Dr Spyros Marchetos
The poor indebted again
Indebtedness in Antiquity arose out of stark power relations, with the weaker owing to the stronger debt, taxes, or tribute. It became more tricky with the development of the modern territorial state, roughly in the first two centuries of the capitalist system, let’s say from around 1500 to 1700. The institutions built then in Europe and its coloniesentaileda massive rise of indebtedness, and also the onset of state indebtedness. Plus a spectacular downgradingof the legal and actual position of debtors, seconded by the sidelining of Christian virtues and of beliefs about post-mortem retribution for sins.
The Renaissance had meant, among other things, renaissance of debt and finance. Money, taxes, and debt spread with the ascent of city-states in Italy and elsewhere, but mainly after the European conquest of the Americas. The huge amounts of treasure looted from beyond the Atlantic fed them, and also the developing commercial networks.The Catholic Church as well as the Genoese bankers of the Habsburgs played a prime role in this tragedy.
The eventual articulation of the world system worsened the debtors’ plight,thus challenging those views of history that take social progress for granted. Capitalist production cannot function without debt, but also capitalist arrangements abhor jubilees. Missed jubilees mean at systemic level war, poverty, or both. Thanks in part to new methods of finance, wars spreading poverty became more and more numerous and murderous in the centuries after the Spanish Reconquista till they climaxed in the Thirty Years War, the most destructive Europe had seen till then. This was in the era of Dutch financial hegemony.
In that age of enclosures -or privatizations, as we call them today- the poor were expropriated without qualms by the rich and powerful. Ages-old commons of all types -springs, fields, forests, rivers, lakes- were turned into private property, while those people who depended on them for their livelihood were left to die or sent to the mushrooming towns as paupers, a source of cheap labour power. Philanthropy did not rhyme well with the markets, that now developed with the active support of the same state that persecuted more and more implacably the poor.
In the hands of the new potentates debt became an instrument on the one hand for fighting the masses and on the other for disciplining them. Toiling to repay it through tax meant, for the many, practical enslavement, while not repaying led to worse. Neither their property nor their persons were safe. For example, the indebted Irish were transferred en masse to the New World with their legal status hardly distinguishable from slavery (“indenture”). The infamous debtors’ prisons described later by Dickens had a long and sad pedigree.
A different class of debtors
These dangers however hardly concerned the ‘high’ type of debtors. The Ancien Regime princes typically contracted personal debts for war making,to be redeemed through looting their neighbours or taxing their subjects. Quite often they did not repay loans at all.Why should they when they were blue-blooded, and stronger than their creditors?
Gradually princely debts became state debts, burdening the public Treasury itself and not the monarch personally; even later the transformation of dynastic states into national states, heralded by the English and French revolutions, turned dynastic debt into national debt, to be repaid through regular taxation falling upon the citizens’ shoulders. A whole science, cameralism, a progenitor of our own fiscal sociology, developed on the European continent longbefore political economy was born in Britain. It studied how best to extract taxes from subjects.
In a nutshell, loan repayment directs to creditors, via the state fisc, income from productive activities. Sensible capital owners avoid lending to states unable to tax or conquer. States need prospects of liquidity, i.e. the ability toregularly tax or plunder, in order to get credit. A practical way to tax was to apprehend a part of valuable commodities as they passed through spaces where the state could have real presence – ports, city gates, tolls.
Debt service meant at the time, first of all, the monarch imposing custom and excise (“cut-off part”) duties. For example, it was no mere coincidence that excise duties first appeared during the English Revolution, together with public markets in state debt. Thanks to such innovations, and to their strengthenedstates gaining in taxing capacities, England and France had reached debt to GDP ratios of almost 80% by the time of the French Revolution, a level reminiscent of our own times.
Financial mechanisms, toll booths and state baillifs by themselves could not in the long term extract the economic surplus necessary for repaying debt. To attract loanable capital states also needed prospects of stability, meaning first of all continuity. In the language of Macchiavelli, the prince must be both lion and fox, use both violence and cunning, later called diplomacy. His rule must be accepted by the subjects as good, legitimate, self-justifying, and self-evident.
The new capitalist states then, that previously never even pretended to include the masses, now sought secure social support, what we modernscall legitimacy. Prominent tax payers managed to get a say on the state’s expenses, eventually participating more fully into state affairs. Representation in parliament became a political goal -‘no taxation without representation’- and eventually turned subjects into citizens. Legitimacy grew out of “a mixture of power, myth, and the protection of property”. If this worked against the propertyless, so much the worse for them.
Tax or borrow?
A milestone in state finances, centrepiece of what has been called the Financial Revolution, was the creation of central banks toregulate on a more formal basisthe relations between lords and creditors. Their precursor was a Dutch city bank, the Amsterdamse Wisselbank, but the first real central bank, combining the functions of the king’s banker and debt manager, was the Bank of England (1694), soon followed by the Bank of Sweden. The Banque de France was created much later by Napoleon, while the US Federal Reserve only in 1913.
Central banks are usually private enterprises but have important public functions. Crowning what David Harvey has termed ‘the state-finance nexus’, they safeguard the interests primarily of bankers and the state, typically at the expense of the poor and middle strata who pay tax, as well as of colonial subjects who are taxed heavily but not even represented.
Central banks were not welcomed by all. The notion that a whole people could get in debt because of financial manipulations by bankers and martial monarchs was hard to digest. The philosophical doyenof liberalism, David Hume, alluding to the standard use of state loans for war making, asserted that “either the nation must destroy public credit, or public credit will destroythe nation”. Three centuries later his prophecy remains unfulfilled, but the cost to the nations proved huge.
