Public debt, the debt incurred by sovereign states, has surged from 75 percent of global GDP in 2008 to surpass 100 percent of global GDP, as states responded to the consequences of the global financial crisis and the COVID-19 pandemic. Now, across Asia, Africa, and Latin America, where public debt spiked to a fifty-year high in the wake of COVID-19 and 60 percent of low-income countries were already on the brink of debt distress, the Russian invasion of Ukraine has fueled a further surge in debt.1 Rising interest rates, soaring food prices, and growing energy costs are exacerbating debt burdens, pushing countries from Sri Lanka and Pakistan to Egypt, Angola, and Tunisia to the brink of default and crisis.2

Public debt was indispensable in containing the spiraling aftershocks of the collapse of Lehman Brothers in 2008 and ameliorating some of the devastation wrought by the pandemic. But a resurgence of inflation around the globe and the specter of sovereign debt crisis in the periphery raise questions about the excessive accumulation of debt. The contradictions of sovereign debt have riven the economics profession into the ranks of hawks and doves — the proponents of sound finance arguing for fiscal rectitude, on the one hand, and advocates of functional finance urging the conscious deployment of the state’s financial power to further democratic priorities on the other.3

The two sides of the debate mirror the Janus face of public debt. It is a temporal bridge between future revenues and current commitments of the state. It straddles the intersection of state and markets and of national and global economy. In its role as a financial instrument for funding the state, public debt is fundamentally a means of wealth accumulation. But it is also a political institution. Stefan Eich, in his exposition of the political history of money, underscores how its pervasive use has shaped the nature of the state and the citizen’s relation to it by tying public credit to notions of temporality and secular change. It is a form of intergenerational binding, where the promise of the future is bound to current choices, posing problems of legitimation that parallel those of written constitutions.4 As a social construct, sovereign debt embodies trust and violence, reciprocity and coercion, private property and a public good, economic power and political authority. Lying in what Joseph Vogl terms the contested “zone of indeterminacy,” where state and market are entwined in a relation of power, public debt has the potential to be a source of civic cohesion — or entrench the power of dominant elites.5

Embedded in these contradictions of national debt is therefore the question of political power. This question is of far too much consequence to be left to the arcane confines of “econocracy.” A deeper engagement with the history of borrowing by states can help cut through the smoke and mirrors and bring the repressed politics of public debt out into the open.

The 2021 book In Defense of Public Debt steps into the breach, tracing the long history of borrowing by sovereigns back to ancient Greek and Italian merchant city-states, through the transition in the seventeenth and eighteenth centuries to the “modern age of public finance” heralded by financial revolutions in the Netherlands and England.6 But it is in the panoptic overview of the evolution of government debt through the last two millennia, which occupies the bulk of this wide-ranging and immensely readable account, that we can discern and clarify the hidden politics of public debt.

Using the lens of history, In Defense seeks to redress the austerity bias in the policy debates around debt by “convincing readers accustomed to thinking about spendthrift governments and dangerous debt overhangs that public debt does good and not only harm.”7 Delving into the conditions under which debt consolidations have been successfully engineered, for instance in Britain after the French and Napoleonic Wars, in the United States after its civil war, in France after the nineteenth-century Franco-Prussian War, and in United States and Europe after World War II, a case is made that the sustainability of debt rests on the calibration of conditions of financial stability, fiscal restraint, and economic growth. While debt crises and defaults do occur, they are not the entire story. In Defense sets out to identify the factors behind the rise of public debt and the circumstances under which high debts are successfully stabilized and brought down. There are basically three paths to easing debt.8 Countries can grow out of debt by fostering growth at a pace that exceeds the rate of interest. They can generate fiscal surpluses that wipe out debt. But when the cuts in fiscal spending jeopardize growth, trapping states in a vortex of rising debt, the path out lies in restructuring the debt by extending the maturity, relaxing the terms, or changing the composition. The writing down of German obligations under the 1953 London Debt Agreement, which reduced the principal by half and extended the payment window to thirty years, is a case in point.9

However, the history of public debt opens the door to much more than the narrow investigation of its use and abuse. The capacity to employ debt finance is contingent on economic conditions, as In Defense argues, but it is also politically constituted and instrumental in shaping social relations. The history of debt crises — how they were perpetuated, managed, and resolved — can help grapple with the central role of sovereign debt in the rise and development of capitalism and illuminate its subterranean politics. In Defense, with its focus on policy rather than power, stops shy of this endeavor. But some critical themes gleaned from the book’s rich and far-ranging historical overview are worth interrogating if we are to have a better comprehension of how public debt mediates and expresses class power.

