold clause: “Shame and humiliation are upon us now. Moral and financial chaos may be confidently expected.” [3]

And yet this radical policy of repudiation of contracts did not cause any difficulty in terms of new bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. issues. Throughout the years 1933–1934–1935 (and beyond [4]), the US government had no difficulty in issuing new debt securities, and at very low rates. One example is the bond issue of 11 October 1933. The 12-year bonds had a very low 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. rate of 1%, and the offer was “vastly oversubscribed [...] abrogation of the gold clause had not generated serious damage to the government’s reputation [...]” (Edwards, p. 106). Meanwhile, foreign creditors were organizing in a cartel. On the same day as the bond issue, on the other side of the Atlantic, in London, the Advisory and Protective Committee for American Investments came into being. Its goal was to seek rulings from the courts that would favour British investors affected by the suspension of payments in gold put in place by the USA. That goal was similar to that of another group whose name left no doubt as to its aim: the International Committee against the Repudiation of the Gold Clause, founded in July 1933 by holders of securities residing in France, Belgium and Switzerland (Edwards, p. 107). These initiatives by creditors bore no fruit, and the repudiation of the gold clause worked as planned, to the USA’s advantage.

 A retrospective look at the beginning of F. D. Roosevelt’s presidency

The radical policy of repudiation of contracts did not cause any difficulty in terms of new bond issues

Roosevelt, elected with more than a 7-million vote lead over his Republican opponent, began his term of office in a climate of extreme economic and financial crisis: more than 10 million people jobless, two million homeless, a sudden and dramatic loss of revenue for nearly 60 million people who made their living from agriculture, massive foreclosures on land and properties by creditors, etc.
It should be kept in mind that as of 3 March 1933, the day before the start of Roosevelt’s term, the Federal Reserve in New York had lost gold stock equivalent to USD 250 million and 150 million in currencies because a large number of capitalists and independently wealthy individuals had purchased gold and currencies in anticipation of a possible devaluation of the dollar or cancellation of its convertibility into gold (Edwards, p 28). All banks and the New York Stock Exchange were closed due to the crisis. Clearly the previous president, the Republican Herbert Hoover, had contributed to creating a climate of mistrust of the incoming administration at the end of his term. He had written on 21 February 1933: “We are in the verge of financial panic and chaos. Fear for the policies of the new administration has gripped the country. People do not await events, they act. Hoarding of currency, and of gold, has risen to a point never before known.”  [5] On 9 March, Congress had adopted the Emergency Banking Act, which allowed the Federal Reserve to issue new “bank notes” that were not convertible into gold (Edwards, p. 38). The Act also gave the President the authority to close the banks, which he did by extending the banking holiday that preceded the official closing.

On 1 May 1933, the New York Clearing House Association (clearing houses are in charge of collecting coupon payments) decided to make its payments in paper dollars. If the holder of a bond insisted on being paid in gold, a certificate was issued stating: “Demand for payment in gold refused.” That document could then be used by the bondholder to bring legal action against the State or the private issuer of the bond.

See: Des dépossessions pour dettes non payées aux dettes hypothécaires et étudiantes : la dette privée durant l’ère capitaliste
Dorothea Lange, Destitute pea pickers in California. Mother of seven children. Age thirty-two. Nipomo, California,
New York Public Library, https://picryl.com/media/destitute-pea-pickers-in-california-mother-of-seven-children-age-thirty-two-56cc4e.

In its editorial of 7 May, the New York Times wrote: “What will the Supreme Court say about the fulfillment of a contract which is “payable Payable A sum of money that one person (debtor) or group of people owes to another (creditor). in principal and interest in United State gold coin of present standard of value? On the answer to this question will depend the policy of the Treasury and the whole American financial community in their approach of making good on approximately $100,000,000,000 in gold-clause contracts.” (cited by Edwards, p. 66). The same day, Franklin Roosevelt, in his “Fireside Chat” radio speech, said in substance that both the public and the private sector had contracted large amounts of debt – approximately USD 120 billion – subject to the gold clause. But, according to Roosevelt, they had done so knowing “full well that all the gold in the United States amounted to only between three and four billion and that all of the gold of the world amounted to only about eleven billion.” [6]Should everyone decide at once that they wanted gold, he said, only one twenty-fifth of the claimants would get it, and the rest, “who did not happen to be at the top of the line, would be told politely that there was no more gold left.” His administration, he added, had decided to put “everyone on the same basis in order that the general good may be preserved.” That meant that each creditor, whether rich or humble, would be paid in paper legal currency both for public and private contracts. (Edwards, p. 67).

