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Pete Green

Debt, the banks and Latin America

(Autumn 1983)

From International Socialism 2 : 21, Autumn 1983, pp. 3–57.

Transcribed by Marven James Scott.
Marked up by Einde O’ Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

Few crises have been so widely predicted as the international banking crisis which finally hit the headlines in August 1982. [1] But such predictions merely testified to the impotence of the actors in the saga to govern their own destiny. The actions of the bankers themselves nearly brought disaster down upon their own heads; yet they had merely been pursuing the quest for profits, a quest dictated not so much by their own greed (although they are certainly greedy men) as by the fundamental nature of capitalism as a competitive system.

When Mexico in August 1982 declared that it could not pay its debts, the only novelty was that those debts amounted to anything between 80 and 90 billion (thousand million) dollars. The world’s biggest debtor had gone bust and the prospect of the banks getting their money back was in the opinion of many experts, nil. Yet the Mexican crisis was only the culmination of a series of defaults (although nobody liked to call them that), of failures to pay what was owed to the various creditors, by nation-states, stretching back over the previous eight years.

In 1975 North Korea refused to pay its debts, which were mainly to other governments. In 1977 both Peru and Zaire had to be rescued by the International Monetary Fund after failing to meet their payments to the banks on several billion dollars worth of debt. In 1979 Turkey and Zaire once more, had to have their debts rescheduled (i.e. the date of re-payment was postponed, although they were expected to go on paying interest for the banks). [2] In 1981, Poland, with debts of 24 billion dollars, sent a shudder through Western banking circles as its economy collapsed, and the struggle between the regime and the working-class organised in Solidarity remained deadlocked. In each case, the banks emerged a trifle shaken but with their profit figures still looking rather healthy. Each crisis was more serious than the last, a sign that the crisis in the world economy as a whole was worsening.

Mexico, along with Brazil (debts of $80 billion) and Argentina (debts of $38 billion) which soon followed in demanding that their debts be rescheduled, was quite another matter. As the figures began to be totted up it was found not only that their debts were much larger than anyone had suspected, but that between them a failure to pay up would wipe out more than 100% of the capital and reserves of the nine largest banks in the USA. [3] Worse than that, these were countries potentially at least as unstable as Poland. Mexico’s ruling party had been in power for over fifty years and its hold looked unshakable – but unemployment was soaring, the working-class was stirring and this was a country right on the borders of the richest, most powerful capitalist state of them all. In Brazil and Argentina things were even worse – tired military regimes losing their grip in the face of economic debacle, or military defeat, and confronting militant rebellious industrial working-classes which showed no signs at all of being prepared to pay the cost of their rulers’ extravagance.

The figures for total third world debt were staggering – a colossal $610 billion worth, more than the total gross national product of Britain. Debts in Eastern Europe amounted to around another $80 billion. [4] Not all of that was owed to the private banks. Much of it was owed to other governments which had provided vast and expanding credits and subsidies to their own exporters to the debtor countries as the world slump deepened in the 1970s. Much especially by the poorer countries of the third world, India, Bangladesh, or much of Africa, which had never been much favoured by the banks, was owed to international, (government funded), agencies like the World Bank or the International Monetary Fund. But the banks it was estimated had put up some 60% of the money, and probably around three quarters of the cash which had gone to Mexico and Brazil.

One estimate, by a collection of international bankers and ‘experts’ called the Group of 30, was that as much as $200 billion of the money lent by the banks would be difficult to collect – was bad debt. On top of that the raging economic crisis in the major industrial countries had pushed thousands of companies into bankruptcy, and a number of major multinationals (Dome Petroleum with debts of $4 billion, or International Harvester with debts of $4.2 billion) were in serious trouble. [5] Both the degree of integration and the vulnerability of the financial system were attested to when a small bank in Oklahoma, USA, Penn Square, went bust in July, and the much larger Continental Illinois found itself with losses of $220 million on money it had lent on via Penn Square. [6] As if to symbolise the whole situation, the head of the bankrupt Banco Ambrosiano in Italy was found hanging under Blackfriars Bridge on June 18 in mysterious circumstances. 1982 was not a good year for bankers.

Not surprisingly, the prophets of armageddon had a field day. Many Marxists who perhaps should have known better got carried away predicting the imminent collapse of the world banking system, but it was understandable given that Denis Healey was doing the same thing. The IMF meeting in September 1982 was, he argued, ‘the last chance to save the world from a catastrophe even greater than the slump of the 1930’s’. He went on ‘Many countries in the third world face the prospect of economic collapse, political anarchy and mass starvation. The risk of a major default triggering a chain reaction is growing every day.’ [7]

Denis Healey was wrong about the impending collapse of the international banking system. He was much more on target when he talked about the prospects for the third world. The rescue operations which were launched with astonishing speed in the months after the Mexican crisis in August showed the IMF and the world’s major states still had the capacity to contain the crisis, and in particular to prevent the collapse of any major bank. But their actions, it will be argued in the course of this article, have not solved the crisis, and may only have postponed the day of reckoning to a later date.

Two developments are necessary if the debt crisis is to be resolved. Neither is very likely. One is a sustained recovery in the world economy. But the debt crisis itself is prolonging tne current slump, reducing the level of world trade, and will limit the scope of any recovery. This makes it impossible for the debtor economies to sell enough goods on world markets to enable them to cover their repayments. The other condition is that the working-class of the debtor economies is prepared to accept the reductions in its standard of living, the increase in exploitation, necessary to free the resources, the surplus-value, demanded by the banks.

In reality the debt crisis is undermining the stability of the regimes whose very authoritarianism was so attractive to the bankers in the 1970s when they were making the loans. The strikes in Brazil, and Venezuela, the demonstrations in Chile and Argentina, are the events that have really frightened the bankers in recent months. For revolutionaries this is the real significance of the debt crisis – although these events will not be examined in any detail here.

This article is devoted to explaining the real roots of the debt crisis, and an examination of the response to that crisis both in the West, and in the major debtor economies of Latin America in particular. Most analyses of the debt crisis have been superficial because they separate out that crisis from the deep-rooted crisis of the system as a whole. That is why this article begins by looking briefly at Marx’s analysis of banks and banking crises.

Money, capital, and the banks

Financial crises have a long history. Charles Kindelberger in his book, Manias, Panics and Crashes, traces them back to the South Sea Bubble of 1720. [8] He along with many others sees them as having a logic of their own. Thus he describes a repeated saga of speculative manias, waves of irrational ‘get rich quick’ optimism, followed by the inevitable crisis, panic and crash. It is a rich tale, of swindlers and fall-guys, foolish bankers and financial mismanagement by the state. It is also a misleading tale.

There have been examples of purely monetary crises, or of purely speculative bubbles, with little or no connection with the state of the productive base in the economy. But they are the exception, not the rule. The most serious crises since the emergence of industrial capitalism have always involved severe slumps, with chronic overproduction and mass unemployment in the productive heart of the system. On several occasions, as in 1847 which Marx studied closely, the collapse in 1890 of the London firm of Baring (which had over-lent to traders in Argentina), and the 1929 Wall Street Crash, the financial crisis has marked the turning-point from boom to slump.

Not surprisingly economists have often seen the root of the crisis in the operations of the financial system itself. Some suggest that if only bankers had not been so foolish or if the government had not mismanaged things the slump could have been avoided. Others advocate reforms of the system, government regulation, even nationalisation, of the banks, as the solution. Marx was scathing about such ideas and the theories that underpinned them:

The superficiality of political economy shows itself in the fact that it views the expansion and contraction of credit as the cause of the periodic alternations in the industrial cycle, whereas it is a mere symptom of them. [9]

Banks make their profit by lending out money. More accurately they make money out of the difference between the interest they charge on loans and the interest they have to pay to attract deposits. One reason why British banks have long been so exceptionally profitable is that they have not until recently paid interest at all on most of the deposits they receive – banks elsewhere have not been so fortunate. It is still the case today that the bulk of bank lending is to governments or, even more important, industrial companies, rather than to individuals. The interest they receive on those loans represents in either event a share of the surplus value produced by workers.

For the capitalists, however, money has the capacity simply to breed more money. The holder of a sum of money only has to place it in a bank, or buy shares, or a unit trust to receive a regular, apparently guaranteed, return. ‘It becomes as completely the property of money to create value, to yield interest, as it is the property of a pear tree to bear pears.’ [10]

Interest only represents a share of the total surplus value produced by workers, which is acquired by a particular section of the capitalist class, the bankers, and those who simply lend money without engaging in production. Yet why is it that those who control industrial capital are willing to tolerate such a group of parasites receiving a share of their profits?

The answer lies in the fact that there are advantages for capitalists from having institutions which specialise solely in the handling of money. Banks act to concentrate sums of money in large quantities and make them available to capitals when they need them. In particular, as capitalism develops so does the scale of investment. Capitals cannot simply invest their profits as they flow in, but have to wait until they have sufficient funds to build a new factory or purchase a new set of machines. At any one time some capitalists will be building up hoards of idle cash, whilst others will be seeking to invest. Those with spare cash can benefit by placing it in a bank. Those who want to invest can borrow even larger sums than those generated by the profits of their own business.

Banks do not simply lend out funds from one group of capitalists to another. They also act to speed up the whole process of the circulation of money in an economy, by minimising the idle reserves of cash which capitalists have to keep. Indeed, although this is not the place to discuss it in any detail, banks, by lending out money, by the creation of credit, can effectively increase the amount of money available within an economy. Banks enable the system to economise on its use of what Marx called ‘money proper’ – gold or state-issued paper money – through the generation of what he called ‘credit money’.

In the early days of banking this occurred when banks issued ‘bank-notes’ or promises to pay, as substitutes for the gold they held in their vaults. But this was a system vulnerable to abuse, and highly precarious if the banks issued too many notes. Since 1844 in England, the Bank of England has had a monopoly over the issue of banknotes, and the amount issued is controlled by the state. However, that has not stopped the generation of credit-money by the banks. In modern capitalism the vast bulk of what economists call money consists not of cash, coins or paper, but of bank deposits. Marx himself noted the emergence of this system, observing that in Scotland whereas ‘currency has never exceeded £3 million, the deposits in the banks are estimated at £27 million.’ The banks only kept cash reserves amounting to about a tenth of their deposits, relying on the fact that its customers would only withdraw all their deposits in cash if there was panic, ‘a run on the bank’. Thus, ‘It is possible therefore, that nine-tenths of all the deposits in the United Kingdom may have no existence beyond their record in the books of the bankers who are respectively accountable for them ...’ (Capital, Vol. 3, p. 603)

The expansion of the system of credit is simultaneously an expansion of debt. As long as capitalism is expanding, prices are rising and profits are flowing in, old debt can easily be paid off, and the temptation to acquire new debt is strong. But as soon as the system begins to falter the fragility of the whole ‘superstructure’ of credit and debt is exposed. The expansion of the credit-system occurs in response to the growth of production and trade. Correspondingly, in a time of slump the credit-system rapidly contract seriously aggravating the crisis.

A slump however also exposes the inner limit of the banking-system, the reserves which banks have to hold against a withdrawal of deposits. For banking rests in a sense upon a gigantic confidence trick – the pretence that deposits which have been lent out are really still there, capable of being withdrawn at any time. As long as deposits and withdrawals roughly balance out there is no problem. Banks will tend to push their reserves down to a minimum, as they expand their profits through lending out money as quickly as it comes in. But in a slump withdrawals will rise and deposits slow, as capitals find their profits falling. An individual bank may find that withdrawals are so great that it has to start calling in its loans, and bankrupt many of the capitals which have borrowed from it. Alternatively, fear that the bank has lent out money to debtors who cannot repay may provoke a run on the bank. Depositors lose confidence in being able to get their money out, all seek to withdraw their money at the same time, and the bank’s reserves cannot, of course, meet the demand. The bank will collapse, the panic spread, depositors will lose their money, the supply of new loans will dry up, and a wave of bankruptcies will throw the system into a severe crisis. Banks, therefore, in Marx’s account are distinctly vulnerable.

At the same time they are powerful due to their ability to concentrate all the idle money-capital of the economy in their hands. That capital they distribute amongst the various spheres of production according to where it can most profitably be used. They speed up the process whereby capital is withdrawn from declining or unprofitable industries and channelled into the profitable and expanding. They can facilitate growth and centralisation of capital in the hands of a few large corporations. They also determine the fortunes of those capitals that start losing money or running up excessive debts. It is the banks that act to ‘bankrupt’ the weak, and promote the strong.

Yet some Marxists in stressing the power of the banks, or in focusing on the rise of what Lenin in 1916 was to call ‘finance capital’ (a virtual fusion of the banks and industry with the banks in command), have ignored the dependence and vulnerability of the banks outlined above. [11] It is true that banks can increase their share of the total surplus-value produced under capitalism at the expense of other sections of capital. It is also true that, when interest rates rise, money-lenders can prosper whilst the profits of industrial capital are falling. But the banks still depend upon the ability of productive capital to generate that surplus-value in the first place. The health of the banking-system depends upon the health of capitalism as a whole.

This issue demands that the whole boom-slump cycle of capitalism be looked at more deeply. But before doing that its worth considering another question.

One of the more remarkable features of Marx’s work is the way in which he anticipated some of these changes that were to take place within the credit system. [12] In discussing the 1847 crisis he argued that the Bank of England’s refusal to supply extra notes to the banking system when the banks were in trouble served only to intensify the crisis. But, he argued:

As long as the social character of labour appears as the monetary existence of the commodity and hence as a thing outside actual production, monetary crises, independent of real crises or as an intensification of them are unavoidable. It is evident on the other hand that, as long as a bank’s credit is not undermined, it can alleviate the panic in such cases by increasing its credit money, whereas it increases this panic by contracting credit. The entire history of modern industry shows that metal [i.e. gold] would be required only to settle international trade and its temporary imbalances, if production at home were organised. The suspension of cash payments by the so-called national banks [i.e. the refusal of the Bank of England or other central banks to provide gold for pound-notes] which is resorted to as the sole expedient in all extreme cases, shows that even now no metal money is needed at home. (Capital, Vol. 3, p. 649)

Two points are worth making about this passage. One is that Marx clearly distinguishes between the use of money within a national economy, where state guaranteed paper notes can indeed completely replace gold – and the use of money for international payments. A state can print as much paper-money as it likes – but there is no guarantee that this will be acceptable as a means of payment to sellers in other countries, especially if, as with the Argentinian peso recently, it is a currency liable to lose its value rather rapidly. To pay off their debts to traders or banks in other countries national groups of capital and the states which represent them, need money which is internationally acceptable – gold, or national currencies which are considered to be as ‘good as gold’ and are therefore held as reserves of foreign exchange. The pound sterling in the years up to 1931, and the dollar up to 1971, were therefore tied to gold as a guarantee of their value on the world market. Since 1971 when the Americans abandoned their commitment to exchanging their reserves of gold for dollars held abroad, gold has had no official role to play in the system. But that, as the exchange rate chaos of recent years has shown, did not settle the issue. Only a world state could issue paper money which would be automatically acceptable everywhere. As it is the world economy remains in a situation where, despite growing internationalisation, the key world reserve currency, the dollar, is issued by one particular, if powerful nation-state. [13]

To return to the passage quoted from Capital Marx is also arguing that whilst state intervention can help to alleviate a crisis (or intensify it), monetary crises will remain an inevitable result of the cyclical movement of capitalism itself.