The Credo of Capital

The first of these themes is the integral role that national debt played in the development and evolution of financial markets. There is “a feedback effect from public debt and its role in financial development to faster growth, and from faster growth back to financial deepening and economic development.”10

Government debt, a liability incurred by the state to fund its expenditures, involves a contractual obligation to pay interest and redeem the borrowed sum on maturity of the obligation. The emergence of the age of modern public finance was itself, In Defense details, dependent on the evolution of an institutional mechanism to protect the interest of the creditors against the risk of default.11 A key development in this context was the emergence of secondary markets where public debt could be sold and resold multiple times. As widely accepted collateral that was easily traded and that maintained its value, sovereign debt came to be the anchor of mechanisms of credit creation and a benchmark for riskier assets. In Defense clearly delineates how financial markets developed along with production and trade, buttressed by trading and borrowing on the collateral of public debt securities. The rise of national debt fueled the development of private financial markets, which were the cornerstone of the commercial and industrial revolutions of the eighteenth and nineteenth centuries. Thus, “It is no coincidence, from this standpoint, that modern economic growth emerged first in Northwest Europe, the cradle of modern sovereign borrowing and lending.”12 The role of government debt in the development of financial markets and the rise of capitalism embodies its “public good” aspect. But what needs to be spelled out is that this debt is also, in the hands of the creditors, a privately owned asset — private property. National debt has been instrumental in creating and enriching the class of rentiers and financiers mediating between the state and the public. The broker-dealers trading government debt did not just grease “the wheels of sovereign finance” and invigorate private capital markets. They represented a burgeoning financial aristocracy.

The experience of the Napoleonic Wars, which saw public debt rise to about 2.5 times GDP in Britain, illustrates both the insights and blind spots of In Defense. The account elucidates Britain’s successful consolidation of this debt through both fiscal effort and the Bank of England’s role in ensuring low interest rates and the smooth functioning of a payment system by providing short-term financing to merchants and financiers. This is the period when the British consol (an annuity-paying government security without a maturity date) came to be perceived as one of the safest and most liquid securities, helping to widen and deepen financial markets.13 But this successful consolidation also entrenched the power of bondholders and enriched the emerging financial aristocracy. The British financial houses of Rothschild and Barings, which would dominate the international financial markets for much of the nineteenth century, emerged as the main players in the aftermath of the Napoleonic Wars, having made windfall profits to the order of 300 percent from the rise in the price of consols (bought at below-par values).14 The market for government bonds also became more concentrated with the financial revolution of the nineteenth century, falling from about 2.2 percent of the population of England and Wales to 0.9 percent of the population by 1865 on the eve of England’s 1866 financial crisis.15

By fostering a parallel sphere of financial transactions, public debt fueled the growth of financial dealing and speculation. This alchemy was the crux of Karl Marx’s analysis of national debt:

As with the stroke of an enchanter’s wand, it endows unproductive money with the power of creation and thus turns it into capital, without forcing it to expose itself to the troubles and risks inseparable from its employment in industry or even in usury. The state’s creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would.16

And so, as long as tradable claims on the state can be sold multiple times without capital losses, “the accumulation of debt appears as the accumulation of capital.”17

That the trajectory of public debt treads along a knife-edge between vibrant financial development and a flood of risky speculative securities is shown quite clearly in In Defense. Financial instability arises when the use of government debt as collateral to fire the engines of credit spins out of control. While there is a long tradition drawing on Marx, John Maynard Keynes, and Hyman Minsky that sees recurrent financial crisis as endemic to finance and its inherent tendency to generate fragility, In Defense attributes instability to “lax supervision and regulation combined with excessive risk-taking to accentuate imbalances in financial markets,” so that it is the failure of the state rather than the proclivities of finance that generate debt crisis.18

