Michael Hudson: 18th Century Writers Understand Effects of War Debt Better Than IMF

Yves here. The book Agnotology described how societies become more stupid. Sometimes it is by design. A major case study was propagandizing against emerging information that smoking causes cancer. But the authors also described other loss of knowledge, such as pre-modern birth control techniques. Michael Hudson sets forth they another example of agnotology below: how earlier thinkers had a better grasp of the economic impact of war debts than mainstream economists do today.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is The Destiny of Civilization.

For the past few years I’ve been writing a history of debt and its political context from the Crusades to World War I. I’m now writing the chapter on how much more realistic the 18th century economic critics of debt financing were than today’s mainstream neoliberals who encourage countries to finance their chronic trade dependency and balance-of-payments deficits by borrowing, as IMF orthodoxy urges. These early political economists warned that borrowing from foreigners would lead to a loss of national sovereignty to creditors. Borrowing at home would create a financial class that not only would gain control of public tax policy and the legal system. The scope of their analysis was politically and socially broader than today’s economic tunnel vision.

One writer in particular, Malachy Postlethwayt, described how the exponential growth of interest-bearing debt not only stifles economies but endows a cosmopolitan financial oligarchy that steadily gains power over highly indebted states. In contrast to the teachings of today’s trickle-down orthodoxy, it was recognized that the emerging financial oligarchy did not spend its receipt of interest in creating new means of production to help the economy carry its debt, but spent it on making yet more loans or indulging in luxury spending and conspicuous consumption instead of investing in productive capital formation and employment.

The second half of the 18th century saw a generation of writers criticize the burden that war debts imposed on the economy. They calculated how much future wars were likely to cost and the interest charge on the resulting debts, and described the need for Britain to stay out of debt to prevent it from polarizing between the Moneyed Interest and the rest of society.

Of particular concern was how high taxes could be raised to pay creditors without slowing the economy and impairing the export trade by which Britain obtained international hard money. Acknowledging that money was the sinews of war, they wrote that the way to draw it into Britain’s economy was to run a trade surplus. That required preventing Britain’s export prices from being pushed up by taxes levied primarily to pay interest on war debts.

Malachy Postlethwayt spelled out the problem as follows in 1757: Suppose Britain were to fight a war every ten or twelve years, and suppose further that each war would add £30 million to the national debt. Within the space of just three wars, in thirty to thirty-five years, the national debt would swell to £170 million. At a modest 3% interest rate this would require annual interest charges of £5.1 million, of which a third (£1.7 million) might be financed by new taxes levied on British land and trade. “And will not, at length, that source of Wealth be dried up, from whence the Public Creditors derive their very Annuity? In consequence whereof, will not the Payment of their Interest become precarious, as well as that of their Principal?”[1] Creditor demands for payment would be self-defeating if their financial demands prevented debtor economies from paying.

Already in 1739. Mathew Decker’s Essay on the Causes of the Decline of the Foreign Trade attributed the deterioration in British trade to the fact that its taxes and tariffs to carry the public debt added a financial element to national costs. Interest was a cost of production like a tax superimposed to pay creditors, many of them Dutch. “Foreigners can rival us [by] the prodigious artificial Value we thereby put upon our Goods to the hindrance of their Sale abroad.” Covering these financial and the resulting fiscal costs raised the rents and hence market prices that landholders had to charge. Decker thus pointed to “the fictitious Value they make in the Rents the Land-holder now receives, compared with the real Value a Free-Trade would make.”[2]

This line of reasoning suggested a downward spiral: Wars could only be financed by running into debt, because populations would not support wars if they had to pay immediately the taxes needed to defray their full costs on a pay-as-you-go basis. But the commercial consequences of war debts would burden the economy and slow its economic growth, ultimately driving the nation bankrupt.

In Great-Britain’s True System, Postlethwayt calculated the degree to which taxes to service public debts increased production costs while draining resources that otherwise would have been available for private investment: “the Sum-Total of these Taxes is at least 31 per Cent. of the annual Expense of the whole People of England. Now, where is the Nation with which we can enter into a Competition of Commerce on equal Terms.” The problem, he added, was that “The TAXES, which are levied to pay the Interest of these Debts, are a Check upon Industry, heighten the Price of Labor, and are an Oppression on the poorer Sort.”

As he elaborated this idea: “The public Debt occasions an Annuity to be drawn out of the Profit and Consumption of every Individual. Before such Debt took Place, everybody possessed their whole Gains. There was no Exchange Alley,” that is, the stock and bond market where debts and shares in companies with monopoly rights were traded.