David Reed, a Republican Senator from Pennsylvania, declared that the President’s decision was equivalent to “repudiation and will discredit this country for a hundred years.”

Carter Glass, one of the Democrat legislators who were totally opposed to the decision to abrogate the gold clause, said during a press conference he called that “the proposal to repudiate all outstanding gold contracts is unconstitutional and the courts will so hold if there is any integrity left in the courts with respect to the sanctity of contracts.” David
Reed, a Republican Senator from Pennsylvania, declared that the President’s decision was equivalent to “repudiation and will discredit this country for a hundred years.” (cited by Edwards, p. 72–73).

These two citations reveal quite explicitly that in the public debate, the decision to eliminate the gold clause retroactively was clearly considered an out-and-out repudiation of debts and a gravely serious attack on the sacred nature of contracts.

As Sebastian Edwards puts it, “To many investors, bankers, lawyers, and politicians, the devaluation of the dollar and the abrogation of the gold clauses constituted a violation of contracts, an outright transfer from the creditor to the debtor class, and an outrageous expropriation of wealth.” (Edwards, p. 117)

Despite the announcements of impending chaos by the financial sector, a minority of Congress and some jurists, the abrogation of the gold clause and devaluation of the dollar resulted in a very large increase in the quantity of gold available to the US Treasury between January and December 1934. The gold stock available to the government increased from USD 3.9 billion to USD 8.1 billion (part of that increase – 2.5 billion – resulted from the devaluation, and the rest from gold purchases made by the US Treasury). A large quantity of gold purchased by the Department of the Treasury flowed into the USA, largely from London and Paris (Edwards, p. 122).

Further, the President’s Democratic Party benefited greatly from the popularity of the strong measures he had taken, winning the midterm elections in October 1934 and strengthening its majority in the Senate by nine seats. 69 senators out of a total of 96 were Democrats.

Roosevelt: “This joint resolution was a necessary step in effectuating the Government’s control of the monetary system”

It is also very interesting to cite what Roosevelt said in 1938 of the Joint Resolution adopted in May 1933 by a large majority of members of the Senate and House of Representatives in support of the decision to abrogate the gold clause: This joint resolution was a necessary step in effectuating the Government’s control of the monetary system.... [T]he holding of, or the dealing in, gold affects the public interest, and is therefore subject to public regulation and restriction....

... The gold clauses in bonds obstruct the [Constitutional] power of Congress to regulate the value of money of the United States” (cited by Edwards, p. 76; author’s emphasis).

Such a declaration is politically light-years removed from the policies that have been conducted since 1970–1980 by most of the governments on the planet, who insist on the need for independence of the 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.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
in relation to the government.

 To remedy the economic and social crisis, authoritarian measures of a scope never before seen in peacetime in a “democratic” capitalist country

When the Democrat President came to power, in 1933, the marginal income-tax rate on the highest incomes was 25%. In three stages, he gradually raised the rate to 91%.

In 1933, then, in a period of a few months, the Roosevelt government took extraordinary measures in the context of a devastating economic crisis that had begun in 1929 and showed no sign of abating.

A few examples of the long series of strong measures taken:

  • Closing all banks for 10 calendar days, and permanent closure of more than a thousand of them. [7] These measures were later followed by adoption of the Glass-Steagall Act, which separated commercial banks from investment banks. The government and the President were given plenary powers over banks by Congress in order to radically clean up the financial system by imposing strong discipline to avoid a repetition of financial manipulations and swindles. The New York Stock Exchange on Wall Street was closed for more than 10 days, between 3 March and 15 March.
  • After only one month in office, the government prohibited the ownership, sale and exportation of gold. All residents of the United States, individuals or companies, were required to sell their gold to the State at the price it set. They were allowed to hold only USD 100 worth of gold, with the exception of jewellery or “raw materials” necessary for business activities. Failure to comply with the prohibition was punishable by imprisonment. “Those who failed to deliver their metal by the May 1 deadline were subject to a fine of not more than $10,000 and a prison term of ‘not more than 10 years.’” (Edwards, p. 42). See the Executive Order above.
  • The government took over management of the Federal Reserve (within which the big private banks played a very important role and did their best to make the task of taking control over monetary and financial policy difficult) and thus took the reins of monetary policy. The New York Times of 1 January 1934 wrote that the government’s decision “will permit the President to take all powers of currency issue from the Federal Reserve Board, and lodge them exclusively in the government.” (Edwards, p. 115). [8] The government also decided that all gold stock held by the Federal Reserve was now at the disposal of the Secretary of the Treasury.
  • The government cancelled a portion of the debts owed by farm families.
  • The government guaranteed workers’ rights, and in particular the right to form and belong to trade unions, the right to strike, the right to collective bargaining, the right to unemployment insurance, the right to a legal minimum wage, etc.
  • The Roosevelt administration greatly increased the rate of taxation on high incomes on two occasions. When the Democratic President came to power, in 1933, the marginal income-tax rate on the highest incomes was 25%. In three stages, he gradually raised that rate to 91%. In 1935, the Revenue Act (popularly referred to as the “Soak-the-Rich Tax”) revised tax laws and regulations for higher incomes. Individuals taking in more than USD 200,000 per year were taxed more heavily, at 63%. The law was revised in 1936, increasing the rate to 79%, then to 91% in 1941. [9]
    In the USA, in 1933, the working class was radicalized to the left and was ready to take action if big capital did not make major concessions

Roosevelt succeeded in getting big capital in the United States to accept reform of capitalism via the introduction of the New Deal. In the USA, in 1933, the working class was radicalized to the left and was ready to take action if big capital did not make major concessions. As a result, big capital regarded Roosevelt as a lesser evil than the risk of an uncontrollable social revolution.

 Other capitalist countries eliminated convertibility of their currencies into gold and suspended repayment of their foreign debt in the 1930s

Elias Goldensky, Franklin Delano Roosevelt, 1933, Wikimedia Commons, https://commons.wikimedia.org/wiki/File:FDR_in_1933.jpg

The United States was not the only country to make the decision to abandon convertibility into gold. Australia abandoned it in December 1929. Britain went off gold in 1931, having devalued the pound sterling by 30% (Edwards, p. 34).

Taking advantage of the USA’s decision, the Nazi government, in place since March 1933, decided to abandon convertibility on 27 April of the same year. Japan and Italy did the same on 28 November 1933.

On 21 July 1933, the United Kingdom announced that it was cancelling repayment of the debts of the First World War in gold, and justified the decision on the grounds that it was the logical progression of the decision made by the United States. [10]

Finally, in 1934, the fifteen or so European countries who were in debt to the USA following the First World War were in suspension of payment, with the sole exception of Finland. Ultimately, a portion of the debts owed to the USA by European countries was never repaid.

Ultimately, a portion of the debts owed to the USA by European countries was never repaid

Suspensions of debt repayment spread to Latin America. In 1932, twelve Latin American countries had totally or partially suspended repayment of their debts; in 1935, there were fourteen. [11] In short, more than half the countries in Latin American unilaterally ceased repayment of their debts in the 1930s. The decision to end repayment of foreign debt was beneficial. Most of the countries who ceased repayment of their debts underwent an economic reactivation in the 1930s despite their not resorting to external loans. Re-establishment of the system of international trade after the Second World War did not end in a return to indebtedness to private capital markets for Latin American nations. At Bretton Woods, in 1944, alternative channels were set up: government credits and loans (and also multilateral ones) substituted for the financial markets. Only twenty years later, in the 1960s, did private banks of the Centre again take an active part in providing credit.

For a certain period, then, the Latin American countries kept their distance from the international financial system because they were convinced that there was little chance of a financial flow resuming in their favour, including for those that had not repudiated their debts. The internal financial difficulties the USA was experiencing only strengthened that conviction. The war that broke out later between the major imperialist countries (1940–1945) changed their priorities. The major creditors (the UK and the USA) were not motivated to create a cartel to recover their debts.