But the more significant blind spot in the narrative is the issue of the ownership of debt and how this distribution shapes society and the economy. While much of the policy debate is focused on the size and sustainability of public debt, its politics cannot be grasped without investigating the pattern of ownership of debt. This question, which was central to early debates on the subject, has disappeared from the discourse.19 It is also absent from In Defense. There is the insight that the pursuit of sound finance in the Victorian period was the “consequence of the enfranchisement and political influence of the creditor class and of the fact that most debt was held by relatively affluent, politically influential citizens,” a political configuration that ensured that debt repudiation was beyond the pale.20 The creditors effectively deployed their representation in the British legislature to curb fiscal profligacy and protect their interests. This insight could be pursued further to explain how the eclipse of the doctrine of sound finance after World War II and its hegemony after the fiscal crisis of the 1970s are also explicable in terms of the backlash and resurgent power of finance — the coup of bondholders against the constraints of the postwar regime, as we shall see in the next section.

Far from representing the promise of “democratization” through an expansion of retail investors — the apocryphal widows and orphans who hold public bonds — the ownership of sovereign debt within the household sector has become increasingly concentrated since the early 1980s in the United States. The holdings of federal bonds by households in the top 1 percent of the wealth distribution rose from a low of around 17 percent in the 1970s to 33 percent in 1983, reaching 38 percent in 2007. Since the global financial crisis, ownership has become even more concentrated, surpassing 56 percent in 2013.21 The share of the top 2,500 corporations in federal debt held by corporations displays a similar pattern. The share of this group of the largest corporations rose from 66 percent in 1956–61 to 82 percent in 2006–10. The concentration of holdings among corporations was exacerbated during the global financial crisis, rising from 77 percent in 2006 to 86 percent in 2013.22 The corporate holders of these assets have, since the 1980s, been dominated by money managers — primarily mutual funds and investment funds.23 The growing concentration in the holding of public debt, wealth, and the financial system is the missing piece in the story of how the US Federal Reserve mobilized debt to rescue the global financial system when the collapse of Lehman Brothers brought it to the brink of a meltdown.24 The rescue did not just revive the flagging financial markets — it reinforced and concentrated the power of finance.

Marx highlighted the critical significance of the growth of public debt (and the financial system) as “one of the most powerful levers of primitive accumulation,” which engineered both the “capitalization of wealth and the expropriation of the masses.”25 His reading of the history of debt in the eighteenth and nineteenth centuries delineated how the growth of the “colonial system, maritime trade, and commercial wars” shaped the development of the financial system and the “system of public credit” that “marked the capitalist era with its stamp.”26 As capitalism evolved, an even closer alignment was forged between the interests of the emergent financial aristocracy and state power.27 The state’s structural dependence on credit became the foundation for the emergence of a powerful financier class, but this class of financiers also depended on the state to provide the fodder for its continual growth. We need to dig deeper into the structure of power constituted by the historical nexus between public debt and private finance in order to comprehend the former’s role in reinforcing the financial aristocracy.

The crucial significance of national debt as the engine of capital accumulation and the concentration of wealth underscores, in Marx’s analysis, why “public credit becomes the credo of capital.”28

State Authority, Financial Power, and the Subversion of Democracy

A second key theme that recurs throughout In Defense is that the state’s capacity to raise and manage its debt is a matter not just of state building but, even more fundamentally, of state survival.

This role is seen in its starkest form in the context of wars. The successful prosecution of war depends as much on credit as it does on military prowess. But by the latter half of the nineteenth century, debt issuance would come to be a regular and ongoing component of statecraft. Beyond war finance, states borrowed to build infrastructure, including railways, roads, and canals that would expand the reach of capitalist markets. In the twentieth century, debt was harnessed to increase social spending, welfare, social services, and transfer payments — a project of forging social cohesion in support of the expansion of markets and capital accumulation. With this, government debt was established not just as a means of firing the engines of capital accumulation but also as a key tool of crisis management. Public spending and debt have grown along with capitalist development, reflecting the functional need for increased spending on infrastructure and social protection in the service of markets and profits.

