America Disregarded 4,000 Years of History In Responding to the Great Recession

We’ve known for over 4,000 years that debts need to be periodically written down, or the entire economy will collapse.

After all, debt grows exponentially … while economies only grow in an s-curve.

The ancient Sumerians and Babylonians, the early Jews and Christians, the Founding Fathers of the United States and others throughout history knew that private debts had to be periodically forgiven.

Debt jubilees are a vital part of the Christian and Jewish faiths. And the first recorded word for “freedom” anywhere in the world meant “debt-freedom”.

Two prominent economists – Professor of economics and director of the Julis-Rabinowitz Center for Public Policy and Finance at Princeton University (Atif Mian), and Chicago Board of Trade Professor of Finance at the University of Chicago Booth School of Business and co-director of the Initiative on Global Markets (Amir Sufi) – wrote last year:

Debt forgiveness makes a lot of sense when the economy experiences a large-scale negative shock that is beyond the control of any one individual.

History seems to understand this lesson well. The 48th provision of the Code of Hammurabi, written more than 3,500 years ago in Mesopotamia, states that: “If any one owe a debt for a loan, and a storm prostrates the grain, or the harvest fail, or the grain does not growth for lack of water, in that year he need not give his creditor any grain, he washes his debt-tablet in water and pays no rent for this year.” The main threat to economic activity in ancient Mesopotamia was a drought, and one of the first legal codes understood that debt should be forgiven if such a negative shock occurred.

In 1819 when agricultural prices in the United States plummeted leaving farmers overly indebted and unable to pay their mortgages, politicians ran to their defense. Many state governments immediately imposed moratoria on debt payments and foreclosures. Senator Ninian Edwards of Illinois pushed through national legislation to forgive farmers’ debt, arguing that the country should have sympathy for the farmers who, like the rest of the country, got caught up in the short-lived “artificial and fictitious prosperity.”

During the Great Depression … the government-funded Home Ownership Loan Corporation established in the 1930s also helped ease debt burdens and reduce foreclosures by lowering interest payments.

During the Great Recession [i.e. the downturn starting in 2007], policy-makers followed a very different strategy. Underwater homeowners were left drowning, with no meaningful assistance. It is a striking contrast, one that everyone should contemplate. What was different this time? Almost every reason for lack of action was likely present in the previous episodes.

We aren’t alone in noticing the historical discrepancy. Here is Brad DeLong, a top economic historian, in his review of our book:

All I can say is that I thought that this was the system that we had. I thought–from the Great Depression era history of the HOLC and the RFC, from the 1980s history of the Latin American debt crisis, from the 1990s history of the RTC, from innumerable emerging-market crises, et cetera, that we understood very well that this is what we should do. Whenever the financial system got sufficiently wedged we resolved it–we turned debt into equity, and we crammed losses down onto debt holders whose investments were ex post judged to have been ex ante unwise.

And from my standpoint the true puzzle is why Bernanke, Geithner, and Obama were so uninterested in pulling out the Walter Bagehot-Hyman Minsky-Charlie Kindleberger playbook and following it in housing finance from 2009-2014. Did they read no history?

The architects of the crisis response typically cite history as motivation for aggressive bank bailouts. But on the problem of excessive household debt, it appears that much history was forgotten.

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  • Brockland A.T.

    What were the 2008 bailouts but a mass forgiveness of debt for the rich at the taxpayer’s expense?

    One man’s debt is another man’s asset. The rich owed that money to one another, and the poor and middle class paid it.

    Michael Snyder wrote about the shemitah; what he didn’t mention was that it didn’t apply to people outside the tribe. Few if any taxpayers are members of the 1% tribe, let alone the elite 1% of the 1%.

    The Biblical shemitah, based on the Mesopotamian practice before it, did in fact recognize that debt was asset. The historical debt jubilees were not the free rides they are made out to be and any releif certainly did not apply to ‘aliens and sojourners’.

    Michael Hudson wrote about the recreation of the aristocratic rentier class via financialization.

    That’s how the system works now; fostering debt dependence to support a rentier class. Its not so much a question of paying off debt but maximizing the rate of interest payments and new sources of financialzation, an innovation the Ancients couldn’t implement with the enforcement technologies of the time. There may be ‘corrections’ from time to time, but the jubilee does not come free.

    • mulga mumblebrain

      Just as with usury, the Jews made an exception for their own brethren, but continued extracting their ‘pound of flesh’ from the goyim. Is it really just a coincidence that with Jews so grossly over-represented in the upper echelons of finance and the Obama regime, and controlling the US Congress through their monetary contributions, that things are playing out as they are?

    • mulga mumblebrain

      Just as with usury, the Jews made an exception for their own brethren, but continued extracting their ‘pound of flesh’ from the goyim. Is it really just a coincidence that with Jews so grossly over-represented in the upper echelons of finance and the Obama regime, and controlling the US Congress through their monetary contributions, that things are playing out as they are?

