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The Making Of The Indebted State Under Neoliberalism

Building on recent work by Graeber and Lazzarato, this new paper aims to uncover the hidden power that banks obtain by creating money out of thin air.

The Making of the Indebted State: Debt, Discipline and Democracy under the Neoliberal Condition

By Jérôme E. Roos, European University Institute
Paper delivered at COST Conference: ‘Power, Finance and the Crisis’
Berlin, September 12-13, 2013



It is often said that money begets power, but if this is so, through what exact mechanisms does the “1 percent” exert its seemingly untrammeled political influence over the state? Drawing on recent interdisciplinary attempts to re-conceptualize money as debt and debt as a power relation, this paper aims to help uncover the disciplinary mechanism that enforces debtor compliance and ensures continued repayment. Most importantly, it argues that – much more than just buying political influence with their superior wealth – private bankers derive their main power from their control over capital flows and their capacity to create money out of thin air. Identifying two types of money (commodity money and credit money) and two associated forms of power (purchasing power and structural power), it tries to show how the neoliberal move towards privately created credit money has endowed global finance with unprecedented structural power, rendering states increasingly dependent on private banks to maintain the process of capital accumulation. The paper concludes that the making of the indebted state under neoliberalism has brought about an unraveling of state sovereignty and political representation, and hence poses a major challenge to traditional democratic processes.



Introduction: Thou Shalt Not Default!

The only part of the so-called national wealth that actually enters into
the collective possessions of modern peoples is their national debt.

~ Karl Marx, Capital, Vol. I (1867:919)

The debt must be repaid. Such is the gospel sung by the leaders of our world. Entire nations are now being subjected to a permanent state of sovereign debt bondage just to keep the money flowing towards their creditors. In an idle attempt to please the markets, others continue to stand fast in their dogmatic faith that enough (self-)flagellation will eventually bring redemption. With an army of technocrats waiting in the wings, elected leaders have found themselves forced out of office in investor-led stampedes for the exits, while millions of ordinary people are being trampled in the process. As one recent epidemiological study shows, it is a violent and deadly logic: with dramatic increases in suicide rates, HIV infections and child mortality, the single-minded insistence on austerity has transformed today’s debt crises into “veritable epidemics, ruining or extinguishing thousands of lives in a misguided attempt to balance budgets and shore up financial markets,” (Stuckler and Basu 2013). In the cradle of European democracy, under the watching gaze of the acropolis, civilization has been strangled to the point where children now go to school hungry and neo-Nazi stormtroopers run racist pogroms in broad daylight. But as Germany’s Finance Minister reassuringly tells us: “everyone knows the problems of Greek society are to be found in Greece and not abroad.” The narrative of Schuld – which Nietzsche reminds us means both debt, guilt and blame – continues to give a moralistic twist to policy decisions that in the final analysis serve a simple and unambiguous purpose: to prevent losses for the big banks.

It is no surprise, then, that recent years have brought about a resurgence of public and scholarly interest in the question of debt and the power of finance. The European anti-austerity protests and the Occupy Wall Street movement in particular have fueled debates over the myriad ways in which the rise of global finance has undermined democracy and fed into inequality. In these debates, it is often said that wealth begets power. In a Vanity Fair piece that directly inspired Occupy’s “we are the 99%” slogan, Joseph Stiglitz (2011) wrote that “virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office.” Simon Johnson, former IMF chief economist, made a similar observation in an essay for The Atlantic entitled ‘The Silent Coup’ (2009), in which he argued that “the great wealth that the financial sector created and concentrated gave bankers enormous political weight.” It seems like a fairly uncontroversial proposition: money buys lobbyists, elections and politicians, so we need to take money out of politics, tax financial transactions, impose a ban on corporate campaign contributions, regulate the banks, keep a lid on executive pay, and redistribute income downward.

But is that really all there is to it? Do the banks just “buy” political influence with their wealth, just as a construction worker buys a sandwich for lunch? Do the many differences between a banker and a worker simply boil down to the quantifiable notion of purchasing power? Or is there something more at play? This paper aims to contribute to the (re-)emerging scholarly debate on the power of finance capital by noting that there is more at play, namely the nature of money and the type of power it endows. Most analysts have so far limited themselves to a critique of the more visible forms of Wall Street’s and Frankfurt’s power: the bankers’ direct control of government positions, their campaign contributions, their armies of lobbyists and advisors. What has been far less obvious to most is the much less visible form of power that the banks derive from their privileged position as the principal creators of credit. In this paper, I aim to show why the main power of finance capital lies not just in its immense stock of wealth, but in its capacity to control capital flows and create money out of thin air.

In making this argument, I build on Graeber’s (2011) and Lazzarato’s (2011) insight that money did not only originate in debt historically, but that it continues to originate in debt today, in the form of credit money created by private banks every time they make a loan to a customer or to the state. I note that such credit money creates a unique form of power (namely structural power) that cannot be reduced to the purchasing power derived from financial resources alone. Applying this insight to the political economy of sovereign debt, we can begin to see how the structural dependence of the state on capital provides private banks with the ability to set the limits within which these states have to operate. In this sense, what is so peculiar about the neoliberal condition is that it combines a monetary system that relies almost entirely on the private creation of money with a financial system that ensures near-perfect capital mobility. The combination of the two has led to a situation in which states have lost control over the creation and circulation of money, which in turn has shaped the structural context in which global finance is increasingly capable of disciplining debtor states through market mechanisms, simply by withholding credit and withdrawing outstanding investments. We can conclude that the making of the indebted state under the neoliberal condition has led to an unraveling of state sovereignty and political representation, thus presenting a major challenge to traditional democratic processes.
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