But the possibilities of mobilizing sovereign debt to launch a virtuous cycle of shared prosperity with the emergence of the welfare state are defined by politics. Michał Kalecki, for instance, had pointed to the undermining of capitalist control as a critical reason for capitalist resistance to using public spending to boost employment, even if such spending might end up boosting profits.29

In Defense argues that the expansion of the franchise, with the elimination of property requirements and the extension of voting rights to the working class, strengthened the political influence of groups that would benefit from social programs. Democratization, the argument goes, was a key driver of the surge in public spending to secure the social and economic stability demanded by the electorate. The need to preempt social unrest among an urban, industrial working class that was questioning the legitimacy of the state, which enforced private property rights while neglecting their needs, is seen as a factor in the growth of welfare spending.30 At the same time, political polarization and fractionalization, where competing factions are able to successfully resist taxes on themselves but lack the power to impose taxes on others, leads to shortfalls in tax revenues and the increasing recourse to public debt.31 The role of politics in driving destabilizing debt dynamics is underscored, for instance, in the experience of France, Italy, and Germany after World War I, when conflicts over who would bear the additional burden of taxes and the thwarted attempts to institute a capital levy triggered a surge in national debt, and debt consolidation was achieved through the precarious road of high inflation and a boom in private credit.32

But the account of democratic empowerment misses a significant aspect of the debt surge in recent decades. The politics of public debt is not simply that of the competing and expanding claims of the electorate. It revolves more fundamentally around the conflict between creditors and citizens — between the state’s contractual obligation to the claims of the financial aristocracy and its political commitment to the rights of the general citizenry.33

Vogl’s exploration of the historical relationship between finance and state traces how public debt was promoted alongside the rise of constitutional government, so that the stability of the financial system corresponded directly with the guarantee of property rights and the protection of creditors.34 Financial-economic restraint on government interventions — including on the size and composition of public spending and the scope of regulations — operates along and outside legislative control over the state.35 The permanent system of sovereign debt that emerged in the seventeenth century was the anchor of both financial markets and the credibility of constitutionally structured government. Paradoxically, the democratization of government, for instance in England after the Glorious Revolution, paved the way for the establishment of new enclaves of power outside the constitutional order.36 This dimension of power is missing from the story of the role of public debt in state building and state survival.

Far from reflecting the expansion of democratic space, Wolfgang Streeck has argued that the surge of national debt since neoliberal revolution launched after the fiscal crisis of the 1970s has been accompanied by an erosion of democracy — a steady decline in voter participation, unionization and worker actions, increasing inequality, and a fall in the income share of workers.37 It is not political fractionalization that explains the ballooning of government debt, but rather the well-organized tax revolt by the dominant class that gathered momentum in the 1980s and led to the stagnation of tax revenues, a more regressive tax structure, and shortfalls in public revenues. Instead of taxing the elite and the financial aristocracy, the state has turned increasingly to borrowing from them. In the process, the creditors acquire a risk-free asset that is easily tradable and is transformed into private wealth in their hands. With this, the stage was set for the emergence of what Streeck calls “the debt state.” The debt state paved the way for both the privatization of state operations and the expropriation of the hard-won rights of working people, as the state retreated from its commitments to social spending.38

Marx long ago pointed to the distributional implications of such conflicts. While financial markets spawned by the trade in government bonds enriched a brood of “bankocrats, financiers, rentiers, brokers, stockjobbers, etc.,” the servicing of this debt, Marx argued, would be wrung from the working class through the overtaxation of “the most necessary means of subsistence.”39 The capitalist debt state reflects this logic, furnishing bondholders with an “enchanters wand” that augments and concentrates the wealth in their hands while inflicting the burden on working people who face regressive taxes and the brunt of cuts in public spending. Constraints imposed under the neoliberal debt state on fiscal stimulus and public investment have aggravated the trends toward stagnation of growth and accumulation, even as they further exacerbated inequality.40

At the heart of the capitalist state is the alchemy that transforms public debt into an engine of private credit creation. This alchemy enmeshes the state in a web of credit claims, leaving it vulnerable to the vicissitudes of investor sentiment. Kalecki had already warned in 1943 that the social function of the doctrine of “sound finance” was to make the level of employment dependent on the “state of confidence.”41 The debt state is subject to the dictate and discipline of credit-rating agencies and bond vigilantes.42 And as states relied more and more on borrowing to cover their expenditures, they became increasingly dependent on the whims and vicissitudes of international financial markets. Equally important, this dependence ensured that states were fully invested in deepening and extending the reach of financial markets. With this development, the management of national debt by the central banks — the fount of Vogl’s fourth extraconstitutional power — has come to embody the fusion of political authority and economic power that is wielded outside and overshadows the legislature, executive, and judiciary.