Booms, slumps and the banking system

Accumulation is the process whereby capital throws back part of the surplus-value it has extracted into the production process as new investment. It is the rate of accumulation, driven by competition for ever greater profits, which drives the system forward, generating the booms, and, when it falters, the slumps. It is accumulation which in expanding the forces of production, and increasing the productivity of labour, also exposes the limits set to capital by capital itself, by the way the system is organised. Accumulation tends to undermine itself, because it cuts into the rate of profit, the flame which lures it forward. The law of the tendency of the rate of profit to fall lies at the root of Marx’s explanation of why the system should sink into deeper and more prolonged crises as it grew older.

The arguments concerning this have been extensively discussed in other issues of this journal. [14] What I want to emphasise here is that Marx’s formulation of the law is at a very high level of abstraction and by itself does not provide a sufficient explanation of how the system moves from boom to slump. Most obviously it is an analysis applied to capital in general, ignoring the unevenness which arises from the competition among different capitals. Some capitals (especially the most efficient with lower costs of production) will be able to gain at the expense of others, even in a crisis.

The unevenness of the system relates to a second point. The rise in the organic composition of capital, and thus the pressure on the rate of profit from this source, is something which occurs only gradually, over a lengthy period of time, and subject, as Marx showed, to a whole number of countervailing tendencies. Yet the system has not slid gradually into a state of stagnation as its driving spark faded away. On the contrary, the underlying tendency has expressed itself only through a cycle of booms, or periods of expansion, in which the rate of profit rises, at least at first, only to fall even more sharply in the ensuing slump. This short-term cycle, which when Marx was writing lasted almost exactly ten years from peak to peak or trough to trough, also has to be explained.

Marx argued that the length of the ten-year cycle had its roots in the lifetime of fixed capital. The recovery of the system after a crisis will also form the ‘starting-point of a large volume of new investment’. [15] Whilst this investment is being made, new machinery introduced, new factories built, demand for means of production is high, encouraging the rapid expansion of industries such as building, steel and engineering. Money is being thrown into circulation, new workers are being taken on, and the level of demand rising ahead of the increase in production which this new investment will generate. Sales are easy, prices are rising, and profits tend to rise as well, encouraging a further expansion of production.

But eventually as this new investment comes on stream, the extra factories and machinery start to function, more and more commodities are thrown onto the market, and a situation of overproduction begins to develop. With full employment and a high level of demand the wages of workers and the price of raw materials will probably have risen. Capitalists find their profits being squeezed both by rising costs and the need to cut prices in order to ensure sales as the market becomes overstocked. They start to cut back on investment, which leads to sharp fall in demand for those industries producing investment goods – building, steel, engineering etc. Those industries, having expanded to meet the extra demand at the beginning of the cycle, are now faced with chronic overcapacity, and start to lay off workers and close down plant. The whole system begins to move in a vicious spiral downwards, as the fall in investment leads to a fall in demand throughout the economy.

If the rate of profit begins to fall as the boom nears its peak, it falls much more rapidly as a result of the slump itself. The fall in investment, the contraction of the economy, the rise in unemployment, all mean that capitals have great difficulty in selling their commodities – in ‘realising’ the surplus-value that is produced. Yet the slump also generates ‘counteracting’ forces which ease the pressure on profitability. The price of raw materials, capital goods and labour may all fall sharply. Some capitals will go bankrupt leaving a larger share of the market, and assets which can be purchased cheaply, by those which remain in the arena.

A revival of the system, a return to boom, however, depends on a revival of investment, and the low level of demand itself acts to discourage any such thing. But this is where the ‘lifetime’ of fixed capital enters the picture. Those capitals which survive the slump will eventually have to replace the machinery which they acquired at the beginning of the cycle. The very act of replacement, especially when it is bunched together by a number of capitals, serves to stimulate the industries producing means of production. They take on more workers, and reopen plant that’s been mothballed, demand in the economy as a whole begins to revive, and the cycle resumes again.

Marx argued that the short ten-year cycle which characterised the nineteenth century was thus rooted in an average ten-year lifetime of machinery. But he also argued that the length of the cycle, and especially the timing of the move from boom to slump, could be affected by other factors, including the operations of the financial system.

Here again we have to develop, make more concrete, Marx’s analysis of the rate of profit. That took no account of the division of the total surplus value between the interest received by the banks, and profit in the strict sense of the return received by productive capital. Obviously, movements of the rate of interest can affect the amount of profit available to the rest of the capitalist class, independently of what happens to the rate of profit in general. Shifts in the rate of interest also go hand in hand with the cycle of capital which we have just discussed.

It is difficult to summarise the most relevant content of Marx’s work in this area. As Engels lamented, Marx left only a mass of incomplete and disorderly notes on the subject. [16] Much of this was concerned with the details of contemporary crises and debates. For example, Marx placed a great deal of emphasis on commercial credit, debts contracted between commercial and industrial capital themselves, which is much less significant today. But the general picture which Marx provides of the expansion and contraction of the credit system in the course of the cycle, which we outlined in the last section, remains extremely relevant. Moreover Marx himself provides a concise account of the way in which the rate of interest changes:

If we consider the turnover cycles in which modern industry moves – inactivity, growing animation, prosperity, overproduction, crash, stagnation, inactivity, etc. ... we find that a low level of interest generally corresponds to periods of prosperity or especially high profit, a rise in interest comes between prosperity and collapse, while maximum interest up to extreme usury corresponds to a period of crisis ... yet low interest can also accompanied by stagnation, and a moderate rise in interest by growing animation. The rate of interest reaches its highest level during crises, when people have to borrow in order to pay, no matter what the cost. (Capital, Vol. 3, pp. 482–3)

The rate of interest is governed by the supply and demand for what Marx called loanable capital’. In the aftermath of a crisis, the period of stagnation and inactivity, interest rates will fall and remain low, because capitals with money to spare will be willing to lend it out again, or redeposit it in the banks, but the demand for loans for productive investment will be weak. As the system begins to expand again, and investment rise, the demand for loans will increase but so will the supply. Sales will be easy, prices rising, and profits high. In this period of prosperity, the credit system expands and more money flows into circulation, in response, as we saw earlier, to the expansion of the productive system itself: ‘The ease and regularity of returns, combined with an expanded commercial credit, ensures the supply of loan capital despite the increased demand and prevents the interest rate from rising.’ (Capital, Vol. 3, p. 619)

However, the expansion of credit, and the relatively low level of interest in relation to the rate of profit, themselves encourage an acceleration of investment and borrowing. The rise in prices, fuelled by the growth of credit, encourages speculation on a further rise in prices. Capitals borrow both to expand production even further, and, increasingly, simply to gamble on purchasing commodities, shares or property, hoping to make a quick profit from a rise in prices which will also enable them to pay off their debts.

The system then comes under pressure from two sources. On the one hand, profits actually generated by productive capital fail to rise to match the vast expectations generated by the speculation, and may even begin to fall, as costs rise and markets become glutted. On the other hand the rapid expansion of lending stretches the reserves of the banks to the limit. Interest rates rise rapidly as the demand for funds far exceeds the supply provided by the return of money as deposits to the banking system. But this rise in interest rates in turn cuts into the rate of profit of those capitals that have borrowed heavily.

The spiralling of credit and speculation means that the crash may come abruptly.

... the appearance of very solid business with brisk returns can merrily persists even when returns in actual fact have long since been made only at the cost of swindled money-lenders and swindled producers. This is why business always seems almost exaggeratedly healthy immediately before a collapse. (Capital, Vol. 3, pp. 615–6)

The banking system does not determine the course of the cycle, but it does accelerate and extend the booms, only to make the entire system dependent upon debt, vulnerable to a rise in interest rates and liable to crash. As the crisis begins, the interest level soars to ‘usurious rates’. Capitals faced with falling demand and prices cannot pay off their debts and are desperate to borrow more. The capitals with money in the bank withdraw it to keep themselves afloat. The rise in the rate of interest benefits the money-lenders, and forces large numbers of companies into bankruptcy.

But if the crisis becomes serious it may spread to the banks themselves. In that event there is a rush to turn bank deposits into cash, banks have to close, borrowing becomes impossible, and the whole system of credit and debt collapses. The crisis in the financial system in turn feeds back into the industrial crisis, aggravating it, and prolonging the stagnation which follows. As Marx summarised the whole process:

If the credit system appears as the principal lever of oveproduction and excessive speculation in commerce, this is simply because the reproduction process which is elastic by nature is now forced to its most extreme limit ... The credit system hence accelerates the material development of the productive forces and the creation of the world market, which it is the historical task of the capitalist mode of production to bring to a certain level of development, as material foundations for the new form of production. At the same time credit accelerates the violent outbreaks of this contradiction, crises, and with these the elements of dissolution of the old mode of production.

We have, therefore, three elements to Marx’s account of crises.

There is his explanation of the basic tendency of the rate of profit to fall, the rise in the ratio of dead to living labour, or of the amount of capital invested in means of production relative to the source of surplus-value. This means that over time, as the system ages, it should become prone to deeper and more prolonged slumps, whilst the booms become shorter and weaker. We have his account of the boom-slump cycle itself, which explains why even in a lengthy period of crisis and stagnation, the system continues to rise and fall, with periods of acute slump followed by limited recoveries. Finally we have his explanation of how the system of credit and banking is drawn into the cycle, in turn influencing the movement of production – helping to sustain and accelerate the booms, only to intensify the slumps which follow.

The relevance of all three of these strands to understanding the world crisis of the 1970s and 1980s should become apparent in the account which follows. But this is by no means obvious, not least when it concerns Marx’s analysis of the banking system and the course of the cycle. The capitalism which Marx examined was far less developed, much less international, much less concentrated in large corporations, and above all less subject to the growth and activity of nation states than it is today.

One consequence of those changes is a shift in the character of the boom-slump cycle. In the nineteenth century, the slump and the contraction of the system of credit went hand in hand with a wave of bankruptcies, a fall in prices (compensating for their rise in the boom), and a wiping-out of debt as it was either paid off, or the debtors were bankrupted and their assets sold. But nineteenth century capitalism consisted of a large number of small firms. The banking system itself was much less integrated and centralised than it was to become by the beginning of the twentieth century. A wave of bankruptcies, even the collapse of a bank or two, did not halt, indeed only briefly interrupted, the upward rise of capitalism. Indeed crises, in rationalising the system helped to restore the rate of profit of those capitals which survived.

Crises therefore were the mechanism by which capitalism resolved its own internal contradictions, ‘violent eruptions which for a time restore the disturbed equilibrium’ as Marx put it. They also served to accelerate the centralisation of capital in the hands of a much smaller group of large capitals – a process facilitated by the banks themselves, with their ability to concentrate large sums of money-capital. Hilferding, observing this growth of vast monopolies interconnected with the banks, suggested in his classic work Finance Capital that the crisis could be at least alleviated, and perhaps even resolved altogether, by this new type of ‘organised capital’.

But the crisis of the 1930s was to show that the concentration of capital in the hands of a few large corporations only intensified the difficulties of the system, once it entered into slump. A crisis now meant the bankruptcy not of a number of small firms but of several large corporations with a devastating impact on the whole national economy. A collapse of one bank now threatened an entire integrated banking system. Not least the internationalisation of the system meant that the crisis was transmitted from one country to another at rapid speed.

However, the crisis of the 1930s would also thrust upon the states, for the first time apart from war, the task of managing their national economies. The 1930s marked the advent of an era in which the concentration of capital was matched by the intervention of the state – increasing spending on arms and welfare, nationalising key sectors of the economy, propping up weaker capitals and bailing out banks in trouble and proclaiming its ability to prevent slumps and sustain growth for ever.

The crisis of the 1970s would, however, expose the myth of the Keynesian managed economy. Yet the protracted, stagflationary crisis of the last decade has been different from both the short sharp shocks of the nineteenth century, and the chronic depression of the 1930s. The persistence of inflation through both boom and slump has been the most obvious difference, but the new phenomenon of ‘stagflation’ (stagnation and inflation combined) is but a symptom of the much deeper transformation in the character of the system. At root it is a product both of the enormous concentration of capital, the resistance to price-cutting of the few giant corporations which dominated most industries – and the intervention of the state to prop up the system as the crisis deepened. That intervention involved, not least, supporting the vast and international system of credit and debt which had grown at accelerating pace in the post-war era. The major states and their central banks have had some success. There has, so far, been no major banking collapse, no sharp contraction of the credit system of the sort we discussed earlier.

But these features of the crisis also mean that the system is trapped in stagnation – there has been no thorough clearing-out, no rationalisation of the system through bankrupting the weak. the inefficient, and all those who cannot pay their debts. Instead the contradictions persist, the system staggers from slump to weak recovery, back into slump – and the debts have just grown and grown – until some of the suppressed tensions finally burst out in the course of 1982. It is this story – of banks and the states, debt and stagflation, and why it is the international banking system, the lending to countries like Poland and Mexico, which has finally broken down – that will be told in the rest of this article.

The origins of the debt crisis – a summary history

The history of international banking is a long one. As far back as the sixteenth century the banking houses of the Medicis and Fuggers were making and losing fortunes out financing the wars of the Holy Roman Emperors or the Kings of Spain and France. The Rothschilds, based in Frankfurt, London and Paris, had become the first ‘multinational’ banking firm in the early 1800s. [17] Marx, however, whilst noting the international repercussions of banking crises does not discuss them in any detail. This was partly a matter of levels of abstraction – Marx never wrote the volume on the world market where such developments would have been discussed. It was also because the significant period of capital export from the heartlands of developed capitalism in Western Europe to the rest of the world only began in the 1880s as he was dying.