  • Silverado

    I swear to God there isn’t one swinging dick in the entire US govt that knows one iota about history. “Oh Mr. A. Jackson, you know about the illegal Federal Reserve Act of 1913 and the historical hazards of unbacked paper currencies? We’re sorry but there’s no openings and nothing for you in today’s BIG govt”. It’s a strange prerequisite for getting to work for the govt mob in DC. And as all know Americans are the anointed ones, this time they’ll tell us, it’s different…

  • jadan

    Thanks for this v. important essay, GW. Household debt and bank debt are not separate. It may be that debt has so overwhelmed even the largest and strongest players that a jubilee would unhinge the system. The Fed bail out was in recognition of the fact that the banks could not afford to bail out households. Debt forgiveness is for those who are not overwhelmed by debt themselves. We find ourselves outside the norms of 4,000 years of history, which could also be called “common sense”. And nothing has changed since 2008 that would make debt jubilee and saving the system possible. The Fed, all those chattering experts, may be experiencing collective madness. They want to raise interest rates and ever so slightly increase the pressure of the debt load! Crazy!

  • Bev

    Better and though perhaps currently thought of as radical, this monetary reform has been initiated six times in our country’s past with brave Presidents like Washington, Lincoln and Kennedy. Protect all
    leaders who do this again:

    The N.E.E.D. Act gives an Immediate, Seamless and Non-Disruptive Overnight Transition from a Crisis-Prone Bank Debt System to a Stable Government Money System.

    The NEED Act is an elegant and simple law which overnight converts our crisis prone bank debt money system into a pure, reliable U.S. money system in fully secure accounts. It is painless, everybody’s money is maintained safe and secure, and all debts can be payable, meaning no losses from systemic defaults (thus restoring confidence in crisis ridden markets).

    Overnight Conversion of Bank Deposits1

    Upon the NEED Act becoming law, all bank deposits are designated and treated as United States Money (sovereign money, just as circulating coins from the U.S. Mint are now). All bank deposits become “safekeeping accounts;” they are no longer owed by banks to their depositors, as they now are; but are instead maintained in safekeeping for depositors (what people think they are now). They’re still exchangeable at will for U.S. currency notes and coins. This change happens overnight and won’t disrupt business. It relieves banks of a liability they now have to their depositors. All these liabilities (bank deposits) are equal in value to the bulk of the U.S. money supply.

    In exchange for removing this liability from banks, an equal liability is put in its place which requires banks to pay over to the U.S. Treasury the repayments from outstanding loan balances2 due to
    them, when banks are repaid by their borrowers.3 The interest remains income of banks. This applies only to the amount of bank loans (or security purchases) that resulted in the creation of bank deposits out of thin air – from so called fractional reserve banking.

    Thus overnight, banks are relieved of liabilities that might be payable at any time (whenever the depositor asked for them), and these are replaced with liabilities that are only payable as and when the borrowers repay their bank loans.

    Any bank loans that arose from banks borrowing money from others will still be paid back to the banks’ lenders in the normal course of business.

    Thus banks have no more liabilities in total than they had before.

    Thus banks’ liquidity situation is dramatically improved, while their net worth is unaffected.

    Also banks’ income situation is dramatically improved since they will no longer pay interest on deposit accounts (their main expense) and can instead charge fees for their deposit services.

    It’s an Overnight, Seamless Transition to a Just Monetary System

    As the principal on bank loans is paid over to the U.S. Treasury it goes into a “Revolving Fund Account” and is recycled back into the economy to maintain the money supply levels. The Treasury revolving fund can lend this real U.S. money back to banks if needed and it can provide funding to pay off the national debt as it comes due; it can provide (on a per capitabasis) interest-free loans to state and local government entities (including school and fire districts), and provide a source of instant funding in case of a national emergency.


    But Wait – There’s More – Much More”

    The Fed presently holds about $4.2 trillion in various securities in its System Open Market Account (SOMA) as “backing” for present day currency and management purposes. Under the NEED Act these are no longer required4 and can be sold back into the market. This can easily provide funding for a onetime tax free dividend for all citizens living in the U.S. It could also be used to pay off all outstanding student debt (about $1.2 trillion).

    As the economy needs more money5, the Monetary Authority will advise Congress the amount and the Treasury will be authorized to create it instead of borrowing/taxing, and can fund programs for infrastructure, education, assuring social security, and resolving mortgages, as authorized and appropriated by Congress (again on an equitable per capita basis).6 For example it can be used to fund a sorely needed national health care system.

    The NEED Act also grants one fourth of all new money created each year directly to the states7 for their needs – for example pensions. Since the federal and state and local governments will have an
    interest-free source of money, they will normally no longer need to borrow. Thus as investors holding various government bonds are repaid; if they want to keep earning money from such investments, they will have to re-invest in businesses in the private sector, thereby generating more economic activity and more employment. Interest rates could fall.

