Colonial-era debt and free banking

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The injustice of developing countries having to pay back extortionate rates of interest that emanate from sovereign debt with colonial-era roots is often rightly made due to the oppressive nature of imperialistic regimes of the time. However, one may wonder why such colonial-era debt cannot be feasibly defaulted upon? The standard argument suggests that this would ruin the country’s credit rating, lead to capital flight, devastate the country’s currency and, thereby, lead to economic and financial ruin. I argue, however, that this scenario only applies in the context of the monetary monopoly that is coercively imposed by most governments the world over through taxation laws, legal tender legislation, trade laws and financial market legislation. Under a Free Banking regime where agents would have an authentic choice of multiple monies, it may even be feasible to default on such unjust debt.

Let us consider the scenario under which a developing country was to default in its colonial-era debt. Standard arguments go along the lines of it ruining the country’s credit rating and thereby making it infeasible for them to borrow from international financial markets for the foreseeable future. This would most likely precipitate capital flight, make the country’s money (relatively) worthless for repaying debts or even internal trade and, thereby, lead to a devastating socio-economic calamity for the country’s inhabitants. Therefore, developing countries’ governments who are subject to such debts are presumed to have ‘no control’ over the status quo. This is nonsense, when examined more closely.

Firstly, these developing countries still often only accept taxes paid in their own monies that are issued by their central banks (thereby imposing a monetary monopoly). This means that the benefits of having access to and utilising multiple monies (whether they be trade benefits through having an access to a variety of exchange rates or credit market benefits through improving creditworthiness, for example) cannot be realised. This is often also reinforced through legal tender legislation (which varies from jurisdiction to jurisdiction in its rigidity and meaning) that can act to inhibit or even prevent the feasibility of conducting trade in multiple monies.

Imagine a system where agents actually had access to multiple monies; where they could trade, borrow, save, invest and so on in order to optimise the specificity of their individual, heterogeneous preferences accordingly. In such a scenario, developing countries’ governments could feasibly default on debt payments that have colonialist roots and, though the governments’ creditworthiness would be called into question by international financial markets, the inhabitants of that country could simply switch to other monies and continue with life rather normally even in the event of the collapse of that government’s own, issued money. Since the inhabitants would also be able to conduct trade normally and reap the trade and credit market benefits associated with having multiple monies, indigenous currencies could also be feasibly issued. Thus, it is not just in the interest of the creditor nation-states that these debt repayments are made but also in the interest of the debtor nation-states since these governments have an interest in maintaining their coercively imposed monetary monopoly regimes.

Thus, in brief, truly Free Banking that enables a genuine choice of multiple monies could feasibly allow peoples to overcome historical injustices and thereby alleviate poverty, inequality and the socially-divisive animosity that the colonialist-era plays, to this day, in perpetuating. In this sense, the historical institution of state-imposed, legally-enforced, Central Banking as opposed to freely-chosen Free Banking works to perpetuate the injustices that linger from colonialist eras. The fault lies not just with developed countries’ governments but also with developing countries’ ones, leading to animosity between various peoples and acting as a major obstacle to securing peace, prosperity and cooperation.

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