The bulk of bank loans and other overseas investment in the 19th century came from Britain and went to finance railways and governments in the rest of Europe and America. But as rates of profit declined and the system entered into stagnation in the 1880s the search for profitable investment opportunities led those with spare capital further afield, and the competition became more intense. The rise of the new industrial powers of the United States and Germany threatened the dominance of France and Britain. The export of capital became intertwined with imperialist rivalries and the scramble to partition the globe between the major powers. It was this development which Lenin summed up by establishing the connection between the growth of ‘finance capital’, the concentration of capital in the hands of large monopolies intertwined with the banks, the export of capital and the epoch of Imperialism.

Although that thesis can be criticised in detail it did capture some of the decisive tendencies of the capitalism of that era. [18] Bank lending to foreign governments in particular was highly profitable but very risky. The American state of Mississippi is still listed in London as a bad debtor from its default in the 1850s. The prestigious London house of Barings, as we noted, collapsed in 1890 after guaranteeing dodgy loans to Argentina. Elsewhere however the accumulation of debt by sovereign borrowers was the cause or the excuse for intervention by the imperialist powers – in Egypt where the British took control in the 1880s, in Turkey where a consortium of German, British and French became the manager of the finances of the crumbling Ottoman empire, and in the Dominican Republic in the Caribbean where in 1907 in exchange for a loan, an American appointee was put in charge of the customs revenues, and troops were dispatched in 1911 and 1916 to guarantee that the money was collected. [19] After the Russian revolution in 1917, however, French holders of Tsarist bonds lost the lot, proving that international lending remained qualitatively different from lending to companies whose assets could always be flogged off after they had been taken to the bankruptcy court.

Capital export, and the markets and higher profits that it generated helped to sustain the rapid expansion of the system in the early years of the twentieth century. Capital export, including both bank lending and loans by individual ‘bond-purchasers’ tended to increase in times of slump in Britain, acting in counter-cyclical fashion to offset the severity of the crisis within the domestic economy. In the 1920s however, the rapid growth of international lending from the United States in particular served both to accelerate the boom and deepen the subsequent crash.

The events of 1929–32 vividly confirmed Marx’s account of the character of banking crises. In the United States nearly half the banks collapsed. In 1931 the Rothschild-controlled Kreditanstalt, Austria’s largest bank closed provoking a chain reaction of deposit withdrawals and bank failures throughout Europe. Germany, which had received large inflows of short-term money in the 1920s, was faced with a demand that the money be repaid instantly and was forced to default on its debts. In both Germany and the United States the collapse of the banking systems added to the severity of the crisis and as new loans dried up thousands of companies had to close. In both countries unemployment was as much as a third of the working population in the depths of the slump. In Latin America the fall in the price of raw materials meant that Bolivia defaulted in 1930, to be followed by names familiar in the current crisis – Peru, Chile, Brazil, Mexico. [20]

International defaults were in some ways less serious for the banks in the 1930s than the crises in the domestic economy. Instead of lending their own money, banks had in most cases simply sold bonds to wealthy individuals on behalf of the government which issued them. Nevertheless in the wake of the crisis the flow of capital from the world’s main financial centres dried up. The issue of foreign securities by United States financial institutions declined from an annual average of $1151 million in 1924–28 to $229 million in 1931 and nothing at all in 1934. [21]

Crudely summarised it can be said that the 1930s marked an end to the era of finance capital and the beginning the era of state capital not just in Russia but throughout the capitalist world. In the aftermath of the crisis states moved to prop up their domestic States. The Roosevelt government stepped in to provide insurance for depositors and extend the powers of the Federal Reserve central bank over the banking system. In Germany the banks were first nationalised by the Nazis and then allowed to operate only under the strict direction of the state. In France four of the largest banks and thirty-four insurance companies were nationalised at the end of the Second World War. [22] In Britain in the 1930s and 1940s both Tory and Labour governments pursued ‘cheap money’ policies, keeping the basic interest rate (the Bank Rate) as low as 2%, to encourage industrial investment.

The postwar order established in the West under American hegemony put an end to the period of national isolation and autarchic policies which had marked the 1930s and led to the second world war. The interests of American capital demanded that the markets of Western Europe be opened up in the name of free trade. But individual states retained the controls they had established over their domestic banks, and the network of exchange controls which limited the mobility of private capital. International bank lending to cover balance of payments deficits was to be in the hands of government-funded international agencies which were dominated by the United States. Capital export in the 1950s and 1960s consisted mainly of either government loans and aid, or direct investment by American and other multinationals, mainly in other industrial countries.

In the 1950s as the long boom gathered momentum the banks in America and Europe were still both tightly regulated and rather minor actors on the international scene. This situation would change for two main reasons.

One was that as the boom accelerated so the demand for bank loans increased as in the booms discussed by Marx. This occurred slowly. Most large corporations were making ample profits to finance their investments internally. But in the 1960s the competitive pressures began to increase, the scale of investment grew, and loans were cheap and readily available. Creeping inflation was rooted in the concentration of capital and the implicit agreement among the giant monopolies to raise prices in line with each other and never to engage in price competition. But inflation also both encouraged and was fuelled by the expansion of credit. Inflation encouraged companies to go into debt because it lowered the value of past debt in real terms, whilst at the same time raising the cost of new investment. The speeding up of the circulation of money by bank lending (which was increasingly efficient and centralised) in turn helped to sustain the overall level of monetary demand which meant that prices could be raised in the expectation that sales would not fall as a result.

By the late 1960s bank lending was accelerating hand in hand with inflation in most of the major western economies. Levels of debt owed by governments, companies and individuals were rising correspondingly. In the past this would have placed increasing pressure on the monetary reserves of the banking system, forcing up interest rates and cutting off the boom. This did not happen only because governments intervened to increase the money supply, in effect printing more money and expanding the reserves of the banks thereby providing as one Marxist has termed it a ‘pseudo-validation’ of the increase in the prices of commodities and sustaining the whole inflationary process. [23] States were finding that they had made a ‘one-sided bargain’, whereby they were committed to propping up the banking system as a whole but had lost all control of the process of bank lending. [24]

The second development that undermined state regulation of the banks was the re-emergence of international lending but in a form quite different from that of the 1920s. The postwar expansion of the system saw an even more rapid growth in the level of world trade, the size and number of multinational companies, and the mutual interdependence of national economies. The revival of international banking was a response to these developments. American banks set up branches overseas to service American multinationals. British banks in London began to receive deposits in dollars which they could then profitably lend out again. American moves in the 1960s to control interest rates and the flow of funds abroad only served to encourage American banks to transfer their base for lending to American and other multinationals to Europe, and especially to London where Harold Wilson’s 1964 Labour government allowed them great scope to operate. [25]

The emergence of the Eurodollar market, as it came to be known, marked a new phase in the international integration of the system. The Euromarkets (which came to include lending in other Euro currencies – sterling, marks and yen as well) were truly international markets in that they involved the borrowing and lending of currencies outside of their country of origin. Lending through the Euromarkets was more profitable because banks were not subject there to government controls, which usually demanded, for example, that they keep a fixed proportion of their deposits as reserves. In the Euromarkets reserves were minimised as banks maximised their lending. The use, via the markets, of offshore tax-havens such as the Cayman Islands, Luxembourg and Panama also enabled banks to escape taxation. On one estimate the average worldwide effective tax rate for American banks on their profits was only 19% in the 1970s. [26]

The growth of the Euromarkets was fuelled by the American balance of payments deficit which widened in the 1960s with the costs of the Vietnam war and increased overseas investment. As dollars piled up in the hands of holders outside the United States, they were redeposited in the Euromarkets for further lending. Even central banks in Europe began to deposit their foreign exchange reserves with banks in London, undermining their own attempts to keep the markets under control. Between 1965 and 1973 the size of the market (excluding interbank transactions or deposits by one bank with another) grew from $15 billion to $132 billion. The internationalisation of the money markets began to undermine the ability of individual states to manage their own national currencies, and provided ample opportunity for speculative movements from one currency to another. This in turn helped to undermine the whole postwar order of stable exchange rates which finally collapsed in 1973.

In the period leading up to the return of the world system to slump in 1974 however, the role of domestic lending was still more significant. Some observers have argued that the length and scale of the long postwar boom is attributable to the inflationary generation of credit, that the ‘western economy sailed to prosperity on a sea of debt’. [27] This is extremely dubious. The expansion of credit did not take off until the late 1960s, after 20 years of boom, and was far too unstable to do more than extend the Boom for a few years; What is true is that in the early seventies the pressure on profit margins on the one hand, and attempts by governments to follow Keynesian reflationary policies as the boom faltered on the other, meant an inflationary explosion of both private company and public debt. The rate of growth of bank loans in the United States accelerated from 9.0% a year between 1965 and 1969 to 15.2% a year in 1970–73. [28] The boom was also becoming more speculative. Inflation now meant that higher and quicker profits could be made from speculating on property development or the stock exchange, or commodities such as wheat and copper, than from productive investment in factories and machinery.

The 1974 slump, precipitated by the oil price rise, but with far deeper roots in the declining profitability of industrial capital, put an end to the speculative boom of the early 1970s. In Britain the collapse of the property market threatened the network of secondary banks which had sprouted in the previous decade. The financial crisis had all the hallmarks of those analysed by Marx with one important difference. To prevent a panic and the crisis spreading to the banking system as a whole the central banks intervened. In Britain the Bank of England put up $2 billion in a lifeboat operation to rescue 26 financial institutions. [29]

But whilst the states (which intervened to bail out or nationalise the most important debt-ridden companies such as British Leyland, Lockheed and Chrysler) and the central banks (which pumped money into the banking system and held down interest rates) could prevent a collapse – they could not restore the system to health. The recovery which followed in the late 1970s was weak and fragile. Investment levels remained low, and despite low interest rates (negative for a while in real terms after inflation was taken into account) borrowing was slow to recover. This was one reason why the banks turned to new, more eager, borrowers in the third world.

The Euromarkets were also hit by the 1974 crisis. The Herstatt bank of Cologne and the Franklin bank of New York had to close after huge losses from foreign exchange speculation. For a brief period this led to a rapid shrinking of the international banking system. The number of banks involved fell almost overnight from over 200 to under 40, as deposits in the interbank market were withdrawn from any bank which lacked the most impeccable credentials. [30] The crisis exposed the degree of integration of the international financial system, created by the way in which banks deposit funds and borrow from each other – so that a failure by one bank ripples through into losses throughout the system. But the crisis also forced the central banks to announce in the Basle Concordat of 1975 that they would take responsibility for guaranteeing deposits with their respective national banks. Confidence was restored, but for the states it was a matter of responsibility without control. When international lending began to grow rapidly again they had no means of regulating it. The banks were landed between 1974 and 1976 alone with an estimated $46 billion worth of deposits from the OPEC countries such as Saudi Arabia, Kuwait and the Gulf States (although the contribution of OPEC deposits to the growth of the Euromarkets has been exaggerated and on one estimate has been only 10% of the total). The slump meant that profitable opportunities for lending in the main industrial countries were limited. Flush with cash, on which they were having to put out interest, the banks were desperate to lend. Third world borrowers, facing large deficits on their balance of payments and often with ambitious industrialisation programmes were anxious to borrow. Between 1976 and 1981 lending to such borrowers, mainly through the Euromarkets, rose at an average yearly rate of 23%. [31]

The whole process of channelling funds from surplus to deficit countries is now often referred to as the great recycling folly. [32] At the time it was acclaimed as a great achievement by all but the most far-sighted, as a means by which the banks could continue to lend to those who wanted to spend, and thus maintain the overall level of demand in the world economy. Certainly the advocates of financial rigour, who now criticise the imprudence of the banks, fail to consider that the stagnation of the system would have been even deeper in the late 1970s if the lending to countries in Latin America and Eastern Europe had not occurred. But the suggestion that this was an act of folly on the part of reckless bankers also needs to be rejected.

Anthony Sampson in his book The Money Lenders tells of how bankers at the annual meetings of the IMF in the late 1970s would literally pursue the finance ministers of countries like Brazil and Argentina in the hope of signing deals for new loans ahead of their competitors. [33] His account of the optimism of some bankers over the mineral resources of Zaire or the stability of the dictatorship of the Shah of Iran makes them look naive and blundering rather than calculating financial sharks. It is a good story, and provides a useful corrective for those inclined to overestimate the sagacity of the ruling class or the expertise of economists. The problem with it is that it ignores just how profitable that lending proved to be. Banking is a very competitive business and as more banks, including the Japanese and tiny banks from the Midwest of the United States, entered the market, margins of profit on loans to the biggest borrowers were forced down. In 1979 Argentina was being charged an interest rate only slightly higher than that for the British electricity board.