In short, half of the countries in Latin American unilaterally ceased repayment of their debts in the 1930s. Suspension of payment enabled the countries who made that decision to hold onto large financial resources to be used to implement policies of expansion

Certain countries who repudiated their debts could have continued making payments, but decided that the internal social cost would have been too high. Suspension of payment enabled the countries who made that decision to hold onto large financial resources to be used to implement policies of expansion. If they had decided to continue repayments, it is certain that they would not have been able to implement policies to control foreign exchange, nor would they have been able to impose protectionist barriers against certain products from the North. These measures made real development possible through a process of Import Substitution Industrialization (ISI). This meant that the countries themselves produced products they had been importing from the North.

Had they not ceased repayment of foreign debt, these countries would not have been able to implement, with sufficient scope, the major programmes of public works that are the second fundamental instrument – after suspension of repayment – of economic reactivation. It is interesting to point out that the decision to suspend was made by regimes whose nature differed greatly. Yet these converging decisions should not be seen as being part of a preconceived strategy. Only later, in particular with the creation of the United Nations Economic Commission for Latin America (ECLA), did Import Substitution Industrialization policies become part of a strategic vision (that of abandoning the model of export-driven industrialization in favour of ISI). Still, the decision to suspend debt repayment had genuinely positive results.

 Conclusion concerning abrogation of the gold clause in debt contracts

Abrogation of the gold clause and devaluation of the dollar in 1933–1934 were followed by economic recovery and a drop in the interest rates at which the country borrowed

In contrast with the predictions made by opponents of repudiation of the gold clause, who claimed that the consequences would be negative and even catastrophic, the results were in fact positive.

Let us review the arguments of the opponents of repudiation or suspension of repayment of debt. According to traditional economic theory, violation of debt contracts has a number of negative consequences for debtors. Reneging on their promises and forcing losses on investors was supposed to create great difficulties for debtors in accessing capital markets and issuing new debt. The cost of new loans was supposed to increase significantly and there would be a “stigmatization effect” on new debt issues. Some critics went as far as to claim that the debtor would be completely excluded from the debt market, at least for a time. A country which repudiates or suspends repayment of its debts would be sanctioned, they claimed; the international ratings agencies would sharply downgrade its rating, resulting in a reduction in investments and consequently a lower rate of growth.

In actual fact, in the case of the USA, as Sebastian Edwards recognizes in Chapter 16 of his book, the repudiation of the gold clause and devaluation of the dollar in 1933–1934 were followed by an economic recovery, and 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.
the country paid when borrowing dropped. Private companies also had access to financing at interest rates that were lower than before the repudiation. The prophecies of chaos proved to be groundless. On the contrary, there was a return to economic growth. Investment in production increased rather than diminished.

 Conclusion going beyond the context of the USA and its repudiation of the gold clause

Joseph Stiglitz: “Empirically, there is little evidence in support of the position that a default leads to an extended period of exclusion from the market”

It should be added that other countries, under very different circumstances and with much smaller economies than that of the USA, also benefited from the decision to repudiate debt contracts in whole or in part or to suspend their payment.

That is the opinion, among others, of Joseph Stiglitz, 2001 laureate of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, chair of President Bill Clinton’s Council of Economic Advisors from 1995 to 1997, and chief economist and vice-president of the 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.

from 1997 to 2000, who gives strong arguments to those who seek a suspension of public debt repayment. In a collective book published by Oxford University Press in 2010, [12] he claims that Russia in 1998 and Argentina in the 2000s are proof that a unilateral suspension of debt repayment can be beneficial for countries that make the decision to suspend: “Both theory and evidence suggest that the threat of a cut-off of credit has probably been exaggerated.” (Stiglitz, p. 48).