The era of Enlightenment was also an era of burgeoning debt, used for everything the rulers craved, from conquering new lands and settling old scores to paying for magnificent cathedrals, lavish opera productions, and splendid baroque orchestras. Occasionally they also used it to cover needs of their subjects. It looked like a virtuous circle for all but those paying the taxes. Institutional stability fed the public debt, and debt paid for stable institutions.
The advancing logic of institutionalization, depersonalization, and regularization had however an unforeseen dimension. It opened the prospect of a strong state that could either have a monarch on its top, or have none. If debt became institutional, and hierarchical relationships lost their personal element, at some point the monarch himself might become optional. In other words, and in uncanny similarity with the predicament of our own times, the public debt created both the need for a political revolution and the possibility of it.
Furthermore, the growing public debt in the eighteenth century cultivated the feeling of impending doom captured in the aphorism après moi,le déluge. Eventually it facilitated the ascent of the capitalistes, which was exactly the eighteenth-century term for those who invested in the public debt. The French Revolution proved another milestone in this process.
We may say then that the national debt in the course of its repayment created the nation itself. But not everywhere. Colonies were also taxed, usually more heavilythan the metropolis, but enjoyed much weaker input in policy-making. Till the twentieth century autocrats like the czar or the sultan, ruling over huge bureaucratic states, borrowed like in the good old times, without undue worries about their subjects’ opinions. But the need to reassure creditors piled steady pressure for more streamlined forms of government.
Borrowing and taxing are the two main ways in which modern states cover their expenses. Trade-offs between the two are possible, but there is no predetermined relationship between them. Seen in historical and comparative perspective, governments’ ability to borrow does not necessarily improve the prospects of societies.
For example, countries especially strong, or strategically located, or for any reason important in international antagonisms, can borrow more easily than others. They may thus evade the politically cost of taxing the powerful, but doing so undermines their long-term development. Well known cases in point are the contemporary USA and post-war Greece, but similar examples abound in pre-1914 Balkans and the Middle East, as well as in other peripheral countries.
Beyond the internal politics of states, debt also influenced the relations among them, and even the very way states and nations were configured. Borrowing always meant foreclosing particular policy options. Lending always meantdirectly influencing others’ policy choices. Eventually loans as instruments of foreign policy weighted upon the formation and structuring of the modern system. For example, Greece could hardly secure its existence had its revolutionaries failed to extract two ‘Independence Loans’ from London and Paris in 1824 and 1825. Rising against the Ottoman sultan at a time of capital glut in the European metropolises proved pure luck.
If nations were formed through debt and revolutions, they also used revolutions to free themselves from debt. After a French family quarrel on who would pay for state debt fell Bastille, unburdening nations from their debts became a primeaspect of political freedom. Since then freedom often entailed state default on debt, and such defaults were counted in the hundreds, their first wave marking the years after 1824.Till the 1990s defaults did not even influence seriously the perceived creditworthiness of states, as empirical studies have shown.Thus political change was added to the two other types of events known to unburden societies from debt -wars and economic crises. Notables normally preferred theselatter alternatives from revolution; normal people didn’t.
 On this secular catastrophe the synthesis of the feminist historian Silvia Federici, Caliban and the Witch. Women, Body, and Primitive Accumulation, Autonomedia, Νew York 2004, is indispensable.
 The classic and still relevant presentation of this dialectic, written in absorbing style, is Karl Polanyi, The Great Transformation. The Political and Economic Origins of Our Times, Beacon Press, New York 1975.
 See for example Jerry White, Mansions of Misery. A Biography of the Marshalsea Debtors’ Prison, Bodley Head, London 2016.
 Demystifying and written with brio: Mauricio Drelichman, Hans-Joachim Voth, Lending to the Borrower from Hell. Debt, Taxes, and Default in the Age of Philip II, Princeton University Press, Princeton 2014.
 D’Maris Coffman, Excise Taxation and the Origins of Public Debt, Palgrave Macmillan, Houndmills, New York 2013.
 M. Drelichman, H.-J. Voth, Lending to the Borrower from Hell…., op.cit., p.248.
 See analytically David Stasavage, Public Debt and the Birth of the Democratic State. France and Great Britain, 1688–1789, Cambridge University Press, Cambridge 2003; P.G.M. Dickson, The Financial Revolution in England. A Study in the Development of Public Credit, 1688–1756, Macmillan, London 1967.
 Alan S. Milward, The European Rescue of the Nation-State, Routledge 2 London New York 2000, p.3.
 David Harvey, The Enigma of Capital and the Crises of Capitalism, Oxford University Press, Oxford 2010, p.48.
 Michael Sonenscher, Before the Deluge. Public Debt, Inequality, and the Intellectual Origins of the French Revolution, Princeton University Press, Princeton 2007, p.4. The intellectual climate of the pre-revolutionary France as well as the role of debt, and of its public perception, in the outbreak of the Revolution are sensitively presented in this study.
 Ibid., pp.1ff.
 This dialectic is explored in Bartolomé Yun-Casalilla, Patrick K. O’Brien (eds.), The Rise of Fiscal States: A Global History 1500–1914, Cambridge University Press, Cambridge, New York 2012.
 Federico Sturzenegger, Jeromin Zettelmeyer, Debt defaults and lessons from a decade of crises, The MIT Press, Cambridge MA, London 2006, p.3.
 Eduardo Borensztein, Ugo Panizza, “The Costs of Sovereign Default”, International Monetary Fund Working Paper WP/08/238, October 2008.