American Bank Profits and Assets in Foreign Countries 1980

8 Largest US Banks

($ Billion)

($ Billion)

For. Rev.
as % of

($ Billion)






Bank of America





Chase Manhattan





J.P. Morgan





Mfrs Hanover





Chemical New York





Bankers Trust





First Interstate








(av. 58.0%)


[Source: see note 34]

Nevertheless, by 1977 most of the major United States banks were making over 50% of their profits on overseas lending (in the case of Chase Manhattan and Citicorp over 70%). [34] Much of the debt was at floating interest rates, which rose after 1979 in line with the rise in interest rates in the United States and the Euromarkets. The scale of the profits American banks were making in 1980 is indicated by the table. If the banks ignored warnings about the rapid accumulation of debt, and the danger of defaults, it was partly because of the profits they were making, which could be made nowhere else, and partly also because the largest banks at least were relying on the IMF and US government to bail them out if they got into trouble. As an official of the Chase Manhattan bank told the magazine Euromoney in 1976:

On the one hand a purely technical analysis of the current financial conditions would suggest that defaults are inevitable; yet on the other hand, many experts feel that this is not likely to happen. The World Bank, the IMF, and the governments of major industrialised nations, they argue, would step in rather than watch any default seriously disrupt the entire Euromarket apparatus with possible secondary damage to their own banking systems which in many cases are already straining under their own credit problems. [35]

The lending was also highly selective. Countries which ran into trouble with their repayments such as Zaire and Peru were promptly cut off from all further loans. In the ten years after 1971 three quarters of all Eurocurrency lending to the third world went to just six countries – Brazil, Mexico, Argentina, South Korea, Peru and the Philippines. Mexico and Brazil alone accounted for a quarter of the debt from all sources. [36]

It has been argued that much of this selectivity was political, that bank loans were directed particularly to client regimes of the United States, or those particularly favourable to the operations of private, multinational capital. The manner in in which bank lending to Chile after 1973, and to Argentina after 1976 increased in the wake of American sponsored military coups is commonly used to support this claim. [37] But the argument misses the point that the real significance of these coups was that they led to a crushing of the working-class movement, and an enormous increase in the rate of exploitation. It ignores the rapid growth of lending to Eastern Europe, even though American banks played only a small role in this. But in Peru in the early 1970s US banks were willing to lend to the nationalist military regime of Velasco even whilst it was cut off from money from American sponsored international agencies after nationalising a number of American owned mining interests. [38]

What mattered to the banks were two features which characterised almost all the major borrowers. One was that they possessed either substantial mineral resources capable at least in theory of generating export revenues on the world market, or that they had already acquired a social and industrial infrastructure which made further rapid industrial development possible (some such as Mexico and Brazil had both). The other was that they were strong repressive states, capable of maintaining high levels of exploitation. As one banker revealed about one of the important state capitalist borrowers in the mid-1970s:

We like Algeria because it’s totalitarian and if the government says people will have to cut back consumption, they will. [39]

Similar considerations applied to Poland, Brazil, South Korea, and Chile after 1973.

By and large the banks preferred lending to states rather than private companies. States after all could at least in theory mobilise the resources of a whole country to pay them back. In Mexico 86% of all funds went to the government or state-owned enterprises. In Brazil the banks financed the military regime’s programme of massive state investment. A remarkable alliance was formed between the Brazilian state which accounted for 51% of industrial assets, multinationals (another 11%) and the international banks (which provided the capital necessary for rapid expansion). [40]

Neither vast resources and industrial capacity, nor vicious repression, could, however, guarantee that the banks would get their money back. The ability of the major debtor economies to service their debt depended also upon the health of the world economy. In the years after 1975 continuing inflation and a moderate recovery in the West lightened the burden of debt service (the proportion of exports devoted to the payment of interest plus the repayment of the sum originally borrowed, in any one year). Inflation of export prices meant that the burden of the debt diminished in real terms, but encouraged the debtors to borrow even more. The weak recovery of the late 1970s went hand in hand with a rapid growth of IT the volume of world trade especially between North and South. All that changed after 1979.

The turning point came with the appointment of Paul Volcker as Chairman of the Federal Reserve (the US central bank) in 1979. His task was to reverse the fall in the value of the dollar on world markets by restraining the growth of the US money supply. He succeeded but only at the cost of sending American interest rates soaring through the roof. With other major economies turning to tighter monetary policies as well, interest rates rose generally, threatening an already precarious financial structure inside the western economies. There is no space here to discuss adequately the repercussions of this shift for the corporate borrowers inside Western Europe and North America. Many had remained heavily indebted through the 1970s, and the failure of the 1974–75 slump to produce a clearing out of the weak and inefficient had merely postponed the problem. As interest rates rose whilst profits were squeezed the banks benefited but the burden for many companies of this debt forced them to slash their operations and throw thousands on to the dole-queue. Bankruptcies soared and a number of major multinationals found themselves in deep trouble – AEG-Telefunken in West Germany. Massey-Ferguson and International Harvesters, Dome Petroleum in Canada, several of the major steel firms and airlines in the United States. According to one observer the American banks were faced with around $100 billion on dodgy loans to corporate customers. [41]

The financial squeeze in the industrial west soon spread to the debtor economies in the third world. The integration of the world financial markets meant that the rise in American interest rates was soon reflected in the Euromarkets. At the same time the slump meant a decline in the markets for raw materials and an even sharper fall in commodity prices. In real terms, on one estimate, interest rates moved from being negative after inflation in 1979, to a positive, rate of 20% in 1981 for the major commodity exporters. [42]

The initial response to these pressures was to go on borrowing, at least by those states such as Mexico and Brazil to which the banks were still willing to lend. But the debt-service ratios were mounting rapidly (see table for figures at end of 1982). An increasing proportion of new borrowing was being used simply to pay off old debt. In 1980 the ‘non-oil developing countries’ received $45 billion from the banks but after paying interest their net receipts were only $8 billion. By 1982 their net receipts had become negative – they were paying more money back than they were receiving. [43] As the table shows the burden had become intolerable: [44]

Debt figures for key borrowers


Total debt

from banks
at end of
1981 $bn

Debt services in 1982 as %
of export of goods and services























South Korea




































[Source: Financial Times, 15 October 1982]

Where the money went – the state of the debtor economies

In the latter half of the 1970s, the growth of the major borrowing countries in the third world and Eastern Europe was well above that of the industrial west, and in some cases (Mexico, Poland, South Korea) was spectacularly high. Between 1973 and 1979 the countries as a whole grew at an average annual rate of around 5%. That growth, as Nigel Harris has observed, helped to rescue the major industrial economies from the 1974–5 slump, “Providing the markets for the export of consumer and capital goods and sustaining the level of world trade. [45]

In the years 1980-83 that situation was sharply reversed. For the developing countries as a whole growth fell to 3% in 1980 and below 2% in 1982. But the aggregate figures conceal a great diversity of experience, and the severity of the crisis in particular countries. In 1982 the growth of the oil exporters plunged sharply with the fall in the oil price and the disarray of OPEC. In Latin America as a whole overall production fell by 2.4% in 1981 and 1.2% in 1982, before the debt crisis of the last year began to take its toll. In the Eastern bloc chronic stagnation set in. [46]

In some countries talk of economic collapse ceased to be the hyperbole of journalists as the figures registered falls in output not seen in any country, apart from the devastation of war, since the 1930s. In Poland output fell by an estimated 12% in 1981 and by a further 8% in 1982. In Argentina the economy dropped by 6% in 1981 and by another 5% in 1882. In Chile a highly speculative boom burst and output fell by 14% in 1982 alone. The bare statistics of course cannot convey the suffering and humiliation they involved for some, usually the poorest, sections of the population, the shortages of essential goods in Poland or the effects of soaring inflation in Argentina, or indeed the shock to the authoritarian political regimes of all three countries.

Debt, as economists say, is nothing but deferred trade. The borrowing had enabled the countries concerned to finance large current account deficits, in effect to import more than they exported. Now the situation had to be reversed, and the borrowers had to run an even larger current account surplus to cover repayment not just of the money borrowed but of the interest as well. The prospects of them doing so in 1982 or in the foreseeable future were nil.

Whilst the burden of interest payments was rising rapidly, maintaining exports was becoming more and more difficult. Commodity prices fell sharply between 1980 and 1982 by around 30% in nominal terms. [47] In real terms allowing for inflation they hit their lowest level since before the Second World War. [48] In the course of 1980 alone the price of one kilo Argentinian beef fell from 218 (American) cents to 160 cents; of Brazilian coffee from 485 cents to 317 cents; of Chilean and Peruvian copper from 260 cents to 165 cents (only cocaine of the major Latin American commodity exports kept its value). [49] The fall in the price of oil was less severe but combined with a sharp decline in the quantity of exports was sufficient to push the economies of Ecuador, Venezuela, and even non-OPEC Mexico with its special access to markets in the United States, into trouble.

In Brazil remarkable efforts were made to compensate by increasing the level of manufacturing exports, with some success. In 1981 the government deliberately engineered a sharp recession designed to cut back imports and divert resources into exports. Manufacturing exports rose by 30%, especially to markets elsewhere in the third world and oil imports were cut by a quarter. [50] For the first time in four years the economy attained a surplus on its balance of trade. The success was noted with approval by western bankers and for a time Brazil’s credit rating was well above that of other major debtors.

But the exercise was like running on a treadmill. In the first half of 1982 Brazil’s export volume actually rose by 5% whilst its revenues fell by 10% because of the fall in commodity prices. [51] Several of the major Brazilian export markets also collapsed in the course of 1982, notably Nigeria hit by the oil price squeeze, and in Latin America itself. Import controls, especially in the United States, added to their problems. Exports of vehicles and components fell by 20%. Imports of capital goods fell by 16% in 1981 and another 10% in 1982, as oil and interest payments absorbed almost the entire revenue from exports. [52] But as a result sectors of industry were beginning to grind to a halt in the absence of necessary spare parts of essential machinery, thus threatening the export drive itself.

Throughout Latin America it was the marginalised population of the shanty-towns, the unemployed (officially around 10%) and the underemployed scraping a living selling odds and ends on street corners (perhaps as much as another 30% in Brazil and Mexico), and the industrial working-class who suffered. Bankers, IMF economists and journalists would fly in first-class, stay in the local Hilton or Sheraton all expenses paid, examine the figures, talk over dinner with the local officials and make their recommendations – an end to food subsidies (an Economist magazine favourite this one, suggesting slyly that all those billions had been squandered on the poor), cuts in public spending, a general reduction in living standards.

For the bulk of the population after years of repression and savage wage-cuts there was little left to cut – no welfare state, no social security cushion. In Argentina in 1982 real wages were still 50% below their 1975 pre-coup level. In Brazil the union organisation and strikes of 1978–80 had pushed up wages in the industrial areas of Sao Paulo. But still an estimated 50% of the population had seen no benefit at all from the post-1964 ‘economic miracle’. According to the World Bank Brazil is the only country in the world where the richest 10% of the population receive more than half of the national income. (In Mexico the top 20% receive 53% of national incomes and the bottom 20% receive 3%.) Whoever benefited from the foreign borrowing it was not the working-class of Latin America. [53]

Where then did the money go? A common explanation (much in favour in right-wing circles as it diverts attention from the depth of the world crisis and the sheer burden of interest payments) is that the money was simply blown, frittered away on corruption and wasteful projects by governments, or used to subsidise a boom in luxury imports for the middle classes and spirited away across the border to buy up villas and other property in Florida and the Bahamas. If this account is inadequate it nevertheless contains an important element of truth.

The most corrupt and incompetent third world regimes in fact received relatively small sums from the banks. In the case of Zaire in the mid-1970s some of the more starry-eyed bankers seem to have been carried away by the immense mineral reserves of that country and President Mobutu’s heartfelt commitment to western interests. Perhaps some banks came under pressure, or were swayed by government propaganda, because of Zaire’s strategic significance for American plans in Africa. But by 1978 even the most patriotic banker was not prepared to go on lending to a country in which most of the $2 billion worth of loans seem to have ended up in the pockets of the Mobutu family. [54]

Zaire was a dramatic but extreme case. But the squandering of borrowed money by the local ruling-class of the debtor countries was common enough. In the oil-rich economies of Mexico and Venezuela the corruption is legendary. Between 1979 and 1982 money poured out of both countries, into tax-sheltered bank accounts in the Bahamas or property in the United States. ‘Mexicans are reckoned to hold some $30 billion in assets abroad, Venezuelans some $18 billion’ according to The Economist. [55]

In Mexico, as in Argentina, Chile and Venezuela, an overvalued currency made overseas assets relatively cheap and encouraged the flight of capital (as indeed the high value of the pound has done in Britain in recent years). In the years 1981–82 the flight accelerated. Some $8 billion is estimated to have left Mexico in the period between October 1981 and the first major devaluation of the peso in February 1982. In one week alone before the August 1982 crisis broke, and the shutters came down, an estimated $2.5 billion is said to have left the country. [56] Elements of the Mexican ruling-class at least were well aware of how serious the crisis was. In effect anything up to a quarter of the money lent to Mexico flowed straight out again, the dollars, the precious foreign exchange, used by the Mexican rich to buy up assets in the United States itself. They still hold that property. The burden of paying off the accumulated debt rests solely on the shoulders of the majority of the population living at near subsistence levels already.

In Argentina, the foreign borrowing of some $40 billion seems to have produced virtually no additional investment or sustained growth at all. In 1982 the Argentinian gross national product, despite a sharp if temporary boom in 1979, was still 2½% lower than it had been in 1974. The monetarist regime introduced after the military coup in 1975 was less thorough than in Chile but it still helped to wreck most of Argentinian industry. High interest rates and an overvalued peso were supposed to bring down inflation and rationalise the economy. Argentinian industry was faced first with a torrent of cheaper imports then with a soaring inflation rate and a collapse of the peso in 1981. Speculation was a far more profitable business than manufacturing in the years up to 1981. Companies could borrow money on the international markets and then lend it out again in Argentina at four times the rate of interest. Those who got their money out before the peso collapsed trebled the value of their original capital. Those who did not were unable to repay their overseas debts in devalued pesos and some spectacular bankruptcies of financial companies ensued. [57]

The scale of bankruptcies in the course of 1981 was such that the state had to intervene and bail out of the shareholders and take over their foreign debts. The workers thrown on the dole and those who saw their wages cut again in 1981 by over 20% had no such protection. The state was already responsible for some 40% of the economy and over half the capital investment in the country despite all the rhetoric about free enterprise. The Army controlled the steel industry jealously, and the navy the shipyards. [58] On top of that some 50% of the public debt was a result of purchases of military material. [59] In the aftermath of the Falklands war it remains the country most seriously in arrears on its debt repayments. According to former economy minister Aldo Ferrer

Argentina’s foreign debt increased by US$30 billion between 1975 and 1982. Two thirds of this represents capital flight and arms purchases. The remaining third can be traced to luxury imports, foreign tourism, and a subsidy to royalty payments and profit remission by foreign companies operating in the country – a total waste of resources from the national point of view. [60]

In Chile, by contrast, the monetarist regime following the coup 1973 was far more thorough and seemingly much more successful. But the consequences in the end were similar. Under the Allende government Chile had been effectively blacklisted in the national financial markets. The 1973 coup was the condition both for a resumption of American aid and a revival of bank lending. By 1976 wages had fallen by 50–60% from their 1972 level. Pinochet’s economic advisors, the ‘Chicago boys’ had set about a remarkable economic experiment, dismantling exchange and import controls, and uniquely for Latin American regimes dismantling the state sector. Nationalised enterprises were sold off at prices so low that the hidden subsidy to the purchasers amounted to 40–50%. [61]

In the late 1970s the Chilean economy was growing at rates of 8 or 9% a year, inflation was down from over 500% to 10% and the ‘experiment’ was proclaimed a success by economists and bankers alike. In reality the boom was hollow. Despite the rapid inflow of foreign capital, fixed investment in new factories and machinery averaged only 15.2% of GNP between 1977 and 1980, ‘one of the lowest rates in the developing world’ according to the Financial Times. [62] Chile remained dependent upon copper for half its exports and on other raw materials such as timber and fish for most of the rest. As commodity prices fell after 1980 the trading deficit soared. In 1981 several of the largest speculative enterprises collapsed. In 1982 industrial production collapsed, even the official unemployment level topped the 20% level and the state was forced to intervene.