If the postwar Keynesian tax state was characterized by the mobilization of fiscal policy in support of public investment, industrial development, employment generation, and the management of demand, the neoliberal debt state was marked by the ascendancy of finance in concert with the policy mantras of central bank independence, inflation targeting, and deregulation. This metamorphosis paved the way for the assumption and concentration of political authority by financial markets. This political authority is rooted in the nexus of state and finance and the shifting alliances, negotiations, and mutual reinforcement that melds the operation of the state with the functioning of financial markets.43 It also signals the de-democratization of public debt, as the fog of finance provides cover to the capitalist state while it extricates itself from its commitment to the welfare and social security of its citizens. The rules of sound finance do not insulate the management of sovereign debt from populist opportunism and political compulsions. On the contrary, these rules grant the state autonomy from democratic accountability while cementing its thralldom to finance.

If the management of public debt is at the heart of the state’s survival, as argued in In Defense, what is at stake is the preservation of the existing social order and the structural power of finance. As the debt state gets embroiled in bailing out finance while ceding its authority to control and discipline markets, the dominance of finance is further reinforced.

In the Grip of the Diabolic Loop

In Defense underscores the specter of “the diabolic loop” that looms over the history of public debt. The diabolic loop refers to the links and mutually reinforcing feedback between the risk that inheres in sovereign debt and that which lodges in bank credit. If banks hold a disproportionately large amount of national debt on their balance sheets, whether because of statutory requirements or portfolio strategy, they are exposed to the risk that deterioration in its credit rating will activate a diabolic loop where collapsing government bond prices jeopardize bank solvency. Growing bank distress and the fire sale of debt that ensues in turn imperils public finances. The conundrum, In Defense argues, is that when financial institutions are encouraged to hold a government’s bonds, policymakers will hesitate to restructure debt, and at the same time, any misgivings about the state’s ability to service its debts create problems for the banks. The government will be forced to intervene, and the rise in public spending in bailouts undermines state finances and raises the risk associated with sovereign debt. This jeopardizes the capacity of the state to provide a backstop to the financial system so that the funding crisis gets intensified — hence the diabolic loop.

While the term “diabolic loop” was first coined in the context of the Eurozone, In Defense points to the shadow this diabolic loop has cast in the emerging market debt crisis of the 1990s.44 The lesson drawn is that that this loop needs to be dismantled. The path suggested is to curtail the incentives of banks to acquire concentrated holdings of sovereign bonds and ensure that banks are not beholden to national governments for their oversight, lessening the attempts or predisposition of states to “force-feed” public debt to banks within their regulatory scope.45 In this reading, it is the banks that are ensnared in the diabolic loop. Their proclivity or compulsion to hold government bonds renders them vulnerable to deteriorating sovereign creditworthiness. But as the US experience during the 2008 financial crisis clearly shows, the loop can be set off by the fragility engendered by the growing complexity and interconnectedness of financial markets dominated by a clutch of big financial institutions.

The diabolic loop is better understood not simply as a feedback interaction between risks and balance sheets but as an outcome of the contradictions at the core of the public-private partnership embodied in the management of national debt. It manifests the umbilical link that has been forged historically between the state and the banking system. Andrew Haldane and Piergiorgio Alessandri trace this link to the early history of capitalism, with banking houses close to sovereigns acting as financiers to the state. This relation was, however, transformed with the development of capitalism, and as central banking and the financial system evolved, to one where the state came to play the role of financier of last resort to the banking system.46

The modern financial system, with its pyramid of complex debt obligations, depends on the state not only as a foundation for its growth — a collateral factory cranking up the financial system — but also as the ultimate backstop for these debt obligations.47 With each rescue, the speculative bets taken on by banks and financial institutions get bigger, so that the state is embroiled in greater interventions and a growing burden of public debt. This pattern, where the central bank is compelled to extend larger and larger bailouts as the speculative bets of finance keep getting bigger is, of course, the diabolic loop, christened by Haldane and Alessandri as the “doom loop.”48 These rescue operations of the state reinforce the dominance of private finance and fuel further speculation and the doom loop’s perpetuation.

When Baring Brothers, a leading financial house in 1890, was on the brink of bankruptcy, and the ensuing panic in the markets posed a threat to the City of London, a rescue operation was orchestrated by British Treasury, the Bank of England, and a coterie of banks under the leadership of Rothschild (Baring’s main rival).49 This rescue was a significant milestone in the evolution of the Bank of England as a key player at the hub of the international financial markets. More than a century later, the hectic behind-the-scenes parleys between major US banks, the US Federal Reserve, and the US Treasury as the subprime mortgage market began its free fall in 2008 was another landmark in the nexus of public debt and private finance.