    Removing interest expenses from federal, state and local government budgets means taxes can be reduced, which would increase the disposable incomes of consumers and producers alike, thus generating more economic activity and thus more employment.

    Good-paying jobs will be generated in engineering, education, health care, construction and manufacturing, estimated in 2012 at 27.2 million full-time jobs.8

    In this way, the economy can generate enough income to pay off all outstanding debts. Therefore banks’ solvency situation is improved even if their net position is unchanged. As the NEED Act makes banks’ business model more profitable, it will enable banks to reduce the margin between the interest they charge and the interest they pay, which will be good for both borrowers and lenders, and the economy as a whole.


    The NEED Act enables the Federal Government to achieve its mandate of full employment under the Employment Act, and enables the re-constituted Fed to achieve its “dual mandate” of maximum employment and stable prices under the Federal Reserve Act.

    Thus the NEED Act enables a non-disruptive, seamless and painless correction to our presently mis-structured money system that is causing havoc and hardship.

    The NEED Act is simple and not really radical in any sense because it is what our Constitution explicitly calls for and is essentially what most Americans erroneously believe we now have!
- money is created by our government, not by the banks making loans;
- banks are acting as intermediaries, borrowing money from some and loaning it to others;
- government has power to create money for infrastructure, education, and health care.


    for footnote information go to

    • Steven

      Thanks for the N.E.ED tutorial. It has been a while since
      I’ve read the bill. The basic principle guiding the proposal – that since money
      is a necessary evil in a market economy, the community on whose behalf it is
      issued and in which it is accepted should be the beneficiary of money’s
      creation – is one most monetary reformers and the public should readily accept.
      Where I believe the bill or at least the expectations of its supporters, goes
      south is the assumption the government’s reclaiming its money-creating
      privilege would provide enough revenue to fund all sorts of much-needed social
      spending and even “a onetime tax free dividend for all citizens” – without
      raising taxes and without inflation.

      The bulk of the government’s revenue to accomplish all this would have to come
      from the “Revolving Fund Account”. A figure for the proceeds from the
      amortization of existing loans should be fairly easy to produce for someone who
      knows where to look. But Bev suggests that much of the money would instead come from the economy’s need for more money: “the Monetary Authority will advise Congress the amount and the Treasury will be authorized to create it instead of borrowing/taxing, and can fund programs for infrastructure, education, assuring social security, and resolving mortgages…” It should be pretty obvious by now that basing a monetary and taxation system on the assumption of perpetual growth on a finite planet isn’t the greatest idea.

      But besides raising revenue, there is another purpose for taxation: checking the build up of debt – the subject of this post. The accumulation of “debts that can’t be repaid (and) won’t be” is antithetical to the survival of the community in which it is occurring. Holding the pernicious effects of ‘the miracle of compound interest’ in check in real time is much to be preferred to business cycles (which have the side-effect of transferring wealth from the little fish to the big ones) or even the inherently disruptive ‘debt jubilees’. With governments world-wide owned lock, stock and barrel by the big fish, debt jubilees are a political pipe dream. As we learned in 2008, the 1% won’t even permit business cycles to serve as a check on the accumulation of their
      ‘wealth’ (our debt).

  • Steven

    Wall Street and its banks could not obtain their ‘free lunch’ without the willing consent of their prey. Monetary reformers and public banking advocates rage against the evils of interest. But they remain silent about an even larger scam – the ex nihilo (out of nothing) creation of money. Many even propose joining with the bankers and Wall Street’s ‘financial engineers’ in the meal. Accepting as a
    necessary evil the completely free lunch inherent in ex nihilo money, to keep ‘the system’ going they propose such expedients as (hundred) trillion dollar coins and “debt free” money. Much as they – and we – would like to ‘say it isn’t so’, money IS debt.

    One of the official, establishment economics-blessed functions of money is serving as a ‘store of value’; in real life that means as a claim on wealth produced by other people. If you have something to sell and a willing buyer, when wealth changes hands the debt incurred by the recipient is extinguished when the appropriate sum of money changes hands. It says so right there on the currency you (used to) carry around. It is no stretch to think of any money that can be exchanged for legal tender as a debt you incur as a member of the social collective on whose behalf money is created, whether you realize it or
    not. Some of this debt is created when you walk through the front door of privately owned banks.

    But these days much more of it is created through the back door of government bank bailouts. The
    way bailouts work is the bankers exchange the ‘debts that can not be repaid’ for debts backed by the full faith and credit of the money on whose behalf the money is nominally issued. As Minsky put
    it “Any unit (i.e. anyone) can create money. The problem is getting it accepted.” Transform it into sovereign debt backed by the ability of government to tax (or the legal tender status of money bankers can dispense if necessary) and ‘problem solved’!

    In the end, however, bankers and governments are just giving us what we (think we) want – control over the lives and fortunes of others; debts we can accumulate when we have more of the world’s wealth than we can use at the moment; debts we can call in as necessary or just for the hell of it – just to show the world who rules the roost.