The monetarist and free enterprise rhetoric of the Chilean government, as in Argentina, was exposed by the sheer depth of the crisis. In January 1983 the government was forced to liquidate three major banks and nationalise five others, including the two largest, to prevent their collapse undermining the economy as a whole. In May the state, under strong pressure from the international banks and the IMF, was forced to take on responsibility for repayment of much of the private sector’s foreign debt. [63]

It would be mistaken, however, to generalise too readily from these examples to the other debtor economies. In both Chile and Argentina the banks seem to have been led astray by the combination of ‘free market’ ideology and successful repression into lending large sums of money which were by and large squandered by the military regimes and local ruling-classes. Elsewhere, and notably in Brazil and Mexico, substantial proportions of the money borrowed from the banks was invested in new productive capacity. But as both cases show, investment by itself does not guarantee a sufficient return.

The IMF itself, in its 1983 World Economic Outlook confronts the question directly, of ‘the degree to which the borrowed financial resources have been used to finance the acquisition of productive capital facilities rather than merely to support current consumption.’ [64] It quotes figures showing that the proportion off Gross National Product invested in the ‘Non-Oil Developing Countries’ rose from 18.9% in the years 1968–72, to 21.9% in 1974–77, to 23.6% in 1978–81. The figures it argues ‘tend to negate suggestions that the upsurge of foreign borrowing has been used! predominantly to support unwarranted levels of consumption.’ But it also observes that the figures do not establish either the efficiency of that investment, or the foreign exchange earnings it produces. There lies the critical issue. In a context of world slump the problem generally is not too little productive capacity but too much – too much for stagnant world markets in particular industries, such as steel, shipbuilding, and vehicles, and too much to generate a rate of profit sufficient to meet the demands for interest repayment on borrowed funds.

The clearest example of the problems created by a massive investment programme is Brazil. The Brazilian state in the 1970s launched a whole series of gargantuan investment projects, financed in large part by foreign borrowing – hydroelectric dams and nuclear power stations, steel mills and shipyards, the sugar into alcohol as an alternative to petrol project, the development of vast mining complexes in association with multinational capital. Whilst Brazilian private capital remained weak, the state under the generals took on some 70% of total fixed investment. [65] Its aim was to build up the infrastructure necessary both to attract foreign capital and sustain the Brazilian industrial boom. The success, both in terms of industrial growth and the attraction of foreign capital from 1967 onwards was indeed remarkable. But with the advent of slump again in the 1980s it was clear that Brazil had over-reached itself.

Some of the projects were too ambitious, too capital-intensive (the capital-output ratio in Brazil is now extremely high at 3.8), and far too long-term to produce the returns capable of meeting interest payments on seven-to-eight year term loans. Some, such as the huge Itaipu hydro-electric scheme, have been abandoned though virtually near completion, for want of cash. The Carajas ore project has been delayed for one year, because of the crisis in the world steel industry. The Paragominas bauxite development in association with Rio Tinto Zinc has been postponed indefinitely. [66] The state-owned shipbuilding company is bankrupt, with $2 billion worth of foreign debt in its own right. [67] Finally the state-owned steel company, Siderbras has run into problems because of import controls in the USA and the decline of domestic investment.

In Mexico the state similarly took responsibility for a massive investment programme once the scale of its oil reserves became clear in the mid-1970s. They failed utterly to anticipate the slump in the oil market after 1980. The rest of Mexican industry after years of subsidy and protection from foreign competition remains weak and inefficient. Major private sector borrowers such as the Grupo Alfa, which alone has debts of some $2½ billion, also launched on ambitious expansion and investment programmes only to land themselves in bankruptcy when the crisis hit in 1982. [68]

Some of the major borrowers outside Latin America also had extremely high investment levels in the 1970s. This was especially true of East European economies. Poland used its overseas borrowing to sustain an investment level of 35% of Gross National Product. [69] Yugoslavia’s investment of 43% of Gross National Product in 1980 was considered by the Financial Times to be a world record. [70] One problem was that these industrial investments remained heavily dependent upon imports of components, technology, and raw materials. The cost of the extra imports often more than offset the extra foreign exchange such projects generated from increased exports to the West. In Poland, as in Brazil, several monster projects had to be abandoned unfinished, as the debt squeeze tightened. Others have suffered from a chronic shortage of spare parts and materials as imports were slashed. [71]

The essential point here is a simple one. To repeat, explanations of the crisis in the debtor economies in terms primarily of corruption, capital flight and unnecessary consumption are inadequate and misleading. They ignore the fact that the crisis of capitalism is a result of too much investment – too much to generate the rate of return necessary to satisfy investors or meet the interest payments on borrowed money. The decline in investment which ensued as the slump took hold only accentuated the problems of low profitability and chronic overcapacity, especially in means of production industries such as steel, petrochemicals, and mining.

The roots of the debt crisis lie less with the individual states concerned, or even with the rashness of the bankers who lent so freely, than with the crisis of the system as a whole. The variety of the regimes which have fallen into bankruptcy, from state capitalist Poland to ‘privatised’ Chile, from oil rich Mexico and Venezuela to the largest Newly Industrialised Country (and the world’s tent largest economy) Brazil, itself suggests that the crisis has far deeper roots than mismanagement by particular governments, or patterns of economic policy. There are one or two much-quoted exceptions. Of the major debtor economies, South Korea in particular has been able to avoid serious difficulty. But that does not mean that the other debtors could have successfully emulated its example. South Korea has been able to maintain its growth-rate largely because of its phenomenal export capacity. In terms of industrialisation it is roughly on a par with Brazil, but its economy is far more oriented towards exports (which take around 40% of its GNP compared to only 9% in Brazil and 13% in Mexico). [72] But there is only room on the world market for two or three South Koreas. Its growth in areas such as shipbuilding, where the total market is stagnant or declining, has been the result of cut-throat competition at the expense of rivals who include Brazil. The idea floated by some observers that every economy could be like South Korea is ridiculous.

Rescuing the banks – the crash averted

By the spring of 1982, as the world economic crisis persisted with no sign of recovery, the western bankers had worked up a cold sweat over the level of third world debt and the prospect of a major default. Poland’s failure to meet the payments on its $24 billion debt in 1981 had frightened them into cutting off lending to the whole of Eastern Europe, including even such a ‘creditworthy’, western-oriented borrower as Hungary. The bankers, as one indiscreet West German indicated to the Sunday Times, welcomed Jaruselski’s crushing of Solidarity, and the prospects of restoration of ‘order’ to the Polish economy. [73] But it was clear that the restoration of Poland’s economy to a point where it could pay off its debts would be a lengthy affair. The situation in Latin American worried them even more.

Yet, in the classical mould of banking crises, it was the banks’ own action in cutting back on new loans which precipitated the Mexican crisis of August 1982, and threatened the whole precarious house of cards of international lending. The Falklands war in April/May 1982 exposed the bankruptcy of the Argentine economy, and added to the financial squeeze on the whole continent. In June a jumbo Mexican loan of $2.5 billion was turned down by the banks, despite an interest rate 1% higher than Mexico had been paying a year earlier. The writing was on the wall; money poured out of the country, and continued to grow even after a forced devaluation on August 6. The Mexican government announced that it could not meet its debt repayments on schedule, and unilaterally declared a moratorium, a suspension of payment. The world’s biggest debtor, its foreign exchange reserves exhausted, was in a state of financial collapse.

The speed with which the American government and the international financial authorities reacted to the crisis was itself a testimony to its severity. In the course of a weekend the US government put up $2 billion (including $1 billion in advance payment for oil); the Bank of International Settlements (BIS – the organisation of central banks) provided a $1.85 billion bridging loan in anticipation of a major International Monetary Fund package, with half the money coming from the US Federal Reserve; the IMF itself promised $4 billion; even the private banks themselves agreed to an emergency credit of $1 billion.

The fear was partly that the nine largest American banks alone had around 50% their capital and reserves locked into Mexico. But it was also much wider than that. An outright default in Mexico would have precipitated a complete freeze of new international bank lending to the whole of the third world. The debts of Mexico, Brazil and Argentina together were sufficient to wipe out the profits, reserves, and the value of the shareholders’ stocks in the major American banks, a far more important factor than the ideology of Reaganomics. As one Swiss banker put it, the rescue was necessary to ‘ensure continual smooth functioning of the international financing system’. [74] Yet the rescue, at least for a while, was successful. As one expert commented later:

Mexico needed $2.7 billion more in 1982 just to meet interest payments and finance necessary imports. To build reserves to a safe level required another $2.5 billion. The rescue package provides it. The immediate crisis is past, thanks to the amount of money mobilised for Mexico. The rapidity with which the rescue was arranged showed both how dangerous default by a large debtor would be and the capacity of authorities to contain it if the political will exists.

The Reagan administration took the lead in assembling the rescue package. Over a weekend Mexico obtained more money in emergency credits from the US government alone than Costa Rica owes all its creditors. The level of US banks’ Mexican lending helps to explain why ideology did not stand in the way of action. What Poland was for the German banks’ profit pictures, Mexico will be for the US banks ... [75]

In the aftermath of Mexico US policy shifted gear in two decisive respects. It now agreed to support an increase in funding for the IMF. At the same time the US Federal Reserve moved to increase the money supply and bring down American interest rates. What that indicated to the rest of the world was that the American government was indeed willing to print more dollars if necessary to bail-out the world’s debtors and the major banks. But there was an obvious problem here, one which caused agonies for the monetarists in the regime. If the United States government or the Federal Reserve simply agreed to pump more money into the debtor economies, or bail-out any bank in trouble, they would be giving money away to those who had been most incompetent or irresponsible. The cost would be borne by other sections of American capital, whether through higher taxes or inflation. The discipline of the market would indeed disappear under such circumstances, and a collapse would be averted only at the cost of continuing stagflation and financial strain.

If, on the other hand, they refused to come up with the money; if, for example, they followed the line of Margaret Thatcher and her hardline advisor Alan Walters, and let Brazil go bankrupt even at the cost of bringing down Chase Manhattan, Citicorp and Lloyds they risked plunging the world into a slump on the scale of the 1930s or worse. The risks, as Federal Reserve Chairman Paul Volcker insisted were ‘without precedent in the postwar world’. [76] Nor were these risks simply a matter of bank profits and financial stability. As The Economist, ever willing to echo official American thinking put it ‘the political problem is even more dangerous’: [77]

If unemployment, inflation and disappointed hopes produce violence, coups and dogmatic politics [clearly ‘revolution’ is a word The Economist prefers not to use], the chaos will be felt throughout Latin America, and the worries of Nicaragua, Cuba or El Salvador will seem mere pinpricks by comparison.

As for Brazil, Argentina and Chile, their military regimes were even less stable and their debts just as serious. Many of the other debtors, however, just might have been written off – their debts small, their economies insignificant. But even here there were problems. Some – Turkey, Zaire, Morocco, those in Central America – were of strategic significance for the United States. More generally, any sort of open default was feared by the banks. If one country was completely cut off from new loans, others might fear similar treatment and unilaterally renounce their own debts. As the debt problems piled up, as more than 20 countries applied for debt rescheduling, (postponing payment to a later date), in the months after August 1982, so the banks and the international financial agencies such as the BIS and the IMF, were forced to respond with a succession of bail-outs. But there was no question, even in the case of Mexico and Brazil, of making it easy. The task of the IMF was to ensure that as much money as possible was extracted from the debtor economies without provoking either economic collapse, or political revolt. It was a tricky task.

In the past the arrival of the IMF had been the cue for the various banks to clear out, as in Peru in 1977, [78] and in Turkey after 1979. But in the case of Mexico, Argentina and Brazil it was clear that the funds available to the IMF (down to a mere $20 billion by the end of 1982 against a total Latin American debt alone approaching $300 billion) were insufficient to keep their economies afloat. In November 1982 the IMF demanded that the leading commercial banks provide an extra $5 billion in loans to Mexico as part of the overall package. [79] Central bankers in the United States and Europe helped to put the screws on, promising that in return the normal standards for regulating and assessing bad debt would be relaxed. Large banks with most to lose put pressure on the smaller banks (there are 14,000 banks in the United States, most of them operating in a single state only but many with some involvement in lending to Mexico or Brazil). In the case of Mexico, in a remarkable feat of cooperation between international agencies and banks from different countries, the money was raised. But considerable tensions arose as a succession of further demands had to be met.

If the American banks had been far less involved in Poland, the European and Japanese banks were less involved in much of Latin America. The German and Swiss central banks were now inclined to be much more conservative in their attitude to the bail-outs in Latin America. The Japanese banks unilaterally cut their levels of international lending by 10%. The Bundesbank imposed strict limits on the amount the German banks could lend to any one country. And the smaller American banks, unable to rely on being bailed out by the Federal Reserve (over 40 small American banks went bust in 1982) were extremely reluctant to increase the level of their involvement. [80]

Apart from major difficulties in the negotiations with the debtor countries, in both Mexico and Chile in particular, the debt owed by private companies to the banks was seriously in arrears, and both governments were reluctant to take responsibility for it. Ironically the western bankers and the IMF were quietly pleased when first Mexico and then Chile nationalised their domestic banking systems – governments were, in the final analysis, deemed the more reliable borrowers, regardless of their political complexion.

With Argentina there were temporary problems over the role of the British banks, with the Thatcher government disrupting the negotiations mainly it seems, for publicity reasons. The Bank of England, and the banks themselves, were always well aware that the threat of an Argentinian default, and the losses that would mean for Lloyds Bank International and other British interests, demanded that matters of business override the squabbles over the Falklands.