See: Why the Elites in the Global South Favour Indebtedness, How Creditors Have Eroded National Sovereignty, and How States are Beginning to Fight Back

When a country succeeds in enforcing debt relief on its creditors and uses funds that were formerly meant for repayment in order to finance an expansionist tax policy, the results are positive: “Under this scenario the number of the firms that are forced into bankruptcy is lowered, both because of the lower interest rates [13] and because of the improved overall economic performance of the economy that follows. As the economy strengthens, government tax revenues are increased – again improving the fiscal position of the government. […] All this means that the government’s fiscal position is stronger going forward, making it more (not less) likely that creditors will be willing to again provide finance.” (Stiglitz, p. 48) Stiglitz adds: “Empirically, there is little evidence in support of the position that a default leads to an extended period of exclusion from the market. Russia returned to the market within two years of its default which was admittedly a ‘messy one’ involving no prior consultation with creditors […] Thus, in practice, the threat of credit being cut off appears not to be effective.” (p. 49)

Joseph Stiglitz considers that those who believe that one of the central functions of 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.

is to impose the highest possible price on countries that wish to default are wrong. “The fact that Argentina did so well after its default, even without an IMF program, (or perhaps because it did not have an IMF program) may lead to a change in these beliefs.” (Stiglitz, p. 49)

Since creditors demand high rates from some countries to compensate for risk it is only right that they should accept losses due to debt cancellation

Stiglitz also clearly challenges the part played by bankers and other creditors who granted massive loans without checking the solvability of borrowing countries or, worse, who granted their loans while knowing full well that there was a high defaulting risk. He adds that since creditors demand high rates from some countries to compensate for risk it is only right that they should accept losses due to debt cancellation. Those creditors should have used the high interests they received as a provision against possible losses. He also exposes the “raider” loans all too lightly granted by bankers to indebted countries (Stiglitz, p. 55).

In short, Joseph Stiglitz argues that creditors should take responsibility for the risks they run (p.61). Towards the end of his contribution he claims that countries who choose to default or renegotiate debt relief will have to enforce a temporary control on currency exchange and /or taxes to prevent a capital drain (p.60). He is in favour of the doctrine of odious debt Odious Debt According to the doctrine, for a debt to be odious it must meet two conditions:
1) It must have been contracted against the interests of the Nation, or against the interests of the People, or against the interests of the State.
2) Creditors cannot prove they they were unaware of how the borrowed money would be used.

We must underline that according to the doctrine of odious debt, the nature of the borrowing regime or government does not signify, since what matters is what the debt is used for. If a democratic government gets into debt against the interests of its population, the contracted debt can be called odious if it also meets the second condition. Consequently, contrary to a misleading version of the doctrine, odious debt is not only about dictatorial regimes.

(See Éric Toussaint, The Doctrine of Odious Debt : from Alexander Sack to the CADTM).

The father of the odious debt doctrine, Alexander Nahum Sack, clearly says that odious debts can be contracted by any regular government. Sack considers that a debt that is regularly incurred by a regular government can be branded as odious if the two above-mentioned conditions are met.
He adds, “once these two points are established, the burden of proof that the funds were used for the general or special needs of the State and were not of an odious character, would be upon the creditors.”

Sack defines a regular government as follows: “By a regular government is to be understood the supreme power that effectively exists within the limits of a given territory. Whether that government be monarchical (absolute or limited) or republican; whether it functions by “the grace of God” or “the will of the people”; whether it express “the will of the people” or not, of all the people or only of some; whether it be legally established or not, etc., none of that is relevant to the problem we are concerned with.”

So clearly for Sack, all regular governments, whether despotic or democratic, in one guise or another, can incur odious debts.
and claims that such debt must be cancelled (p.61). [14]