If the present public Debt instead of being encreased, was paid off, the Profits of the Manufacturers, Tradesmen and Merchants, &c. would be all their own. They would be exempted from paying at least 100 per Cent. out of their joint Gain … with that Advantage we should be able to undersell our Neighbours; Our People would of Course multiply; Our Poor would find ample Employment; even the aged and infirm might then earn enough to live upon; new Arts and new Manufactures would be introduced, and the old ones brought to greater Perfection.[3]

But if war spending continued, higher taxes to service its debts would increase production costs and hence export prices. That would impair the balance of trade and bullion would flow out, leaving the economy to stagnate without the money needed to support industry and to defend the realm in coming wars.

The conflicting class interests at play were described baldly by Sir John Barnard in 1737: “To speak properly, the Publick Funds divide the Nation into two Ranks of Men, of which one are Creditors and the other Debtors. The Creditors are the Three Great Corporations and others, made up of Natives and Foreigners; the Debtors are the Landholders, the Merchants, the Shopkeepers and all the Ranks and Degrees of Men throughout the Kingdom.”[4]

Other contemporary writers recognized that in the end, foreign debts could not be paid. They either would have to be cancelled, as French and English kings had been doing ever since the 14th century, or all the country’s property would pass into the hands of foreign creditors and domestic financial oligarchies.

In his 1750 essay “Of Money,” David Hume estimated that Britain’s fundholders numbered about seventeen thousand persons, just a fraction of the total population.[5] Seizing upon this calculation, Postlethwayt complained that “Since our Debts have taken Place, not near one Tenth of the Land of England is possessed by the Posterity or Heirs of those who possessed it at the Revolution.”[6] National debts also favored a cosmopolitan financial oligarchy, an alliance that threatened to overshadow Europe’s traditional rivalries and to become its new economic and political authority, much as the imperial papacy had been in the 12th and 13th centuries. “As Foreigners possess a Share of our national Funds, they render the Public in a Manner tributary to them, and may in Time occasion the Transport of our People, and our Industry.”

Postlethwayt’s warning was that the drain of money to pay interest would create a shortage of credit in Britain, especially if this debt service were remitted abroad to Dutch investors. In contrast to the quantity theory of money held by David Hume and most modern economists (holding that less money would reduce prices proportionally), Postlethwayt pointed out that the scarcity of money actually would raise most commodity prices, by interrupting economic activity, causing production shortages and economic distress, making private-sector credit more risky and thus increasing borrowing costs.

James Steuart was even more blunt in 1767. However, he acknowledged, “if we suppose governments to go on increasing, every year, the sum of their debts upon perpetual annuities, and appropriating, in proportion, every branch of revenue for the payment of them; the consequence will be, in the first place, to transport, in favour of the creditors, the whole income of the state, of which government will retain the administration.”[7] Britain’s financialized prosperity thus had the politically transformative effect that Postlethwayt had deplored: “this property is transferred to a new set of men, who were once the monied interest, and who afterwards acquire the lands, and consolidate this additional circulation; does not this chain of consequences represent a kind of circle, returning into itself?” The monied aristocracy became the new aristocracy, displacing the old landed nobility. The problem was how to prevent putting “the whole property of the state in constant circulation, from one class of men to another,” from landowners and the population at large to creditors.

This perception was free of the modern idea that automatic adjustment mechanisms enable foreign debts to be paid by price adjustments making the exports of debtor countries more competitive as a result of deflation and economic austerity. There was no faith in such adjustment mechanisms when it came to foreign debts.

By the time Adam Smith wrote the Wealth of Nations in 1776, he concluded that the only way to avoid economic collapse was to stay out of the wars and projects of empire that led Britain into foreign debt in the first place. He defined a free market as one free of debt, especially foreign debt (as well as free from rent, including the monopoly rent of companies like the East India Company, established by government as a means of making rents to pay down its war debts).

Today’s histories of economic thought simply pick up the narrative after this flowering of critiques of debt were replaced by the pro-creditor logic of David Ricardo and other bank spokespersons trying to assure populations that debts would not create any problems of more than a transitory and self-curing character.


[1] Malachy Postlethwayt, Great-Britain’s True System (London, 1757):2 and 12.

[2] Mathew Decker, Essay on the Causes of the Decline of the Foreign Trade (London, 1744 [1739]):preface. The kindred terms “fictitious costs” and “fictitious capital” (for the capitalization of such rentier payments into asset prices) became common in the late 19thcentury to refer to economic rent – interest, land rent or monopoly rent causing market prices to exceed intrinsic cost-value. Countries free of having to pay such rentier income in the form of would be able to underprice exports from rent-ridden economies.

