The virtues of financial repression

15 October 2011 by Eric Toussaint

During the 1930s in the United States, to get out of the crisis resulting from the 1929 Wall Street crash the Roosevelt government decided to reduce the freedom previously enjoyed by the financial and banking sector. In the wake of this decision and under pressure from popular mobilizations in Europe during and after ‘Libération,’ governments of the Old Continent set a limit on what capital could do. As a consequence, during the thirty years following World War II, the number of banking crises was minimal. This is demonstrated by two neoliberal US economists, Carmen M. Reinhart and Kenneth S. Rogoff, in their book, This Time Is Different: Eight Centuries of Financial Folly, published in 2009. Kenneth Rogoff is a former chief economist with 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 Carmen Reinhart, a university professor, is Senior Policy Advisor at the IMF and 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.

. While they are obvious supporters of the capitalist system, these two economists acknowledge that the limited number of banking crises can be mainly explained ‘by the repression of the domestic financial markets (to varying degrees) and the heavy-handed use of capital controls that followed for many years after World War II. [1] It is significant that authors who on principle are opposed to strong public regulation should use the negative phrase financial repression to refer to public policies aiming at restraining the freedom of capital. Nevertheless, Reinhart and Rogoff find the consequences of deregulation so embarassing that instead of rejecting financial repression outright they formulate a fairly equivocal comment: ‘We are not necessarily implying that such repression and controls are the right approach to dealing with financial crises. [2] In a book of over 400 pages they fail to make any alternative proposal.

Indeed, for three decades after World War II governments in most industrialized countries implemented policies that regulated capital flow. They also forced the banks to behave prudently and nationalized part of the financial sector. As Reinhart and Rogoff acknowledge, in order to avoid bank defaulting, governments set ‘high requirements for bank reserves, among other devices, such as directed credit and minimum requirement for holding government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. in pension and commercial bank portfolios. [3]

They observe that ‘since the early 1970s financial and international capital account liberalization – reduction and removal of barriers to investment inside or outside the country – have taken root worldwide. So too have banking crises. After a long hiatus the share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of countries with banking difficulties first began to expand in the 1970s. [4]

On the other hand, public control over banks as practised in India and China saved them from bearing the brunt of the 2007 financial crisis. Reinhart and Rogoff consider the measures taken by Chinese and Indian governments today reminiscent of the years after World War II: ‘This kind of financial repression is far from new and was particularly prevalent in advanced and emerging market economies during the height of international capital controls from World War II through to the 1980s. [5]

In his time Adam Smith recommended that governments drastically limit the freedom of bankers: ‘those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed. [6]

By contrast when governments remove strict financial regulation on capital and on financial companies banking crises multiply and result in widespread economic crisis.

What happened in 2007-2008 did not lead governments to impose strict prudential rules. Some partisans of capitalism such as Alan Greenspan, former director of the US 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 :
, repeatedly argue the case against prudential measures. In a Financial Times op-ed Greenspan compares the earthquake that hit Japan in March 2011 to the financial “tsunamis” that have hit the world of finance over past years. He claims that just as it would be unreasonable to demand that the Japanese government take precautionary measures to protect its population from a natural disaster that occurs once in a century, it cannot be expected that bankers keep sufficient liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. to face banking crises that occur only two or three times in a century. [7] He is thus opposed to the limited prudential measures put forward in the Basel III accords. [8] Generally speaking, if these accords were implemented, the liquidity coverage of banks should amount to 7% of their commitments, which is grossly inadequate. The International Finance Institute, which groups together the main European private banks concerned by the management of the ‘Greek crisis’, is putting pressure on governments to soften those rules. These banks want to maintain a laisser faire, laisser aller stance. [9]

However, we must take measures to prevent financial institutions (banks, insurance companies, pension funds Pension Fund
Pension Funds
Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets.
, hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. , etc.) from further undermining our economy. We must sue governments and CEOs that are directly or indirectly responsible for banking and stock exchange collapses. In the 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. of the vast majority of the population, it is urgent to expropriate banks and make sure they serve the common good, by nationalizing them and putting them under workers’ and citizens’ control. Not only should we refuse any compensation to major shareholders, but we should demand that these same shareholders pay for the cost of sanitizing the financial system. We must also repudiate the illegitimate debts that private banks claim from governments. And of course implement a number of complementary measures such as controlling capital flow, prohibiting speculation and transactions with tax and judiciary havens, and setting up a tax system geared towards social justice. In the context of the European Union, treaties such as those of Maastricht and Lisbon must be abrogated. The statutes of 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.

must be radically changed. While the crisis has not yet reached its peak, it is high time to take a U-turn and enforce an anticapitalist outcome to the banking and stock exchange turmoil.

Translated by Christine Pagnoulle and Judith Harris


[1Carmen M. Reinhart, Kenneth S. Rogoff, This Time is Different, Eight Centuries of Financial Folly, Princeton University Press, 2009, p. 205.

[2Ibid., p. 205.

[3Ibid., p. 106.

[4Ibid., p. 206.

[5Ibid., p.66.

[7Alan Greenspan, Financial Times, 27 July 2011.

[8Published on 16 December 2010, the Basel III Accords are banking regulation proposals that should be implemented by 2019. They leave out off balance sheet exposures, which is one of the factors that led to the subprime crisis. The re-evaluation of prudential thresholds by the representatives of 27 central banks should result in private banks increasing the amount of liquidity they have to keep in order to face up to a crisis. See the text of the Basel III Accords at and

[9Financial Times, “Tougher supervision could be pernicious, IIF warns”, 13 July 2011.

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:
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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