281 - Michael Hudson: How Debt Destroys Empires

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**Robinson Erhardt** (1:06)
We're living through big arguments about government debt, interest rates, war spending, tariffs, whether central banks should be independent. And this raises many questions, but one of them is, what is the key to getting a government under control? So when you look at the world today, what do you think people are missing about the relationship between finance and political power?

**Michael Hudson** (1:35)
Well, the governments are under control, but they're largely under control by the banks that have used, ever since the 12th century, creditors have set the terms for war loans. And the terms are that they have to be in charge of the tax policy, and what they want is to get paid on the debts. Well, and the earliest debts, when we picked them up in the 12th and 13th century, the interest rates that the churchmen permitted when they reversed the Christian churches' denunciation of usury and said, well, there's something called interest, and that's okay when the Catholic Church does it. The basic interest rate was over 22 percent with a late payment fee of another 22 percent. The late fee could start in about a month, not a whole year. So that for the kings who were borrowing money to go to war and almost all of the government debts from the 12th century right down through the 17th century, all the government debts were war debts basically. And you can imagine that especially the kings of England and France going to war, the kings were defaulting more and more. And so the objective of the banks was to say, well, we want to get paid. What do we do? What collateral do you have? Well, they'd ask for collateral, but mostly they just wanted the interest. Well, the problem was that between the twelfth century and the seventeenth century, the kings were only able to pledge their own revenue from their royal lands, plus whatever they could convince the parliaments to levy in taxes to pay the creditors. But the parliaments, especially in Britain, didn't want to give the king power to pay the creditors. And this was a fight that already in the thirteenth century led to the barons forcing the Magna Carta, that said, we don't want first King John to go into debt and borrow, and then we don't want his son, Henry III, to borrow, to wage wars that actually the Vatican was pressing on the kings to wear. So, the kings basically had less and less of their own property to pay the bankers.
They'd sell off the land, they'd pawn the royal jewels. England had to pawn the royal jewels numerous times. And the result was that there were many defaults. Well, how can the bankers get paid? Well, there was a way of getting paid and that was already put in place. And it was the Catholic Church that had put this in place. The bankers wanted to use governments as essentially collection agents to pay the debts that they took on, mainly to go to war, which always has been the main cause of government budget deficits. Well, that system of financial control has led to today's world, where we have financialization and where the economy is steered by a tax policy and government policies aimed at extracting enough money to pay the financial sector.
And as their debts grow, there's more and more interest that has to be paid, more and more amortization, and that leaves less and less revenue available to spend on goods and services. And as the domestic market is shrunk by paying the debt overhead, there's less and less ability of companies to make a profit. And the economic surplus that was supposed to go to form the profits that would be reinvested in more means of production, to increase output and living standards, well, all of this is stifled by turning over the economic surplus to the bankers. And already by the 18th century, there was a long argument about something that is very in the center of discussions today.