[3] Postlethwayt, Great-Britain’s True System:165 and 52-53.

[4] John Barnard, Reasons for the Representatives of the People of Great Britain to take Advantage of the Present Rate of Interest for the More Speedy Lessening the National Debt (London, 1737), quoted in Wilson, England’s Apprenticeship:318. The three great corporations were still the Bank of England, the East India Company, and the South Sea Company.

[5] Hume, “On Money,” cited in Postlethwayt, Great Britain’s True System:213-215).

[6] Postlethwayt, Great-Britain’s True System:17-18 and 213-215.

[7] James Steuart, An Inquiry into the Principles of Political Oeconomy (London, 1767):349-351.

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  1. Michaelmas

    ‘War is a way of shattering to pieces, or pouring into the stratosphere, or sinking in the depths of the sea, materials which might otherwise be used to make the masses too comfortable, and hence, in the long run, too intelligent.’

    ‘The war is not meant to be won, it is meant to be continuous. Hierarchical society is only possible on the basis of poverty and ignorance. ‘

    — George Orwell

  2. The Rev Kev

    If I recall correctly, it was Great Britain which found a solution to how debts from war would build up until a Sovereign reneged on it by founding the Bank of England in 1694. England wanted to finance a great Fleet to rival that of France but could not through normal channels borrow the money to do so. With the founding of the Bank, people were encouraged to subscribe to it to raise the needed funds and the government stood behind the bank and made sure that those subscribers were paid their annual interest of 8%. This was backed by revenues derived from taxes and duties on shipping. With this solid financial footing, Great Britain was able to finance much of their future wars in building up their empire. And I would guess that the revenue from these new lands and conquests would then flow back to Great Britain to liquidate the original loans-


    1. Michael Hudson

      Yes, that is precisely what happened. The Bank of England was founded with its sole material asset being government debt (1.2 million pounds, soon expanded). Making government debt the foundation of private-sector bank assets created a self-financing dynamic — thanks to the magic of double-entry book-keeping. With that innovation, government debt became the monetary base, not deflating the economy.

      1. Neutrino

        Reading the article made me visualize the familiar US debt spike graph showing wartime and other periods. Analogous graphs throughout history could show some type of government and counter-party activities and resulting impacts on the populace, whether in England, France, The Netherlands or elsewhere. Are there such exhibits?

      2. Smith, M.J.

        Thank you, Prof. Hudson.

        William Hogeland’s latest book, The Hamilton Scheme, covers much of the same ground. Apparently, the creation of a “domestic financial oligarchy” was exactly what Alexander Hamilton had in mind.

      3. Susan the other

        Couldn’t it be just as easily said that the government asked for credit and cooperation and as a reward it paid interest but in order for this to become the monetary base it needed to be perpetual because interest was always paid after the money was used and made a profit and so interest pushed inflation? So, theoretically if there is a debt jubilee and all debt is cancelled then the value of all assets needs to be adjusted which would be pretty crazy. Just thinking about our 34Tr national debt. What we need to make our monetary base believable at this altitude isn’t more interest or a big devaluation, but rather something more valuable than inflated hard assets. Something like a reclaimed natural environment, from whence it all came in the first place. That pays back the real credit and we get to keep the assets.

        1. Yves Smith Post author

          I hate to tell you but this is very confused.

          Money does not pay interest. Credit instruments do.

          The understanding of money has become confused by the creation of money market accounts, which pay interest and have a convention of maintaining a $1 NAV per share. They have broken the buck, which led to them being guaranteed.

          Paul Volcker absolutely hated money market accounts because he foresaw that consumers were treating them like bank deposits, which did not pay interest, and that the authorities would eventually be forced to backstop them. This regime has come to guarantee all sorts of credit risks when the only risk they should be guaranteeing are smallish bank deposits and deposit accounts used to pay payrolls, where the accumulation of large balances is unavoidable. The Fed once provided that sort of business account. I have not bothered tracking down the details but I assume it no longer exists for the same reason the Post Office Bank no longer exists, that the banks insisted it be wound down because they did not like the competition.

          1. Susan the other

            I guess I just don’t understand the concept of debt as money. I do understand the concept of credit as money and that money itself is a token of credit. Of cooperation. But I hit a brick wall when I switch that out with its opposite, making money a token of debt. ‘Confused’ is definitely the correct word for me.

