In a recent discussion, Michael Hudson shared an extensive historical perspective on societies that purport to be democracies, and examined how debt dynamics can adversely affect not only borrowers but lenders as well. He also elaborated on intriguing aspects like the Catholic Church’s involvement in shaping war finance.
Glenn Diesen: Welcome back, everyone. Today, we have Professor Michael Hudson with us. I encourage everyone to explore his work and his website, which I’ve linked in the description. It’s wonderful to see you again.
Michael Hudson: It’s a pleasure to be here again.
Glenn Diesen: You have authored numerous influential books, especially in the realm of political economy. In works like The Collapse of Antiquity, you delve into the history of finance.
I wanted to explore some of this history with you today because understanding it is vital, especially as the current financial crisis accelerates, revealing the unsustainable nature of the existing financial system. Our understanding of past events can help us make sense of the present situation and potential alternatives.
Historically, societies have often regarded their established systems as permanent, yet these are frequently only temporary arrangements. By examining history, we can gain insight into both the consistent trends and the changes in this system. A broad question arises: What can we learn about our current financial system by looking back? What constants, such as the oligarchic tendencies in finance, can you identify?
Michael Hudson: Much of my work over the past 50 years has revolved around the history of debt and banking.
By the late 1970s, it was evident that countries in the Global South were suffering from a debt crisis, while nearly all Western economies were experiencing a severe business cycle, one that extended beyond typical fluctuations. Each recovery occurred at a progressively higher debt level, signaling an unsustainable trend.
I sought to understand how this situation originated, which led me to spend 25 years leading a Harvard group examining the economic histories of Mesopotamia, Egypt, and Israel—the ancient Middle East, now referred to as West Asia—to uncover what set the West apart from its historical antecedents.
To frame your question, modern rhetoric often contrasts the United States and Europe as democracies against China and other nations outside the U.S. alliance labeled as “autocracies.” However, the term “autocracy” traditionally refers to a mixed economy, which by the 19th century was often called socialism.
Government investment in core infrastructure, subsidized rates, and robust anti-monopoly laws to prevent economic exploitation were hallmarks of industrial capitalism in the 19th century. These efforts aimed to diminish economic rent and transform money and credit into public utilities, thus lowering operational expenses.
Achieving this efficiency required halting the privatization of natural monopolies, such as railroads and communication systems, evident in the wake of Thatcherite England. Furthermore, the U.S. definition of autocracy has increasingly encompassed any governmental role that goes beyond the regulations set forth by Thatcher and Reagan in the 1980s.
I investigated the characteristics that make the West unique compared to preceding eras. Interestingly, it wasn’t democracy that defined Western civilization. Aristotle analyzed constitutions and noted how many could claim the title of democracy while essentially functioning as autocracies.
The entire Western narrative has portrayed itself as unique, setting it apart from ancient Bronze Age societies, predominantly found in Asia, from Mesopotamia to China. Historically, what spurred civilization’s advancement over 3,000 years was central authority.
Historians often refer to these rulers as “divine kings” in Mesopotamia and Egypt or “emperors” in Confucian China.
The central authority’s role—be it a king, temple, or emperor—was to ensure popular prosperity, which should inherently be the essence of democracy.
In the West, however, democracy is viewed as achieved through the ballot box and voting processes, though early Roman and Greek constitutions largely concentrated power among the aristocracy—landowners and creditors—leading to a predatory oligarchy that drove much of society into debt.
Ultimately, it was the dynamics of debt that precipitated the fall of the Roman Empire, mirroring trends we witness today.
Throughout early civilization history, texts—from Mesopotamia through to Aristotle and Plato—acknowledged the perilous nature of debt outpacing the ability to repay. When debts exceed what can be repaid, debtors often fell into servitude to creditors.
The Western experience has mirrored this historical dynamic, with contemporary debt polarization resembling that of antiquity.
The distinguishing aspect of early Asian development—and what sets China apart today—is its prevention of a financial oligarchy’s rise.
During my education in the 1950s at the University of Chicago, we frequently read Plato’s Republic. The pivotal theme centers around a scenario in which Socrates asks whether it’s just to repay a debt to someone dangerous..
