Bankers and kings

It is ironic that financial mandarins today hold exactly that region in debt where their ascendancy first began.

For as long as there have been kings, there have been bankers. Politics and money are inseparable, but their interests often diverge sharply and with spectacular results.

In medieval Europe, for instance, the biggest clients for moneylenders were kings and the nobility. Sovereigns who fell too deep into debt were asked to cut back some of their indulgences, perhaps curtail the size of the court, the banquets, or the exemptions to their subjects for revenue payments that gradually piled up. Sometimes frivolous wars had to be ended, and Europe had plenty of those, once the capacity to pay for them dried up. Just as commonly, frivolous wars would often start under the duress of debt, perhaps to acquire a lucrative region whose revenues could help pay off the debt.

Discussions between creditors and borrowers were rarely pleasant. Sovereigns roared with all their might at the ‘cold-bloodedness’ of the bankers, the nobility gnashed their teeth at the demands for austerity. Vilification of the bankers often followed, with poisonous descriptions of them as bloodthirsty hounds, as evil infidels, as outsiders who were trying to ensnare the good king’s realm and his pious subjects. The vilification often dried up as soon as the next tranche was released.

Sometimes the only way for sovereigns to eliminate the debt was to eliminate the creditor. This was an extreme step since it meant almost permanent disconnection from the networks of sovereign lending, although it was still possible for a sovereign to eliminate one creditor on some flimsy pretext and coerce the others to continue lending or face the same fate.

The creditors’ position was rarely secure. They were always vulnerable to an arbitrary seizure of their wealth, to wilful default or coercive rescheduling and almost always lived out their lives as pariahs from respectable society. They had few alternatives to lending as long distance trade was being squeezed by the Ottomans and the only large clients left for them were the monarchs. An uneasy relationship existed between the two in those days, they both needed each other yet their interests could diverge sharply very quickly.

This primitive world of sovereign lending changed when Europe opened up long distance trade with the discovery of the America, and the arrival by the shipload of American gold and silver that was then used to procure and transport Asian commodities back to the European mainland. The massive transatlantic trade in specie metal, and the ensuing rush for Asian manufactures, lifted the moneyed classes out of this uneasy relationship with the monarchs and their landed nobility.

The new alliance between monarchs and merchants and bankers gradually led to the elimination of the landed nobility as the building blocks of sovereign power, to be replaced by owners and controllers of capital. And with this ascendancy of capital came rules governing the conduct of sovereign affairs, principally respect for private property and the creation and management of national currencies.

The new order gave bankers the respectability they had long sought and gave their enterprise the protections it needed to be free from the exercise of arbitrary power. In return, bankers mobilised the nation’s surplus and ploughed it into the regeneration of the nation’s wealth.

But having eliminated their subservience to the capricious and arbitrary exercise of sovereign power, bankers found they had created a new problem: speculative bubbles. Money left to its own devices, it slowly came to be discovered, could wreak terrible damage. And just as the relationship between state and capital developed rules for its conduct, eventually rules were developed to encase the relationship between creditor and borrower as well.

Of course all this took centuries to happen, and other elements of the story — such as the emergence of modern armies and the colonisation of Asia and Africa — also greatly impacted the developments. But over the course of time a financial system emerged that is so large, so complex, so free from any restraints imposed upon it by sovereign power that it has begun to dictate its terms to the largest and richest countries of the world. And yet, this enormously complex financial system is unable to generate an adequate response to the difficulties of the eurozone in spite of numerous ‘summits’.

It is ironic perhaps, that the financial mandarins of the world today hold exactly that region in debt where their ascendancy first began: Europe and America. The regions that were coercively incorporated into their enterprise — Latin America and Asia — are watching the show as if from afar.

But what is more ironic is how the medieval gambit has reared its head once again. Watch the eurozone drama a little carefully and you’re entitled to forget that you’re watching some of the most advanced countries in the world. As Italy and Greece struggle with the demands for austerity, the language in which they speak about their creditors is sometimes so visceral as to be unprintable. Likewise with the creditor countries, where the ‘degenerate’ and ‘lazy’ lifestyle of the borrower countries is being vilified in form and language better suited for tabloid newspapers.

Besides the language, the nature of the gambits is quite medieval too. Consider the ease with which the leaderships of Italy and Greece talk about a possible default, knowing that the consequences of such an action would hurt creditor banks in France and Germany more. Much of this will probably taper off once the next tranche is released from Greece’s rescue package in December, but will come around again when the third tranche is due.

So if a medieval gambit is playing itself out in the heart of the modern financial system, should we expect a moment when the sovereign seeks to eliminate the debt by eliminating the creditor? What might such a moment look like? Nationalisation?

Published in The Express Tribune, October 27^th, 2011.