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The Debt System - book review
by Phil Armstrong
17 December 2019

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 and exorbitant commissions are payable. 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 and World Bank 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’(The European Commission, The European Central Bank 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 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 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

Footnotes :

[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).

Phil Armstrong