This discussion leads to a broader concern regarding debts owed to predatory oligarchs—who might use these funds to deepen the indebtedness of others—underscoring the necessity for rulers devoid of excessive wealth or property to mitigate the temptation of monetary addiction.
Historically, the overarching principle among ancient authorities in Mesopotamia, Egypt, and China was to maintain economic equilibrium while safeguarding societal prosperity and preventing exploitation.
A common understanding in ancient regimes was the practice of debt cancellation. From Sumer to Babylon, starting with Hammurabi through to the Biblical jubilee year of Leviticus 25, newly appointed rulers would enact debt forgiveness under various circumstances, such as new leadership or natural disasters.
This tradition starkly contrasts with the Western narrative, which has not sustained such practices from its inception, lacking a centralized authority to regulate debt growth effectively.
Today, we find ourselves bound in a similar dynamic. Since the conclusion of World War II, a consistent buildup of debt has become evident, culminating in the contemporary crisis.
The debt burden is now unmanageable without negatively impacting the broader economy, imposing a scenario akin to an IMF austerity model not just on developing nations but also on advanced economies.
In contrast, China’s growth trajectory remains distinct due to its state-controlled monetary and credit system, which has precluded the emergence of a financial elite akin to Western banks.
In the U.S., lending primarily fuels financial markets rather than industrial growth. Since 2009, the U.S. economy has witnessed primarily financial developments characterized by shifting wealth toward the top echelons, leaving the middle class behind.
Historically, successful socioeconomic systems have avoided financial polarization and ensured wealth was not merely an extraction from debtors. The goal has always been to foster genuine industrial and agricultural growth, investing in capital formation rather than merely financial assets.
However, the repercussions of World War I fundamentally transformed this trajectory. Economic arrangements post-war leaned heavily towards protecting creditors, notably impoverishing Germany and other European nations and leading to various financial crises.
After World War II, the United States restructured global financial norms to maintain creditor favor, ultimately leading to an imposition of austerity—a model that continues to affect both developed and developing nations today.
Consequently, economies like those in the U.S. and Europe are now experiencing the impact of this dynamic historically faced by the Global South.
As a result, societies today are caught in the cyclical problems of debt exceeding repayment capacity. Without careful debt management, stagnation similar to that of the 1920s could recur, impoverishing both debtors and creditors alike.
Moreover, the continual transfer of financial resources to creditors means that vital capital is not being reinvested into the economy, exacerbating economic decline.
On the relationship between warfare and banking, I have a forthcoming book that outlines how international banking evolved from the Crusades to World War I. It demonstrates how the Catholic Church initiated international banking while undermining its anti-usury edicts.
Initially, Rome financed military endeavors by relying on local warlords for funding. These arrangements involved quid pro quo contracts, where warlords would gain territory in exchange for financial loyalty to the Church.
By the end of the 11th century, when resistance to Roman dominance grew, two papal factions emerged. The Roman papacy organized campaigns disguised as holy wars while aiming to expand its territorial control, especially over Constantinople.
Ultimately, the Church’s attempts to exert financial control over secular kingdoms laid the groundwork for modern banking systems. Unlike classical antiquity, where significant financial operations were often decried, international banking catered specifically to war expenses, forging early alliances that benefited the church and secular rulers alike.
As warfare remained prevalent, a system emerged that profited both international bankers and kings, diverging from past practices that included moral constraints against usury.
Consequently, political and fiscal relationships shifted towards banking institutions that enabled increased borrowing for warfare while curbing local governance’s power.
Finally, we must address the lessons from this historical trajectory. As we stand on the precipice of another systemic crisis, we must question how society will navigate its current debt burden. A thorough understanding of the financial dynamics at play and a reevaluation of governance systems to prevent oligarchic control is imperative.
Glenn Diesen: Thank you for your insights today. It’s crucial to recognize democracy extends beyond voting, aiming instead to counterbalance the influence of oligarchies.
Michael Hudson: Absolutely, and I appreciate the opportunity to explore these topics with you. This educational dialogue underscores the importance of grounding our understanding of current events in historical context.