The unregulated proliferation of finance since the ’90s sparked crisis in Asia and Latin America before exploding into a full-fledged global financial crisis in 2008. Public debt soared as financial markets unraveled, and the state inserted itself as the dealer or market maker of last resort, intervening directly in markets for a range of financial assets in order to place a floor under tumbling asset values. Central banks across the advanced capitalist world, with the US Fed leading the fray, absorbed the toxic assets that had clogged the credit machinery. These large-scale unconventional interventions were critical in reviving global financial markets.50 But in the process of rescuing them, the state has become even more deeply implicated in underwriting the systemic risk that inhered in markets, reassuring bondholders of their commitment to guarantee and service debt obligations.51 This shift is even more starkly evident in the response of the US state to COVID-19, when it summoned all its financial firepower to protect the wealth and asset holdings of the financial aristocracy, even as it dithered and fumbled in addressing the public health crisis facing the broader citizenry.52

The ballooning of central bank balance sheets, which began after the financial crisis and has further accelerated in the wake of the pandemic, is thus a symptom of states’ prioritization of finance’s claims over those of citizens. This embrace of bond markets by central banks — the monetary financing of government spending through purchases of bonds — is quite distinct from the postwar interregnum when central bank interventions in bond markets were geared toward keeping a lid on the cost of state borrowing and buttressing the use of fiscal policy to manage aggregate demand and extend the social safety net. The recent interventions are imbued with a fundamentally different politics. The backstop provided to bond markets and the broadening of market-making interventions to a wider swath of financial assets is meant to restore the financial engines that drive markets’ shadow mechanisms by easing the conditions of private financing.53 What is critical is not the scope that effectively managed sovereign debt affords to the state to pursue public purpose. It is rather the critical role of public debt as the anchor of financial markets.54 Not only has power been transferred to markets themselves, but the machinery of the state has been conscripted into absorbing the risk that is building up in the financial system. But the risks do not just dissipate. The burden is borne disproportionately by ordinary working people, not only within national boundaries but in the context of globalized financial markets around the world.

The diabolic or doom loop can therefore be understood as a concrete form that the nexus of public debt and private finance has taken with the evolution of capitalism. The doom loop does not have finance in its grip; it is the state that is held hostage by finance. If we are to dismantle the diabolic loop, it is the stranglehold of finance that must be overthrown — the power of finance that has to be dismantled. Only then will the balance that is now stacked in favor of the financial aristocracy be reclaimed by working people and the broader citizenry.

The Despotism of Debt

Another key theme that runs through In Defense is the global dimension of the market for public debt. The international character of sovereign debt is traced back to the lending activities of the banking houses of Bardi, Scali, and Peruzzi of Florence, Genoa, and Venice in the thirteenth century.55

In Defense underscores an asymmetry in the functioning of the market for government bonds, in that latecomer states have not instituted the prerequisites for well-functioning debt markets domestically. These states, therefore, borrow in the leading international financial centers where globally dominant financial institutions (Rothschild and Barings in the early nineteenth-century sovereign bond wave, US money center banks like Citibank in the 1970s’ syndicated loan boom, or asset managers like BlackRock in the surge of debt since 2010) act as gatekeepers of the international markets for sovereign debt. Strewn through this history are the mechanisms that financial institutions in the leading hubs developed to protect their interests and deal with defaults. This includes forming bondholder committees to organize negotiations, controlling the stock exchange to prevent defaulting debtors from launching new issues, lobbying states to impose economic and political sanctions and embargos, and, in extreme cases, launching gunboat diplomacy and the seizure of control of fiscal operations and financial assets, depriving the defaulting sovereign of fiscal and financial autonomy.56 The British invasion of Egypt in 1882 and the takeover of the Khedive treasury is a case in point, but there were eighteen instances before World War I when military pressure was applied or foreign control was imposed in response to debt problems.