In both Mexico and Brazil, the participation of their domestic banks in the international banking network known as the ‘interbank market’ was itself a serious issue. This is the market in which banks borrow and deposit funds with each other for very short periods of time. Described as ‘the most sensitive mechanism’ in the entire system, it is here that a crisis is most rapidly felt. [81] Banks are supposed to use the system simply to deposit any spare cash they might have, and to borrow when they face a temporary shortage of funds. But in the course of 1982 it became clear that Mexican and Brazilian banks had been using the interbank market to borrow as much as possible to cover their mounting balance of payments problem. Such very ‘short-term lending’ is the easiest to cut off when the going gets rough. In a few months more than $4 billion in deposits were withdrawn from Brazilian banks by other banks. All efforts by the IMF and the major US banks responsible for the rescheduling to get this money back, failed.

The incident revealed both the degree of financial integration of the world’s financial system, and the speed at which particular banks operating within it could be exposed to a rapid withdrawal of funds, not by ordinary commercial or individual depositors but by other banks. Hungary had been thrown into financial crisis by that alone when its National Bank suffered a similar withdrawal of deposits at the beginning of 1982 in the wake of the Polish crisis. It is in this area of the international financial system, unregulated and uncontrollable by any single nation-state, that the threat of a collapse lies.

Yet by the summer of 1983, as this was being written, the danger of a collapse of the banking system of that nature, with major banks suffering a sudden withdrawal of deposits, and the whole fabric of international lending disintegrating, seemed to have been averted. Indeed within ruling-class circles a new argument had arisen. The US government, the IMF and the central banks, in intervening so rapidly, had simply bailed out the banks, it was suggested in some quarters. In the US Congress moves to increase funding for the IMF were running into difficulty. Demands for tighter control of bank-lending, reminiscent of the 1930s, were being made. The argument came from the Republican right as much as from the left. Other sectors of capital were becoming resentful at the way in which the banks had not only been rescued from disaster but were profiting from it into the bargain. [82]

Rescheduling loans simply means that the date of repayment of the principal (the sum originally borrowed) is postponed. It is like turning over an overdraft from year to year. As long as the banks get their interest payments regularly it doesn’t hurt them at all, on the contrary. In Mexico the banks in charge of the rescheduling charged $200 million in fees alone, whilst interest rates on the rescheduled loans rose, nearly doubling the return for many banks. [83] In Brazil Citicorp Bank’s profits jumped 46% to $153 million in 1982, a fifth of their total profits on loans which are only about 5% of their assets. [84] In July the Group of 30 estimated that the banks were making an extra $1.75 billion out of all the reschedulings. [85] Amazing though it may seem Mr Garrett F Bouton, of the Scandinavian bank (one of the biggest ‘consortium banks’ specialising in international lending in London) could say in February, 1983:

The profitability of our Latin American operations is going to shoot up in 1983 because of new business at higher margins. The Latin America manager has a smile on his face. [86]

The important point to remember about this is that banks make money from lending it out. If they were repaid the loans they would only seek to lend them out again – probably to a safer borrower, but probably also with a lower interest-rate. That is why a Brazilian diplomat could joke with Anthony Sampson that ‘If we really wanted to ruin Citibank we would suddenly repay the whole loan’. [87] The extra profits were supposed to compensate for the increased risk on new lending – but it was far from clear what the risk was, with the largest American banks certain that if something did go wrong and they suffered a withdrawal of deposits the Federal Reserve would have to step in and bail them out.

The problem which still exists for the banks, however, is that some of their loans may have to be written off altogether. Banks are normally obliged by the regulatory authorities to balance out their loans and their borrowings. If some of their loans have to be written off as bad debt, they have to be covered out of their reserves and ultimately out of their capital and profits. For the largest banks, it was this ‘insolvency’ threat as it is known, which became the biggest worry of all. [88] As the table shows Citicorp, on conservative estimates of its exposure, has dodgy loans to the third world totalling more than double the value of their equity (the money raised from shareholders). Declaring even a small proportion of that as bad debt would have wiped out their profits for 1982, led to a collapse of the value of their shares on the stock-market, and possibly provoked by itself a serious withdrawal of deposits and a consequent inability to make new loans.

‘Problem exposures’ for major American and British Banks


Pre-tax profit

Bad debt reserve
end 1982

Problem exposures overseas
end 1982





as % of total

as % of group









Bank of America







Chase Manhattan






































[Source: FT, 23 March 1983. NB columns have been left blank when data not available]

In reality, the American banks have been left free to decide themselves how large their bad debt provisions are to be. In 1982 they wrote off more bad debt on lending to companies in Britain than they did for the whole of Brazil. [89] That enabled some even to declare higher profits, and increase dividends to shareholders. German and British banks made much higher bad debt provisions, but then they could write most of those off against tax. In all three countries, however, losses declared on loans to industry, or on lending to other failed banks such as Penn Square in the United States, were far higher than those declared for lending to third world governments. [90] With the central banks turning a blind eye, the problem had been covered up and the confidence trick maintained. Indeed as long as the interest continued to flow in, and there was no run on the bank, the crisis as far as the banks were concerned seemed not to exist. Nothing, however, had really been solved. The banks had been rescued from the threat of collapse, bribed with higher interest rates and looser government regulation to go on lending, and subsidised indirectly through the government and IMF money (itself subscribed by the major western powers plus Saudi Arabia) lent to the debtor economies. The fundamental problem had been simply postponed. As one banker admitted ‘We are buying time. But what for? [91] The Financial Times in May, observing that the solutions ‘reached so far offer little more than a temporary palliative’, could only conclude that:

What is now required is a decisive recovery in world trade that will allow hard-pressed debtors to boost their exports to a level that will assure creditors of their ability to service the debt over the medium-term. [92]

Anthony Harris, however, in the same newspaper, labelled this ‘waiting for something to turn up’ stance, ‘the Micawber approach to debt’. [93] The problem as he acutely observed was that the classic remedy for an accumulation of debt lay in the deflationary collapse of the slump itself. The bankrupt were bankrupted, the debt wiped out, and interest rates fell, enabling those that survived to borrow cheaply and more easily again. The whole process of state intervention and central bank rescue in the 1970s and 80s as we noted earlier has prevented that happening. The slump has been limited at the cost of ‘shoring up the ramshackle structure of eurocurrency lending’, and perpetuating inflation and high interest rates.

But if such an insight has the qualities of a Marxist, his own alternative reveals only the pious hopes of a naive liberal. For Harris what is required is a wholesale ‘financial reconstruction’ – with the IMF or some other supranational institution taking over responsibility for the debt from the banks. The banks would lose money but gain security. The borrowers would pay lower interest rates over a longer term. Such plans have multiplied over the last year. Apart from a host of technical problems they all suffer from a major fallacy – the IMF depends for its resources on a United States government which has no intention of providing the funds for such an exercise. It cannot even get a much more limited bill providing a small amount of short-term cash through the US Congress. The plans presuppose a world state capable of regulating world capitalism – and that’s not available. [94]

In the meantime the volume of new funds flowing to the indebted economies is falling rapidly. Despite all the central bank pressure, and the new money raised for Brazil and Mexico, net international banking flows are estimated to have fallen by as much as 70% in the last twelve months (see graph). New bank lending to all non-industrial countries was $65.5 billion in 1981 and fell to $39.5 billion in 1982. But even in those two years it was estimated that the flow of interest payments back to the banks exceeded the flow of new money so that the actual inflow was negative, Now it looks as though new lending to much of the third world has ceased altogether. Lending to all non-OPEC countries in the developing world was only $1.6 billion in the first quarter of 1983. But $3 billion went to Mexico and Brazil alone, which means that there was a fall in outstanding debt everywhere else. [95]


This suggests just how nervous the western banks have become, despite the high interest rates on new loans. It also puts into context the common suggestion that the debtors are in a position to blackmail the banks into lending money by the threat of default. Even in the case of Brazil, where Finance Minister Delfim Netto deliberately-increased borrowing above what was needed in the late 1970s in order to lock the banks into an unbreakable commitment to supporting the Brazilian economy, that argument has looked rather dubious. The attempt to exercise that leverage by talking of default during negotiations through the summer of 1983 turned into a poker game, in which it was Brazil not the banks who backed down.

The cutback in new lending is adding to the strains on the world economy. It means that the debt crisis has spread to countries which until very recently were prospering with relatively low levels of debt. OPEC countries in particular, such as Nigeria and Indonesia, with little existing debt but sudden cash-flow problems arising out of the fall in the oil market, have found it impossible to raise money. In the course of 1983 the non-oil developing countries alone were expected by the IMF to run a balance of payments deficit of $70 billion dollars (down sharply from $90 billion dollars in 1982). But in the absence of new bank or IMF lending that will simply not be possible. Instead imports will have to be slashed regardless of the consequences. Such a rapid adjustment will be devastating for the economies concerned. It will also further reduce the level of world trade, cut export markets for goods from the industrial countries, and deepen the crisis.

The IMF simply lacks the funds to make up the gap left by the fall in bank lending. This is the second serious problem currently preoccupying those trying to manage the crisis. The IMF has already committed $6.5 billion more than it actually has in its coffers as part f the rescue packages. Even with the 50% increase in quotas greed in April it will still be seriously short of cash. [96] Because the situation is so desperate the IMF will probably eventually get more money from the USA. But the opposition to the proposal is revealing. As one congressman put it, the IMF increase is ‘only designed to make sure that some of our go-go bankers who got in over their heads on shaky loans to foreign countries would not have to pay for their own mistakes.’ [97]

This it should be emphasised is merely an argument over sharing out the losses between different sectors of capital – the banks on the one hand, or the taxpayer (in effect other sections of American capital) on the other. Both sides are agreed that the losses should be minimised, that the money should not be given away, and that the debtor economies should be squeezed as hard as is possible. The capitalist class of the western world, as indeed the capitalist class of the debtor economies, are, as always, determined that the working-class of Mexico, Brazil, Chile etc will have to be made to pay. Profits, however, they are distributed between different groups of capital, always depend on maintaining the rate of exploitation. It is this issue which constitutes the third and most important preoccupation of bankers, politicians, and IMF alike.

Making the workers pay: the IMF and the debtors

The IMF is not an autonomous supranational organisation. It is controlled by the states that put up the money – the western industrial powers plus, in recent years, Saudi Arabia. Nor is it simply a tool of American imperialism, though that is rather closer to the truth. The Fund is based in Washington; the United States puts up 20% of the money (Britain is next largest with 7%) and has a veto over where the money goes. But the Fund’s main task has become that of financial policeman on behalf of the western banks as a whole in managing the debt crisis. [98]

As we have already noted it is not the amount of cash that the IMF provides which is decisive. Its funds are far too limited for the bailing-out operation required by the largest debtors, although many of the smallest and poorest debtor countries, cut off from all bank lending, are completely dependent upon the IMF. In the case of Brazil, Mexico and Argentina its role has been to provide the endorsement without which the banks would refuse to lend more money. The condition of all the rescheduling negotiations has been that the government involved submit to an IMF programme of austerity measures.

The 1970s saw a succession of such programmes, negotiated with countries as diverse as Britain and Italy on the one hand, Jamaica and Turkey on the other. The severity of the conditions varied. In some cases, as in Britain, the negotiations were a charade, designed to divert public anger away from politicians who were just as anxious to impose the cuts demanded as the IMF itself. But in all cases the logic of their measures was the same. The economy, and the living standards of the working-class in particular, would have to be squeezed to provide room for the extra resources needed to increase exports, improve the balance of payments, and pay off the foreign debt.

The programmes usually followed a standard formula: a) cuts in public spending, and increased taxation designed to bring down budget deficits b) monetary restraint and higher interest rates designed to increase savings and rationalise the economy through bankruptcies; c) devaluations of the currency aimed at improving aimed at improving the competitiveness of exports on world markets, and cutting imports; and d) wage cuts through holding down wages whilst import prices and inflation rose with the devaluation, and through reductions in any subsidies for food or other essential goods. [99]

Ensuring that the banks get repaid has not been the only consideration for the IMF. Consistently it has emphasised the opening up of economies to the world market, and has opposed import controls and any measures designed to limit the free movement of capital, into or out of a country. That is not simply a matter of the free-trading ideology which prevails in IMF circles. It expresses the close association of the Fund with the interests of US capital and multinationals generally.

Correspondingly the IMF has tended to impose tougher terms, or refused to lend at all, to regimes in the third world of a leftist hue, or those inclined to nationalise or strictly control the operations of American capital. The most blatant recent example of this was in Jamaica, where the replacement of Manley’s regime by that of right-wing Seaga in 1980 was welcomed with a loan on soft terms, as well as with money from the World Bank and the Inter-American Development Bank. [100] In this respect the IMF is more political, less governed by straightforward criteria of profitability, than the banks themselves.

On the other hand the IMF, other international agencies, and sometimes the US government directly, have been willing to make special efforts to prop up repressive military regimes which have a vital strategic role in American policy, or in which American capital has high stakes. As the bankers’ magazine Euromoney put it: ‘In the case of countries such as South Korea, the Philippines, Taiwan or Israel it is reasonable to expect that the day of default would be forestalled indefinitely as long as the stake of the US government in economic and political stability remains high’. [101]

Similar considerations seem to have applied in the course of the last year to IMF loans to the three countries in Eastern Europe are members of the Fund – Romania Yugoslavia and the most recent recruit Hungary. IMF support here has gone hand in hand with measures opening the economies to foreign investment, and in the Hungarian case setting up an export-processing zone of a par with that on the border of Mexico. [102]

All this may seem to support the view of some left-wing observers ch as de Witt and Petras, that the debt crisis has become the ‘major lever’ through which international capital is consolidating its hold on the third world economies and undermining regimes oriented towards policies of ‘independent’ national development. ‘The real issue’ they argue, ‘that seems to be unfolding is the role of the banks in the restructuring of third world economies and societies to facilitate the free flow of international capital’. [103]

One problem with their and similar lines of argument is that they suggest that an alternative economic strategy of autarchic development, in isolation from the world economy, is a viable one. Cheryl Payer, for example, in her otherwise useful The Debt Trap, presents North Korea as a model of a self-reliant economy. More seriously in the present context, however, that analysis underestimates both the sheer severity of the crisis and the threat to the banks themselves. For the moment at least this remains the overriding preoccupation of the IMF.