 The case of Argentina in the years 2010–2020

One last reflection on Sebastian Edwards and the case of Argentina: In his book devoted to the abrogation of the gold clause by the Roosevelt administration and Congress, Edwards explains that he took an interest in that period of the history of the 20th century because he had realized that the Argentinean government, in the decade after 2010, justified its attitude toward creditors by referring to what the USA had done in 1933–1934–1935. Edwards says himself that he was on the side of the creditors when the American judicial system ruled in their favour and required Argentina to compensate them. What Edwards forgets to say is that Argentina, as Stiglitz mentions, also benefitted from its resistance to the private creditors. The country’s annual growth rate between 2003 and 2008, in the middle of the suspension of payment, was very high despite the fact that the country no longer had access to financial markets. Judge Thomas Griesa of the United States District Court for the Southern District of New York ruled against Argentina in 2013, but the Argentinean authorities resisted the ruling. Only with the election of the neoliberal Mauricio Macri to Argentina’s presidency did the country agree, wrongly, to pay the vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
in whose favour Griesa had ruled. However, Macri’s management of debt matters was disastrous and led the country to the brink of insolvency in 2018
. The IMF had to grant Argentina an emergency credit of USD 45 billion – the largest amount ever granted by the institution in its entire history. That credit and Macri’s management of the crisis ended in his government’s losing the election in 2019, and it was followed by another credit from the IMF in an amount of USD 45 billion, to be used in repaying the first loan. This shows clearly that submission to the markets and to the IMF can have no positive results, and that it is better to resist creditors while conducting another type of policy.

The author thanks Maxime Perriot and Patrick Saurin for reading the manuscript of this article.

Translated by the CADTM translation team.

Bibliography of works consulted regarding abrogation of the gold clause:

Sebastian Edwards, American Default. The Untold Story of FDR, the Supreme Court, and the Battle over Gold, Princeton University, 2018.

Pierre de Saint-Phalle, “Sebastian EDWARDS, American Default : The Untold Story of FDR, the Supreme Court, and the Battle over Gold” | Revue européenne des sciences sociales 2019/1 (57-1), pages 299–303 (in French). Available on Cairn.info https://www.cairn.info/revue-europeenne-des-sciences-sociales-2019-1-page-299.htm ‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬

For more on Roosevelt’s New Deal:

For an assessment of the effects of suspension of debt repayment:

Barry Herman, José Antonio Ocampo, Shari Spiegel, Overcoming Developing Country Debt Crises, OUP Oxford, 2010. https://global.oup.com/academic/product/overcoming-developing-country-debt-crises-9780199578795?cc=us&lang=en&#



[1Sebastian Edwards, American Default. The Untold Story of FDR, the Supreme Court, and the Battle over Gold, Princeton University, 2018. Comparing debt stock to GDP is questionable, but since Sebastian Edwards makes that comparison himself, I mention it to give an idea of the size of the amount. A large part of this article is based on Edwards’s narrative.

[2The official price of a troy ounce of gold set at 35 dollars remained in force until August 1971 when President Richard Nixon put an end to the convertibility of the dollar into gold, which had been restored by the Bretton Woods agreements in 1944.

[3Cited by Sebastian Edwards in his introduction, p. XIV.

[4This continued throughout Roosevelt’s four terms of office as president. F. D. Roosevelt (1882–1945) was president of the United States from 1933 until his death in 1945, during his fourth term of office.

[5Cited by Edwards, p. 28.

[6Edwards, p. 67

[7“By March 29, 11,878 banks had reopened, out of 17,349 in operation before the holiday...” Edwards, p. 41.

[8NYT, “Decision on Gold Reported Reached,” 1 January, 1934, p. 4.

[9After Roosevelt, for more than 50 years, the USA had a marginal tax rate on high incomes of nearly 80%.

[10“The obligation that the British government undertook in 1917 has been abrogated by an alteration of the law of the land under whose jurisdiction the bonds were issued.” (cited by Edwards p. 98).

[11Marichal, Carlos, A century of debt crises en Latin America, 1989; Vilas, Carlos, Crisis de la Deuda de América Latina, 1993; Ugarteche, Oscar, El Falso dilema, 1997, p. 117.

[12Barry Herman, José Antonio Ocampo, Shari Spiegel, Overcoming Developing Country Debt Crises, OUP Oxford, 2010, 424 p. Chapter 2 is by Joseph Stiglitz: “Sovereign debt: notes on theoretical frameworks and policy analyses” p. 35–66

[13Indeed one of the conditions set by the IMF when it helps a country about to default is that it raise local interest rates. If a country is free not to comply with IMF conditions, it can lower its interest rates so as to prevent bankruptcies.

[14Joseph Stiglitz has defended this position on several occasions over the past ten years. See his book Globalization and Its Discontents, Norton, 2002.

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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