The asymmetric position of debtors in the periphery therefore derives from the instrumentality of debt in their subordination to the tutelage of international finance. The mechanisms adopted to “protect” the interests of the creditors are in essence enforcement mechanisms that encroach on the political authority of the debtor state. But after World War II, the gunboat diplomacy and direct seizure of control would be overshadowed by the role of multilateral agencies like the International Monetary Fund and the World Bank in enforcing debt conditionalities that serve the imperatives of the cartel of US-dominated global finance. Debt has been effectively deployed to integrate countries in the periphery into global financial markets. At the same time, financial integration and increased dependence on global finance has augmented the power that finance asserts over debtor states in the periphery. The threat of gunboat diplomacy and the seizure of assets has been superseded by that of a financial blockade imposed in concert with the multilateral agencies implementing the agenda of the US-led group of advanced economy lenders. The structural transformations of the neoliberal period have entrenched and reinforced the power of finance across the global economy.

This consolidation of the structural power of finance also explained a puzzle addressed by Jerome Roos.57 While sovereign debt defaults and suspension of payments were widespread in the wake of the debt crisis before World War I and in the interwar period, the unilateral declaration of suspensions, moratoriums, or default has become extremely rare in the postwar debt crisis. The ascendancy of finance and the unprecedented power it has come to wield over debtor countries unlocks this mystery. Specifically, Roos outlines how this power was buttressed by the growing concentration and centralization of international credit markets, the interpenetration of US-led multilateral intervention under the aegis of the IMF’s lender-of-last-resort function in the global financial architecture, and the growing dependence of capitalist states on private credit, which reinforced the sway of both global and domestic financial elites.58 The conditions attached to the bailouts extended to debtor countries ensured that the claims of global creditors were fulfilled, even if the costs of the imposed austerity measures imperiled the livelihoods of working people domestically. Debtor states submitted to humiliating conditionalities under the threat of being frozen out of global capital markets, enmeshing them more deeply in the rule of finance.

That this was a political project and not simply a technical exercise in financial programming to secure debt repayment is brought out most starkly in Yanis Varoufakis’s account of the torturous negotiations between the newly elected Syriza government and the troika of the European Central Bank, the European Commission, and the International Monetary Fund.59 In Defense’s account of the Greek debt crisis suggests that it was protracted and disruptive because the principals all denied the need for restructuring the debt — there was a hesitation by the Greek government to impose losses on domestic banks and investors and by the troika to destabilize German and French banks or trigger a domino effect in other countries in the European periphery. The account is correct in its diagnosis that the obstacles to restructuring the debt were political and not technical. But Varoufakis’s record of the negotiations reveals quite clearly that the political obstacle was imposed unilaterally by the European leadership. The Syriza team had proposals that would ensure debt repayment. Brutal cuts had already been imposed on social spending, and the deficit had been decreased quite drastically. But what the European leadership was holding out for was a complete capitulation on the social-democratic program of Syriza, most significantly the new government’s plan to strengthen collective bargaining and institute safeguards against the arbitrary retrenchment of workers. The humiliating terms were not simply to ensure creditors got paid. They were imposed to discipline Syriza and preempt labor reforms as well as any initiatives expanding social benefits. It was also meant to be a salutary lesson to other European members and a sharp deterrent to any groundswell toward greater social democracy. The virtual surrender of political authority from the Greek government to the creditors and the troika, in what Varoufakis characterized as a neocolonial arrangement, hearkened back to the gunboat diplomacy and usurpation of fiscal control of colonies and protectorates in the nineteenth century.60 Debt is deployed as an enforcement mechanism to subjugate states and override democratic processes.

The history of sovereigns in the periphery borrowing from international markets has been punctuated by debt crisis. A dominant strand of economic policy debates has focused on ineluctable thresholds of debt (relative to gross domestic product), beyond which growth would be pulled down by rising indebtedness.61 In Defense eschews the idea that the problem faced by emerging market economies is that of too much debt to argue that the problem is rather a failure to adhere to basic principles of prudent public debt management.62 Sovereign borrowers in the periphery are more vulnerable because they borrowed in foreign currency and were therefore subject to rising debt repayment costs when their domestic currency fell. Increasing recourse to short-term debt also accentuated risk, since demand for these debt instruments can evaporate quite suddenly. In that sense, the crises reflect a failure of the debtor state to effectively manage debt and financial stability.

