John Plender, author of Capitalism: Money, Morals and Markets and senior writer at the Financial Times, talks about debt in the capitalist system and what it means for Greece and the eurozone.
In The Economic Consequences of the Peace, written in 1919, the economist John Maynard Keynes referred to relations between debtors and creditors as the ultimate foundation of the capitalist system. That foundation is often rocky, as the battle between German Chancellor Angela Merkel and the Greek leader Alexis Tsipras vividly demonstrated over Greece’s latest rescue package. One of the (many) themes of my new book on capitalism is that a heavy legal and cultural bias in favour of creditors against debtors has prevailed throughout the ages. The bias, as Keynes argued in his assault on the post-war Versailles settlement, can have profoundly damaging political and economic consequences.
The demonisation of debtors goes back at least as far as the Code of the ancient Babylonian king Hammurabi – the first recorded legal code from around 1750 BC. This sets out gruesomely the terms on which a defaulter should sell himself, his wife, his children, concubines or slaves to a creditor, or give his family away for forced labour to discharge unfulfilled debt obligations.
That indicates how the instinctive feeling that saving is virtuous and that debt is deplorable runs deep. And there is a fundamental tension between the ethical notion that people should take responsibility for their actions and the economic and social case for giving people a fresh start. Yet, over time, there has been a growing recognition that penalising debtors is economically counter-productive. No one works like a slave to pay off debts that look insurmountable, while throwing debtors into jail ensures that creditors receive nothing at all.
Interestingly, in the context of current frictions in the eurozone, one of the first examples of liberal thinking on this score occurred in Athens. Around 600 BC, the Athenian constitutional reformer Solon responded to an economic crisis for which excessive debt was partly responsible by introducing laws that scrapped all limits on the rate of interest, reduced or cancelled many debts, and forbade personal slavery for debt.
But that was an exception. A more enlightened view had to wait until English ministers under Queen Anne introduced, in 1706, the concept of legal discharge from debt on partial repayment. The legislation came at a time when debtors accounted for a majority of the prison population.
Since then, the politics of debt have been transformed by universal suffrage. No one is jailed for debt nowadays. And, in the Anglophone world, bankruptcy laws are consciously pro-enterprise. It is no coincidence that a country like the US, whose bankruptcy laws are famously liberal, has an exceptionally vibrant venture capital sector and a very entrepreneurial culture.
Nor is it entirely coincidental that three American presidents – Abraham Lincoln, Ulysses S. Grant and William McKinley – experienced bankruptcy personally, as did a number of great entrepreneurs, including William C. Durant (founder of General Motors), Henry Ford, Milton Hershey, H. J. Heinz and Walt Disney.
In contrast, Germans are among the most unreconstructed, for a host of reasons. Even their language tends to reinforce disapproval of indebtedness. There is an etymological link between debt and guilt in the German word schuld. German conservatism was also a product of history, notably the great Weimar hyperinflation.
Yet German historical memory is peculiarly selective. Germany is the only major developed country to have been the beneficiary of debt forgiveness in modern times. The occupying powers after the Second World War wrote off the great majority of the Nazi-era debt and postponed collection of other debts for nearly half a century. This debt amnesty, which allowed Germany to embark on its economic miracle with a cleaner balance sheet than any of the victorious allies, was extraordinarily magnanimous. Yet, while most Germans can cite the Marshall Plan as an act of post-war American generosity, this larger act of macro-economic mercy has disappeared from the political consciousness of Germany’s current austerity police.
That said, in international debt negotiations, might is right. But the lesson of Versailles, as Keynes understood so well, is that the ultimate consequences of debt realpolitik can be catastrophic. It is a point that should not be overlooked when considering the future of Greece and the eurozone.