Welcome to my three part series on debt relations and the financial architecture underpinning imperialism. You can find part I here. Part I covers the origins of debt, and begins to approach how we currently conceive of it. This post will cover the post-Bretton Woods era and the American role as world banker.

Sovereign, or national, debt is an inherently capitalist concept— in France, at one point, “capitalist” meant those who hold a piece of the national debt. Even now, wealthy elites benefit from uninterrupted debt servicing, while it inflicts harm on the general population and economy. So, national debt is not owed to all people equally, even though the idea behind national debt is that the government owes something to all its people, particularly future generations. All our currency is premised on trust for the state, after all. This idea of borrowing from future generations is something Kohei Saito would refer to as temporal displacement. Saito argues that capitalism depends on various forms of displacement (temporal, technological, and spatial) to function; since it’s unsustainable, it only works by temporarily displacing crises. David Graeber, too, argues that capitalism displaces crises but also believes that the specter of crises is necessary to the functioning of capitalism. Since the world wars, there have been a series of existential threats, such as nuclear holocaust and global warming, that have put a limit, artificial or otherwise, on our ability to generate credit, or future money. Part of the reason national debt can be extended forever is because it’s “fictitous capital”. The state debt is just a claim to future tax revenues.

The concept of fictitious capital comes into play when analyzing the contemporary dollar hegemony and the US sovereign debt. In 1971, Richard Nixon delinked the dollar from gold— converting the dollar to pure paper money that was intrinsically worthless. In other words, fictitious. So the dollar becoming the world’s reserve currency, rather than gold. What this means, is that the USA’s sovereign debt, largest in the world, is fundamentally different than every other country’s. Almost every country’s sovereign (foreign) debt is in dollars, and the US Federal Reserve has a strange ability to create dollars out of nothing, which the rest of the world only accepts as currency because the United States government (USG) insists that they should. But what’s missing in the understanding of sovereign debt, and the US’ in particular, is that all sovereign debt is essentially war debt. It’s historically been war that’s causes states to need credit, and the American wars are entirely financed by deficit spending. Military spending, in fact, is such a large proportion of the American budget that one could argue that American sovereign debt wouldn’t exist at all without it. But their deficit spending has bought them military preponderance— the ability to drop bombs at any point of the Earth’s surface with just a few hours notice. In this sense, one can argue that, instead of gold, it’s American military power backing up the dollar.

American imperial power is not only backed by their military preponderance, but a system of global forced loans. The US foreign debt takes the form of treasury bonds held by institutional investors in countries that are effectively American military protectorates: Germany, Japan, South Korea, Taiwan, Thailand, and the Gulf States. These loans, unlike most loans, aren’t designed to mature and be repaid. According to the economist Michael Hudson, these loans are to be rolled over indefinitely and actually depreciate in value, effectively making them tribute from client states under military occupation to an imperial core.

This system makes the US, in effect, the world banker, the way Britain was during the gold standard era. It taps into the surpluses of creditor countries in the periphery and recycles surpluses through the financial markets to emerging markets in the periphery. The integration of countries in the periphery into a global financial market has not only been the method by which the US has affirmed its dominant position in the global capitalist system post-Bretton Woods, but was also the method by which Britain did the same thing pre-1971. Both relied on the ability to rely on periphery surpluses and displace speculative shocks on to the same periphery countries.

While the US doesn’t particularly have to worry about its sovereign debt, third world countries very much do. They can only print their own currency, and so have only a few options to acquire dollars to pay off their sovereign debt owed to external creditors. Third world countries can only print their own currency and so rely on the US for dollars to pay their debts. They can export their raw materials to Western countries and get paid in dollars, or they can privatize their economies and sell them off to, usually, foreign multinationals. These strategies, although popular, don’t usually raise the necessary dollar funds. This leaves the last option: asking the International Monetary Fund (IMF) for a loan. The IMF will usually acquiesce, pending a conditionality framework.

The IMF was initially designed as an instrument to aid expansionary national economic policies that would enable member countries (European nations and Japan) to overcome a shortage of loan funds. The USG ended up marginalizing its role to prevent the emergence of true multilateralism, and the postwar reconstruction plans ended up easing the dollar shortage largely through military and economic aid from the United States, which supported the dominant role of the dollar. Later, the IMF became a means by which to impose deflationary discipline onto debtor countries. Central to this is its conditionality framework, which allows the IMF to set certain economic policy conditions that the debtor country must consent to before aid disbursement. These conditions are usually a mix of austerity and trade liberalization policies, which lead to increased poverty and unemployment in the debtor country. The IMF, and other global governance institutes like the World Bank, are thus able to bring huge swaths of the world under undemocratic economic control, largely as a strategy to increase so-called free trade, which “creates a spatial arena” open to domination by economically and politically powerful countries.

The Washington Consensus is the ideological underpinning of the IMF. Richard Peet (Unholy Trinity: The IMF, World Bank and WTO) argues that this consensus might as well be called the “Washington-Wall Street Alliance,” given the disproportionate representation of Wall Street investment bankers. Conditionality-setting at the IMF, therefore, can be understood as an epistemic activity, because the trick lies on converting politics— a set of opinions that basically represents a class interest— into a practicality that appears to come from theory and expresses the common good, rather than only that of the aforementioned class interest. The IMF is able to produce its own ‘objective’ science by funding studies that support its claims and sidelining those that don’t. Claims to rationality and the standardization and centralization of knowledge production has long been an imperial strategy by which to create an intellectual hegemony. As Timothy Mitchell (Rule of Experts) says “...the offices of the East India Company in London have now given way to the headquarters of the International Monetary Fund in Washington, D.C. or the World Trade Organization in Geneva”.

The IMF was established at the 1944 Bretton Woods conference, which was “an occasion for the formalization of US and UK dominance into an international monetary agreement, complete with enforcing institutions”. The conference itself only included a small number of states, largely from North America and Western Europe. Even with the limited states present, some participants felt that there were too many. John Maynard Keynes, part of the British delegation, complained that there were 21 unnecessary countries and described the conference as a “monstrous monkey-house”. His language is telling, not only in its racist metaphor, but in the belief that international monetary policy needed to be decided upon by economists from a few countries for the good of the world. But even Keynes did not agree with the American proposal to allow the IMF to dictate domestic economic policy conditions, largely on the grounds that it eroded sovereignty. But the American agenda was cloaked in ideas of technocratic expertise and international cooperation and that, along with their capital investment in the IMF, led to the success of the proposal.

Armed with the dollar standard and the IMF’s technocratic expertise and conditionality framework, the United States is able to bring most of the world’s economic policy under centralized and undemocratic control— thus achieving what no earlier imperial system managed: a flexible form of global exploitation. Debtor countries are controlled via the Washington Consensus while the Treasury bond system compels surplus countries to extend forced loans to the USG. The IMF’s centrality in international crisis management has also institutionalized financial surveillance, monitoring and control in a way that was never so regularly and universally applied. Debtor countries are now forced to impose austerity measures that, in addition to their harmful effects on the poor, block their own industrialization and agricultural modernization. Their designated role of exporting raw materials and providing low-cost labor is then cemented.