            1. drive-by commenter

              Well, but credit can only happen when there is debt, they’re two faces of the same coin (the double-entry principle mentioned above). But if I understood you correctly, maybe the solution is remembering that debt securities (e.g., government/corporate bonds) bear interest? This way they’re an asset for the holder, a less liquid asset than money, but that can be traded nonetheless and has the benefit of receiving interest (money by itself bears no interest). In a sense, just by receiving some money back makes that security an asset, interest is there only to justify not holding $1000 in cash, but buying instead bonds that will only give you the $1000 back in 10 yrs

  3. Fred

    “Of particular concern was how high taxes could be raised to pay creditors without slowing the economy…” Eisenhower understood and applied it better than most.

    1. CA

      ““Of particular concern was how high taxes could be raised to pay creditors without slowing the economy…” Eisenhower understood and applied it better than most.”

      There were 3 recessions lasting 28 months during the Eisenhower years: 1953, 1957 and 1960. Growth was relatively slow through the Eisenhower years:


  4. TomDority

    In spite of the ingenious methods devised by statesmen and financiers to get more revenue from large fortunes, and regardless of whether the maximum sur tax remains at 25% or is raised or lowered, it is still true that it would be better to stop the speculative incomes at the source, rather than attempt to recover them after they have passed into the hands of profiteers.
    If a man earns his income by producing wealth nothing should be done to hamper him. For has he not given employment to labor, and has he not produced goods for our consumption? To cripple or burden such a man means that he is necessarily forced to employ fewer men, and to make less goods, which tends to decrease wages, unemployment, and increased cost of living.
    If, however, a man’s income is not made in producing wealth and employing labor, but is due to speculation, the case is altogether different. The speculator as a speculator, whether his holdings be mineral lands, forests, power sites, agricultural lands, or city lots, employs no labor and produces no wealth. He adds nothing to the riches of the country, but merely takes toll from those who do employ labor and produce wealth.
    If part of the speculator’s income – no matter how large a part – be taken in taxation, it will not decrease employment or lessen the production of wealth. Whereas, if the producer’s income be taxed it will tend to limit employment and stop the production of wealth.
    Our lawmakers will do well, therefore, to pay less attention to the rate on incomes, and more to the source from whence they are drawn.

    Written around 1925

    1. eg

      This is the difference between earned and unearned income, a distinction important to the Classical economists, but lost (thrown away? Hidden?) during the Marginal Revolution, and then buried forever when the neoclassical orthodoxy banished forever from the academy the study of the history of economic thought.

      Cui bono?

  5. Beachwalker

    An amusing thought exercise is to imagine what would happen to the American upper 1 per cent, if somehow an authentic peace party took over congress and the White House. What would become of our poor oligarchs if this new government cut defense spending by 80%, closed all the overseas military bases and stopped promising everyone that we would defend them from our enemies?

      1. drive-by commenter

        Even when FDR proposed mild reforms (by any rational account, although they were judged extreme, even more so by today’s standards), it’s said that the Rockefellas called general Smedley Butler to stage a coup, but at that time he was tired of “being the gangster of capitalism” so he said “no”. Butler told congress himself, but nothing happened to Rockefeller and co.

  6. GlassHammer

    Older economic frameworks gained purchase due to the people, the culture, the events, and the governments of that period providing them fertile ground to work within. The sensibility, utility, and overall accuracy of those older economic frameworks wasn’t enough to make them influential.

    Today we have a different people (less morally concerned with and connected to their community), different culture (much more dog eat dog with no emphasis on belonging), different events (crisis are less geographically contained making them harder to adapt to) and different governments (zero stewardship over their people instead openly seeking any/all advantage over them).

    Given what we are working with no one has to excessively suppress older economic frameworks, they would struggle to find purchase regardless. (Not arguing that they are invalid frameworks just pointing out that the environment you would deploy them into is very hostile to them.)

  7. spud

    the problem with Postlethwayt thinking is that, what if the wars are for free trade? that’s clearly the case today, and it was back then. the British waged war on the world to covet the resources and labor of others at the point of a gun.

    “If the present public Debt instead of being encreased, was paid off, the Profits of the Manufacturers, Tradesmen and Merchants, &c. would be all their own. They would be exempted from paying at least 100 per Cent. out of their joint Gain … with that Advantage we should be able to undersell our Neighbours; Our People would of Course multiply; Our Poor would find ample Employment; even the aged and infirm might then earn enough to live upon; new Arts and new Manufactures would be introduced, and the old ones brought to greater Perfection.[3]

    and if you undersell your competitors as what is done under free trade, you are exporting your unemployment, deflation and poverty onto others. who will be forced into raising tariffs for self protection.

    the quickest way to war, strife, poverty and indebtedness, is free trade. this is playing out now in the Ukraine, Gaza, Kenya, Bolivia and of course the rest of the world.

    most likely, those debts will never be paid.