In both Mexico and Argentina the Fund has proved very flexible over such matters as exchange control, import restrictions and limits on the remission of profits by the subsidiaries of multinationals to their home base. [104] Increasing the trade surplus to provide funds for interest payments to the banks has priority. The devaluation of the peso has made Mexican assets and labour costs substantially cheaper for US companies. This may yet encourage a large inflow of capital especially to the ‘In-Bond’ plants on the Mexican border. But for the moment foreign investment in Mexico has plummeted down to only $20 million in the first quarter of 1983, compared to $478 million for the same period in 1982. [105]

Reformist criticisms of the IMF are legion. A typical example can be found in the second report of the Brandt commission, Common Crisis. This argues that the Fund should raise considerably greater funds, be more flexible about its conditions, and pay greater attention to ‘political realities’. This last perhaps reveals the most serious concern of the so-called liberal wing of the western ruling-class. As the Report puts it:

Even for countries that are in a position to respond to stern measures, it is pointless to press corrective action to the point where political upheaval will result, as happened in Egypt for example, or Sudan in recent years. [106]

The fear is certainly justified. But the proposals for reform tend to miss the point. The primary objective of the IMF is to keep the economies afloat so that the flow of interest payments to the banks continues and the international financial system does not disintegrate. The complexity stems from the difficulty of bankrupting whole countries and flogging off their assets. Even if that was politically possible it would bring down the largest banks in the process. Instead, as one banker told the Financial Times, the IMF ‘has to apply just enough medicine to cure the disease without killing the patient.’ [107]

The political risks are serious. The combination of severe economic crisis and the debt squeeze mean that the pressures on the mass of the population who already live at levels barely above, or often below, subsistence already, are becoming intolerable. A journalist from the American magazine Newsweek, not noted for its radicalism, wrote in July for a feature on Latin America:

The social consequences of the debt crisis have been devastating. Malnutrition has increased significantly in Mexico and Peru as governments reduced welfare programmes and slashed subsidies on basic food items. Physicians have reported a sharp rise in the number of cases of highly contagious diseases such as tuberculosis and typhoid, due to severe housing shortage in already overcrowded cities. At the same time medical care has deteriorated: hospitals simply lack the foreign exchange needed to buy medicines and supplies.

In city after city relief organisations have set up soup kitchens and shelters for the homeless tragically reminiscent of the worldwide Depression of the 1930s. With unemployment rising and the buying power of workers being eroded by devaluations and triple-digit inflations, many people have turned to crime to make ends meet. In Mexico City burglaries and robberies are up 33% over last year. [108]

Over the last few years the pressures of the debt crisis, and IMF imposed austerity programmes, have led to strikes, riots, or massive popular explosions in countries as diverse as South Korea and Egypt, Poland and Morocco. In some countries, as in Turkey and Poland, the pressures of the bankers, the demands of restoring order to the economy have led to military coups and the crushing of the workers’ movement. In others, as in South Korea in 1980, seemingly impregnable regimes have tottered only to re-establish their control in the absence of any coherent strong, socialist opposition. But in Chile, Argentina and Brazil the crisis has exposed, after years of brutal repression, the vulnerability of the military regimes. In all three the ruling-class has split, providing an opportunity for the working-class to reorganise itself and fight back.

The pressures of the debt crisis are not going to diminish. As we emphasised at the very beginning of this article, solving the underlying problem depends upon two developments: a recovery in the world economy which is strong enough to provide a market for the exports of the debtor economies; and being able to increase the rate of exploitation, the mass of surplus-value extracted from the workers of the countries concerned, sufficiently to pay off the bankers. Neither condition on its own would be sufficient. Increasing the production of surplus value as we showed earlier does not generate extra profits unless the commodities produced can be sold on the market – and in this instance that means on the world market for hard currency.

Yet the very measures imposed by the IMF are adding to the slump, and making a strong recovery much less likely. Attempts to increase the production of surplus-value by cutting wage-levels and public spending are adding to the problems of realising that value through depressing the world market. This contradiction lies at the heart of the IMF programme. Measures designed to improve the competitiveness of one country in isolation might be successful. Applied to a whole number of countries they simply cancel one another out. Even US Treasury Secretary, Donald Regan, managed to dimly recognise the problem, last December, when he told reporters: ‘We have a big conundrum. How can the industrialised world import less and export more, and the developing countries import less and export more, and the less developed countries import less and export more? How can the world do this simultaneously and maintain any kind of an international trading system. [109]

What this situation means is that the IMF programmes are unlikely to work for more than one or two countries capable of gaining at the expense of the rest by undercutting them on world markets. Devaluation, for example, on which the IMF places so much stress means lower export prices on world markets, but more expensive imports in terms of the local currency. Lower export prices do not necessarily mean higher sales if world markets are stagnant or protectionism is increasing. But higher import prices will add to accelerating inflation, cutting into real wage levels, and adding to the strains on the economy. [110]

The debt crisis has already led to a significant reduction in the level of world trade. The debtor economies have had to slash their levels of imports by astonishing amounts (in Mexico’s case by 70% in the last year). That as we saw earlier cuts into the markets for other debtor countries, reinforcing the vicious spiral of contraction. It has also reduced the export markets of the industrial countries. US exports to oil-importing developing countries fell by 13% in 1982 (after growth rates averaging 20% in the late seventies). Exports to Latin America alone fell by 40% in the year to April 1983. [111] A third of American exports go to the third world and estimates are that these falls alone will mean 1% less growth in the United States this year. In Mexico crisis by itself has cost some 250,000 jobs north of the border. [112] For France, West Germany and Britain the story is similar, especially now that the OPEC producers, especially Nigeria, are also being squeezed and refused new loans.

In the absence of new bank loans the US government is trying to step up the credit it makes available for trade. Despite paying out $500 million in export credit guarantees to unpaid suppliers to Mexico, it has offered a total of $2 billion in new export credits to Brazil and Mexico. [113] The problem is that these loans are tied to the purchase of imports from American suppliers – they do nothing to solve the problem of paying off existing debts and covering the balance of payments deficit.

Those pressures are going to persist for the foreseeable future, and will probably mean that the value of world trade will fall even further than the 2% decline of 1982.

Nor is the debt problem and its deflationary consequences confined to the third world and Eastern Europe. Portugal has just had to submit to an IMF programme. Spain, Greece, Denmark and Ireland are major borrowers on the Euromarkets, and in 1982 France alone borrowed an estimated $25 billion pushing its total foreign debt up to $60 billion, the third largest in the world. None of these countries is liable to default on its debts or even fall behind on its interest payments. But all are being forced into deflationary measures by the strain, cutting working-class living standards, and reducing their rates of growth. The debt problem may have its roots in the development of the world crisis. But it has now itself become a major factor perpetuating the slump.

It is true that as this was being written the bankers and the IMF were congratulating themselves on their success in Mexico. In the first half of 1983 Mexico ‘achieved’ a trade surplus of $6.5 billion. Its debt had been rescheduled, the interest was still flowing, and the government had even turned down the use of a $5 billion standby loan from its creditor banks, and a further $329 million from the IMF. The Economist went quite over the top: ‘In no other country in modern times, not even post-Weimar Germany, has so radical a programme been instituted so rapidly, so free from hesitation – or with such sudden success.’ [114]

Well, we shall see. It was anyway a curious sort of success which cut the GNP by 5% and living standards for most Mexicans by 30%. The trade surplus was partly a product of the stabilising of the oil price, and the fact that thanks to guaranteed markets in the United States, Mexico along with Britain is the only oil producer to have increased its level of production over the last year. It was even more the result of a cut of 79% in the imports of capital goods, 73% in the imports of consumer goods, and 59% in raw materials. [115] Business Week observed more coolly that:

To head off a collapse of Mexican industry, the Bank of Mexico will have to ease the draconian squeeze on imports, including vital industrial materials and parts, that has slashed factory output ... [de la Madrid, the new President] must ease up on the brakes soon or risk triggering serious labour unrest, despite remarkable restraint so far by Mexican unions. [116]

It was that restraint that seems to have been the basic reason for the self-congratulation. As one banker quoted in the same article declared ‘The political management of the austerity measures has been excellent’. The success was testimony to the deep roots of the Institutional Revolutionary Party (the PRI) in Mexican society, its ability to both incorporate the opposition and the trade union movement, and present a radical populist face whilst pursuing the wishes of the bankers. At a critical moment in September 1982, after the crisis broke, the government was able to defuse the mounting tension by nationalising the banks. De la Madrid has launched a well-publicised drive against corruption, put the former head of the nationalised oil company on a show-trial, and relied on fatalism and fear of the sack to keep the workers quiet.

It remains to be seen how long they can get away with that. As in Chile and Brazil the debt crisis may yet prove the solvent which unleashes an upsurge from below. Certainly the crisis has not been resolved. $20 billion worth of debt owed by bankrupt private companies such as the Grupo Alfa has still not been sorted out. 800,000 new jobs a year are needed just to keep up with the birthrate. One report estimates that the financial crisis will again become acute in 1987 when some $35 billion of rescheduled debt and interest payments will be due in one year. [117]

If they were acclaiming an end to the crisis in Mexico, the worries over Brazil were intensifying. The problem could be summarised in two figures. Brazil was expected to run a trade-surplus of $6 billion in 1983, achieved by the same drastic cut in imports as in Mexico. But its interest payments alone for 1983, even after all payment of the principal had been postponed, amounted to $12 billion. [118] Bridging that gap demanded new finance. But the bankers were running scared. The political situation in Brazil, from their point of view, was by no means as healthy as in Mexico.

In May it was clear that the IMF targets set for Brazil only five months earlier were nowhere near to being met. The public sector deficit was still soaring. Inflation was approaching the 170% a year level. Both the banks and the IMF stopped any further loans, and a series of cliffhanging negotiations began. In particular the IMF demanded an end to subsidies on essential goods, and that the indexation system of wages be altered so that wages rose by only 80% of inflation in each year. With inflation at over 100% it was estimated that the new system would mean that wages would fall in value by more than half every year.

The resistance of the Brazilian regime did not stem from any belief that such cuts were not necessary. The fear, as Delfim Netto the finance minister put it, was that they would be ‘political suicide’. [119] In May the unemployed of Sao Paulo had rioted. In July the workers of the same region came out on strike. Oil refinery workers throughout the country stopped work. The engineering workers of Sao Bernardo do Campo followed. Within 24 hours nearly all the large factories, including those of Ford, Volkswagen, Mercedes and Saab had stopped. [120]

The strike was short-lived, with the leaders of the main state-run trade unions helping to prevent it spreading. But it scared the generals. The IMF negotiators were made of sterner stuff. Interest payments of $2 billion to American banks were now almost 60 days in arrears, the point at which the banks would have to declare those loans as non-performing, exposing their vulnerability to the rest of the world. There was talk of Brazil simply refusing to pay and setting up a debtor’s OPEC. Still the IMF refused to give way. The BIS under pressure from the Swiss and German central banks refused to renew a short-term bridging loan. Partly it was a matter of setting an example, of showing to every other debtor government that the IMF was not a soft touch. More crucially it was because the IMF and the bankers knew very well that they would only get their money at the expense of the Brazilian working-class. The Brazilians submitted, and obtained some of the money that had been held up. But the issue was scarcely settled, and the banks are still holding back on promised loans.

‘The main difference between the Brazilian and the Mexican crises’ said a top Brazilian banker, is that in their case the political framework was known and sound. Our changes are being attempted on shifting political sands.’ [121] The collapse with ill-health of President Figueredo symbolised the weakness of the military regime, in power ever since 1964. Moves towards elections, toleration of opposition parties and parliamentary democracy were designed to defuse the mounting tensions inside Brazil. But they have also, despite continuing repression on the streets and victimisation in the factories, provided an opportunity for the independent trade unions and the Workers’ Party of Lula to organise. The Brazilian industrial working-class is one of the most concentrated and powerful in Latin America. The very pace of industrial growth in the 1970s gave it the opportunity to exercise its muscles. In 1978, 1979, and 1980 they came out on strike led by the car-workers of the Sao Paulo region, and won substantial if temporary gains. [122] They remain the main threat, even in the absence of coherent revolutionary leadership, to the resolution of the debt crisis in Brazil, and thus in the world as a whole.

Recognition of that threat, along with the sheer severity of the demands imposed by the IMF, has led to a significant split in the ruling-class of Brazil. Demands that Brazil unilaterally refuse to pay, declare a default, have been commonplace amongst bourgeois opposition politicians as well as in working-class circles over the last few months. At the beginning of September 1983 [123] even the central bank governor of Brazil, Carlos Langone, resigned, declaring that: ‘I am convinced that [our] recent experience with the original programme of the International Monetary Fund ... indicates the difficulty of undertaking such commitments which can only be reached at an extremely high social cost.’

The Brazilian generals are trapped. If they concede to the opposition and abandon trying to push through the wage cuts, they will expose their own weakness to the Brazilian working-class. They will also cut themselves off from those who have been their friends and backers ever since they seized power in 1964 in the United States, as well as upsetting the multinationals and bankers with whom they had formed so fruitful an alliance. If they continue trying to push through the attack on working-class living standards they will have to rely on severe repression, rather than on the cooperation of trade union and social democratic leaders on which the ruling-class in the West can depend. That repression will quite possibly provoke a backlash, a mass eruption of the workers and unemployed which would be impossible to contain. For the moment the generals are sticking with the IMF and their American backers – but the threat of a Brazilian default, whether out of sheer economic necessity, or as a deliberate act, is a real one.

Fear of a debtor’s OPEC, or simply an outright refusal to pay by Brazil, which would probably be followed by a number of other countries, now haunts the bankers. Such actions would not, as has already been argued, provoke a collapse of the western banks. The Federal Reserve and other central banks would still step in and bail them out. But it would destroy their profits, and greatly accelerate the contraction of international lending which is already going on. The opposition movement in Brazil, as with the Peronists in Argentina and similar currents throughout the third world, does not however offer a satisfactory alternative. A default would mean that a country would no longer have to pay off the heavy interest on its debts, but it would also throw it back into autarchy, cut off from new credit for years to come, its trade disrupted, its assets liable to seizure (Mexican oil tankers, for example, sent to other countries would be seized by the US navy in the Gulf of Mexico on behalf of the banks). [124] A debtor’s OPEC, as suggested by Venezuela, which sought to use the threat of default to negotiate easier terms with the banks on behalf of all the major debtors, seems a more promising proposition. But there are no signs that the debtors are capable of agreeing among themselves, and their recent meeting at Cancun was a damp squib.