However, a striking feature of the history of debt crisis in periphery is the tendency of such crises to cluster together, typically marking the cresting of a wave of borrowing. In the nineteenth century, such bunching occurred in the 1820s, 1870s, and 1890s, at the end of a long lending boom. After the interwar surge of emerging market debt crisis in the 1930s, the recurrent waves of debt crisis resumed with the revival of private lending flows in the 1970s. Since the ’70s, there have been four waves of lending flows to the periphery, each ending with a spate of debt crisis — the 1970s surge ended with the Latin American debt crisis in 1982; the resumption of debt flows in the ’90s was interrupted by the Tequila Crisis in 1994 and the Asian and Russian crises in 1997–8; and the wave launched after 2001 came to an abrupt halt with the global financial crisis and crises in the European periphery. The fourth wave that began in 2010 is larger, faster, and more broad-based than the previous three.63 This wave has also seen the growing role of China and unregulated asset-management funds in sovereign debt markets.

The cyclical pattern of a surge of lending to emerging market economies that ends abruptly with widespread crisis suggests that, when we seek the drivers of debt crisis, we should not just be focusing on the failures of the debtor states, whether it is failure to manage deficits or exercise oversight and prudential control over the financial system, but on the logic of global finance. If the tide rises, the fault lies in the moon, not the fish!64 The growing integration of financial markets has led to the emergence of global financial cycles — the global synchronization of cross-border capital flows and co-movements of assets prices propelled by monetary conditions in the United States.65 There is also evidence of synchronicity in the dynamics of the ratio of public debt to gross domestic product that suggests that the coincident trends in this ratio across countries are dictated by the global macroeconomic context rather than domestic conditions.66 The bottom line, then, is that states in periphery that are closely integrated with and dependent on global finance have little room to insulate themselves from debt crises set off by global market conditions.

Public debt in the international domain is thus a disciplinary device, a means of dominating and usurping authority from the debtor states in the periphery, as well as a mechanism for concentrating and siphoning the periphery’s wealth and resources into the hands of global finance. The history of debt crisis in the periphery since the nineteenth century bears testimony to this despotic power. Beyond its role in the rise of the modern capitalist state, debt is integral to the exercise of imperial power and the international ordering of global capitalism. The process by which government bonds became the cornerstone of the international financial system’s hybrid hierarchy constituted by both public and private assets is entwined in the process by which US-led global finance established its hegemony globally.67

The Debt Is Owed to Us

The Janus face of public debt as both a public good and private property casts its shadow on the history of national debt mapped out in In Defense. The deep dive into more than two millennia of history helps illuminate the constraints and the potential to strengthen the public good aspect of government debt. In Defense hones in on:

the connections between the prerequisites for public debt issuance and broader economic, financial, social, and political changes, including strengthening political checks and balances, the development of markets, and the emergence of market-supporting institutions.68

Embedded in this focus is the dual role of sovereign debt in both shaping and emerging from the evolving relation between the democratic state and modern capitalism.

But if we dig deeper into history to unearth the subterranean politics of debt, it becomes clear how the feedback effects from national debt to the development of financial markets entrench the power and priorities of finance at the expense of those of the citizen; how the nexus of public debt and private finance at the core of the capitalist state subverts democratic processes, as finance exercises an extraconstitutional authority so that the capitalist state’s compact with ascendant finance overshadows its commitment to the security and welfare of its citizens; how the diabolic loop traps the state in a growing spiral of debt in order to keep the wheels of finance turning at a faster and faster pace; and how debt becomes a lever in the subordination of countries in the periphery to the dictates of global finance.

Buried in this history is the political role of government debt as a tool of oppression. Disentangling and making visible the politics embedded in public debt’s history is a step toward reclaiming it as an instrument of revolt. Control of debates over the management and purpose of sovereign debt must be wrested from the democratically unaccountable technocracy that arbitrates dispassionately in favor of global finance so that public debt can be marshaled in support of a progressive agenda.

The radical possibilities of public debt resonate in the slogan raised by the International Women’s Day strike in Argentina in 2020: “The debt is owed to us.” If we are to resist the despotic power of debt, we need to reclaim and reconstitute national debt as a public good that is the common property of citizens, asserting the rights of the people over the claims of finance. The collective power of trust and reciprocity must be mobilized to overthrow the coercive and violent force of public debt.

About the Author

Ramaa Vasudevan teaches economics at Colorado State University. She is author of Things Fall Apart: From the Crash of 2008 to the Great Slump and a member of the Catalyst editorial board.