  8. TimD

    In the 1770’s Britain was embarking on the industrial revolution which allowed them to out-compete, out-produce and out-grow other countries. Debt is less of an issue when an economy is experiencing heavy investment and export-led growth. Much like the US after WWII, strong investment, strong growth and a debt that was shrinking as a percentage of GDP.

    Contrast this with the US now. It is a country that has had almost 50 years consecutive years of trade deficits, a debt that grows three to four times as fast as GDP. It could turn things around but it needs to attract investment in domestic productive capacity instead of offshoring, it also needs to produce competitively so it can move to a trade surplus. The current trade war with China, isn’t going to do it; it will just maintain inflation and make it harder to service the debt.

    1. spud

      but Briton was stealing at the point of a gun, other peoples resources and labor. the industrial revolution made that theft, “more efficient”.

      export led growth means poverty at the other end of the export. a recipe for instability, debt and war.

      in reality, trade must come down to buy what you have to, sell what you can.

      otherwise the west which is driven by free trade cranks whom must be put back in the asylum, because the world now wants to be sovereign, and get paid a living wage for their resources and labor.

      1. TimD

        I agree, the market economy is all about efficiency, it also means it doesn’t care what happens at the other end as long as the destination market and the supply of cheap raw materials isn’t affected. There are numerous examples of countries with a strong manufacturing base controlling other countries to ensure that.

        For long-term stability and balanced development trade needs to be balanced. In the short term, the more a country can export, the faster it grows and the richer its ruling class gets. What I found so surprising was that the ruling class in the US pushed for offshoring manufacturing and opening up the economy to imports through free trade deals. Sure they got even more wealthy by maintaining prices and dropping production costs with their offshore manufacturing, but it was at a tremendous cost to the US economy.

  9. Ken locke

    There is another factor. The finance elite have found their natural home with the military-industrial-congressional Complex and in the west have been transnational to a considerable degree. In the past they have occasionally financed both belligerents in a war. Win-win

  10. Skip Intro

    I think there is an interesting application of war debt visible with the EU and Ukraine. The EU is particularly ill suited to national military and other expenditures for war, and not only are they donating tons of weapons and ammo, they are restocking at prices that are vastly inflated due to the effects of the war on production costs. Some have wondered why Russia has destroyed so much of Ukraine’s energy infrastructure, but left the connections with the western suppliers intact. While Ukraine draws power from EU utilities, it also saddles them with increasing levels of bad debt. With the zero-sum bloodsport budgeting in the EU, austerity and popular discontent were inevitable, and pretty damn quick.

    And speaking of financial attrition, if all the Black Sea drone flights now require fighter escorts, they rapidly lose their viability. If they are reserved for ‘special occasions’, they become a mighty tell, if they fly regularly it becomes mechanically if not financially unsustainable.

  11. AG

    We was taught in high school in Germania that double book keeping was invented by none other than us Germanians in the pretty Fugger merchant town of Augsburg, which is Bavaria.
    And that´s how it is. “We´re top of the world Mama.”

    p.s. Great piece. Thx!

    1. AG

      Nicolai Petro in a new interview about Ukraine (with Nima not Dima) on why the US is shooting itself in the foot in economic terms:

      “Although I have a preliminary answer to that question. It´s not a very generous one. But I don´t think Americans, in particular politicians, understand economics. They just don´t understand global economics because they live in a system where laws can be imposed by authorities to condition economic outcomes.”


  12. drive-by commenter

    A perceptive analysis by Prof. Hudson, as usual. It’s great that he’s been writing these shorter texts, it makes it easier to keep tabs on him and they still pack a lot of punch.

    I’d like, though, to contemporize it slightly differently. Once upon a time, there were this thing called “tax” and when the government wanted to balance its budget, it could tax the wealthy. But this is a faint memory now, nowadays government borrows from the wealthy and not only they don’t lose their money (previously taxed), they actually get interest on what they couldn’t spend anyway! To complete the charade, when government debt is too great, the fiscal hawks come in to usher more austerity on the poor, for the benefit of the rich. Although debt typically doesn’t matter much when it’s not foreign debt (though the rich are still getting richer in this case), the fiscal hawks will still bicker at it anyway and pretend it does.

    And as a few people commented, war has always been a state policy for various reasons. Unfortunately, as Hudson’s paper explains, now that governments have been taken by creditors there’s the additional reason of keeping the flows coming to them. But wars have always been a feature, not a bug. As this world ends in a mixture of Mad Max and Terminator, I, for one, shall welcome our new insect overlords


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