The nationalist alternative, of default, ‘self-reliance’, and a return to barter trade as in the 1930s, is simply not viable in the highly integrated interdependent world economy of the 1980s. It would not, as far as the bourgeois opposition in Brazil or Argentina is concerned mean an end to the intense exploitation of the working-class of Latin America – merely that the local ruling class would receive a larger share of the surplus-value. Revolutionaries are in favour of defaults certainly. But only as part of a process of the complete expropriation of capital and the destruction of all bourgeois states.

The roots of the debt crisis lie deep in the fundamental contradictions of world capitalism. The analysis Marx provided of how such banking crises emerge, which we outlined at the beginning of this article, remains relevant today. But the manner in which the crisis has unfolded has been very different from that of the 1930s, and from the boom-slump cycle of the nineteenth century which Marx studied. The internationalisation and concentration of capital have meant that crises have become potentially much more devastating and intractable. But the intervention of major states, capable of mobilising massive resources from other sections of capital to stave off the bankruptcy of companies, banks or countries, has decisively affected the course of the crisis.

The International Monetary Fund, the central banks of the United States, Britain, France, West Germany and Switzerland in particular, led by the United States government, have shown their ability to act as a lender of last resort to the international as well as the domestic banking system. But whilst they have rescued the banks, they have not rescued the debtor economies. All the money received by Mexico and Brazil has passed straight out again as interest payments. For them as for the many smaller economies suffering equally severe pressures if less publicity, the Costa Ricas, Bolivias and Moroccos, the crisis is going to get worse and the intolerable pressures on the mass of the population are going to increase.

The threat of a collapse of the world banking system in spectacular fashion has passed. Even if Brazil defaults on its interest payments, the pain will be felt but for the large American and British banks it will not be fatal. They will suffer losses. They will not be allowed to go bust. Size in the banking world is a guarantee of security – although it is a security which may well go hand in hand with a reassertion of state regulation over the freewheeling international lending market which dominated the 1970s. Instead of a collapse world capitalism is facing instead the prospect of interminable agony – a long drawn out period of strain and stagnation, a contraction in the level of international lending, and in the volume of world trade, and a weak recovery at best from the current slump.

The political instability which that means throughout the system is already evident. In Chile as this is being written, ten years after the coup the Pinochet regime is finding that its middle-class support has deserted, and that shooting down demonstrators on the streets has not stopped the waves of protest. In Argentina, whilst the labour movement is in disarray, the military regime is still crumbling in the wake of the Falklands disaster and the severity of the crisis. In the Philippines, another major debtor economy which is on the verge of bankruptcy, the Marcos regime has been shaken by mass protest in the wake of the murder of an opposition politician. The real possibility of ending the debt crisis lies here – with the working class, whose relative size and strength in Brazil far exceeds that of Russia in 1917; of the working class in the debtor countries deciding that they simply will not pay the price needed to keep the system going.


1. Warnings were sounded as early as 1977 by Arthur Burns, Chairman of the US Federal Reserve (the American central bank) and Richardson, Governor of the Bank of England. Burns said that US banks ‘must not and cannot continue lending’, but they did. The quote and other predictions can be found in A. Gunder Frank, Crisis in the Third World London 1981.

2. Details on the reschedulings can be found in M.S. Mendelsohn, International Debt Crisis: The Practical Lessons of Rescheduling, The Banker, London, July 1983; and in the World Development Report 1983 issued by the World Bank pp. 22–23.

3. Financial Times (FT henceforth), 23/3/83 – for details of bank ‘exposure’.

4. International Monetary Fund, World Economic Outlook, 1983. This article will contain a large number of figures, many taken from official sources, but most should be taken with a pinch of salt. Nobody knows how much the Mexican state and Mexican companies and banks really owe. The World Development Report, op. cit., gives details of public debt for all third world countries but these tend to be out of date, exclude lending to private companies and underestimate short-term debt, which was rising rapidly as a proportion of all debt, especially in the case of Mexico, Argentina and Venezuela in the years 1980–82. Most up to date and thorough guesstimates of the size and breakdown of individual country debtors are in the reports of the Morgan Guaranty Trust, quoted regularly in the Financial Times. One of its reports was summarised in the FT, 11/10/82, and used here.

5. Sunday Times, 8/5/83; Economist, Survey Banking on Recovery, 26/3/83.

6. Economist, 16/10/82.

7. FT, 4/9/82.

8. C.P. Kindelberger, Manias, Panics and Crashes, London 1978.

9. K. Marx, Capital, Volume 1, London 1976, p. 786.

10. K. Marx, Capital, Volume 3, London 1981, p. 516. (All subsequent page references are to this edition.)

11. V. Lenin, Imperialism; the Highest Stage of Capitalism, Collected Works, Vol. 32 (first written in 1916). The definition of ‘finance capital’ was taken from R. Hilferding, Finance Capital, London 1981 (written 1910). For critical discussion cf. M. Kidron, Imperialism – Highest Stage But One, Capitalism and Theory (1974); N. Harris, The Road from 1910, a review of Hilferding in Economy and Society, Volume 11 No. 3, August 1982; and my Finance Capital, Socialist Review, Issue 51, February 1983.

12. The work of the French Marxist Suzanne de Brunhoff has sought to show the continuing relevance of Marx’s work, cf. her Marx on Money (New York 1976) and State, Capital and Economic Policy (London 1978).

13. R. Parboni, The Dollar and its Rivals, London 1982.

14. Especially the articles by Chris Harman, International Socialism 2 : 9, 2 : 11, 2 : 13, 2 : 16. For the use of levels of abstraction in Marx’s discussion of the tendency of the rate of profit to fall cf. R. Rosdolsky, The Making of Marx’s Capital, London (1977) and B. Fine and L. Harris, Rereading Capital (London 1979).

15. Capital, Volume 2, London 1978, p. 264.

16. F. Engels, Preface to Capital, Volume 3, op. cit.

17. K. Bohn, International Banking in the 19th & 20th Centuries (London 1983).

18. See the references given in note 11.

19. A. Sampson, The Money Lenders (London 1981) and B. Stallings, Peru and the US Banks, in R. Fagen (ed.), Capitalism and the State in USLatin American Relations (Stanford 1979).

20. For the American banks see J.K. Galbraith, Money (London 1976): for the world slump and the banking crisis as a whole D. Aldcroft, From Versailles to Wall Street 1919–29 (London 1977) and C. Harman, The Crisis Last Time, International Socialism 2 : 13.

21. Figures from E. Varga and L. Mendelsohn, New Data for Lenin’s Imperialism (New York 1940).

22. Details in K. Bohn, International Banking, op. cit.

23. M. Aglietta, A Theory of Capitalist Regulation, London 1979, Chapter 6.

24. I owe this point to Jim Kincaid.

25. A clear summary of the origins of the Euromarkets can be found in J. Aronson, Money and Power (London 1977). See also N. Harris, Of Bread and Guns (London 1983).

26. H. Watchel, A Decade of International Debt, Theory and Society, Vol. 9, 1980.

27. E. Mandel, The Second Slump, London 1978, p. 29.

28. H. Magdoff and P. Sweezy, The End of Prosperity, New York 1977.

29. E. Mandel, op. cit.

30. J. Aronson, op. cit.

31. C. Johnson, What prospects for growth in the international credit markets?, The Banker, January 1983.

32. E.g. D. Lomax, The Recycling Folly, The Banker, August 1982.

33. A. Sampson, op. cit., especially chapter 1.

34. J. Aronson, op. cit.. The table is quoted in Bruce Franklin, Debt Peonage, Monthly Review, March 1982, from Forbes Magazine, July 1981.

35. Quoted in A. Gunder Frank, The Crisis in the Third World, op. cit., p. 148.

36. N. Harris, Of Bread and Guns, op. cit., and IMF, World Economic Outlook 1983.

37. The most coherent argument on these lines is in R. Peter de Witt and James Petras, Political Economy of International Debt: The Dynamics of Finance Capital, in J. Aronson (ed.), Debt and the Less Developed Countries (Westview 1979). See also Franklin, op. cit., especially Chapter 4.

38. Stallings, Peru and the US Banks, in Fagen, op. cit.

39. J. Frieden, Third World indebted industrialisation: international finance and state capitalism in Mexico, Brazil, Algeria and South Korea, in International Organisation 35, 3, Summer 1981.

40. J. Frieden, op. cit.

41. Economist Survey, Banking on Recovery, 26/3/83.

42. South, July 1983; World Development Report, op. cit.

43. C. Johnson, op. cit.; South, July 1983.

44. Table from Financial Times 15/10/82.

45. N. Harris, op. cit., p. 81.

46. World Development Report 1983, op. cit.

47. P.-P. Kuczinski, Latin-American Debt, Foreign Affairs, Winter 1982–3.

48. World Development Report, op. cit.

49. Economist report, Latin America, April 30, 1983.

50. FT, 28/1/82.

51. P. Knight, Brazil: An Economy Transformed, in E. Carim (ed.), Latin America and Caribbean 1983, World of Information Survey, London 1983.

52. Economist, Survey of Brazil, 12/3/1983.

53. World Development Report, op. cit.; A. Gunder Frank, op. cit.

54. A. Sampson, op. cit.

55. Economist report on Latin America, 30/4/83.

56. J. Rettie, Mexico, in Latin America and Caribbean 1983, op. cit.

57. Andrew Thompson on Argentina in South, August 1983.

58. FT, 14/1/82.

59. R. Lindley, Argentina, in Latin America and Caribbean 1983, op. cit.

60. Latin America Regional Report, The Southern Cone, 4/2/83.

61. A. Foxley, Towards a Free Market Economy in Chile 1974–79, in Journal of Development Economics I, No. 1, Feb. 1982.

62. A. Kaletsky, Chile’s Economic Experiment, FT, 9/3/83.

63. FT, 4/5/83.

64. IMF, World Economic Outlook 1983, p. 69.

65. Economist Survey, 12/3/83. See also J. Frieden, op. cit., and R. Munck, State and Capital in Dependent Social Formations: The Brazilian Case, Capital and Class, No. 8, Summer 1979.

66. FT, 25/2/83.

67. FT, Survey of Brazil, 18/11/81; Latin America Weekly Report, 17/12/82.

68. FT, Survey of Mexico, 22/3/82.

69. Business Week, 21/9/81, Why the Socialist Bloc’s Plans Aren’t Working.

70. FT, Survey of Yugoslavia, 7/9/83.

71. For a detailed examination of the state of the Polish economy see Barker & Weber, Solidarnosc – from Gdansk to military dictatorship (International Socialism 2 : 15, Spring 1982).

72. World Development Report 1983, op. cit.

73. Sunday Times, 13/12/81.

74. A. Friedman, A Colossal Mountain of Debt, FT, 20/8/82.

75. Deborah Riner, Guns, Gluts and the Bankers’ Power, in Latin America & Caribbean, 1983.

76. Guardian, 18/11/82.

77. Economist, 21/8/82.

78. B. Stallings, Peru and the US Banks, in R Fagen,.op. cit.

79. P. Montagnon, The New Way with Debt, FT, 31/1/83.

80. W. Hall, The Small Banks Get Nervous, FT, 21/12/82.

81. P. Montagnon, A Jolt to be Remembered, FT, 1/3/83.

82. W. Hall, The Battle with the Banks, FT, 5/9/83.

83. FT, 31/3/83.

84. FT, 6/3/83.

85. Guardian, 11/7/83.

86. Guardian, 8/2/83.

87. A. Sampson, Brazil versus the Bankers, FT, 22/7/83.

88. Economist, 16/10/82.

89. Guardian, 8/2/83.

90. FT, World Banking Survey, Part One, 9/5/83.

91. A. Harris, The Micawber Approach to Debt, FT, op. cit.

92. FT, World Banking Survey, 9/5/83.

93. A. Harris, The Micawber Approach to Debt, op. cit.

94. Every financial expert in the world seems to have produced a plan for solving the debt crisis, it would be tedious to discuss them in any detail. Examples can be found in The Economist of April 30 (M. Zombanakis) and July 9 (Lord Lever).

95. Figures from Bank of International Settlements Report analysed by P. Rodgers in the Guardian, 19/7/83; the FT of 19/8/83 and 23/8/83.

96. FT, 10/8/83.

97. W. Hall, The Battle with the Banks, FT, 5/9/83.

98. Economist, Survey of the IMF, 26/9/81 – and for a useful political analysis see Sue Cockerill in Socialist Review, 1982, No. 9 (Issue 47).

99. Cheryl Payer, The Debt Trap, London 1974, and Wachtel, op. cit.

100. W. James, The Decline and Fall of Michael Manley, Capital and Class 19, Spring 1983, and articles by N. Girvan et al., in Development Dialogue, 1980, No. 2.

101. Quoted by de Witt and Petras, op. cit.

102. N. Harris, Of Bread and Guns, op. cit., chapter 6.

103. De Witt and Petras, op. cit.

104. Economist, The IMF and Latin America, 11/12/83.

105. FT, 6/9/83.

106. Common Crisis, The Brandt Commission 1983 (London 1983).

107. FT, 6/9/83.

108. Newsweek, The Debt Crisis Boils Over, 25/7/83.

109. Quoted in South, July 1983.

110. Common Crisis, op. cit., pp. 30 & 64.

111. Wall Street Journal, 2/8/83.

112. South, July 1983.

113. FT, 31/8/83.

114. Economist, Mexico under the IMF, 20/8/83.

115. Guardian, 6/9/83.

116. Business Week, 5/9/83.

117. Report of Data Resources Inc. reported in Guardian, 27/6/83.

118. A. Whitely, The IMF’s Fragile Lifeline, FT, 23/8/83.

119. A. Sampson, Brazil versus the Bankers, FT, 22/7/83.

120. Socialist Worker, 16/7/83.

121. FT, 23/8/83.

122. See D. Beecham on Brazil in Socialist Review 1982 : 10 (No. 48), and Brazil: State and Struggle, Latin American Bureau, London 1982.

123. A. Whitley, Brazil’s Debt Crisis Tough Talks, Frayed Nerves, FT, 6/9/83.

124. Economist, 7/5/83. For more discussion on the issue which is certainly a real one see A. Sampson, Brazil versus the Bankers, op. cit., and for a sustained argument in defence of the possibility of Mexico defaulting and ‘going it alone’ the article in the third worldist magazine South in November 1982 by Ajit Singh (better known in Britain as a leading member of the Cambridge group of advocates of import controls).

Thanks in particular to Jim Kincaid, Pete Binns and Chris Harman for suggestions and help with this article.

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