The Case for a Debt Jubilee. Richard Vague

his army and help build the great public works of that society. At first, historians were surprised to learn of this phenomenon, but archeologically documented instances of debt amnesty are numerous and growing, and refer to actual, and fundamental, debt practices in these cultures. In fact, some historians view this practice as conservative, counterintuitive as that may sound, since it was a mechanism that both preserved the practice of lending and kept those loans from overwhelming these economies.

      A key Old Testament passage, Deuteronomy 15:2–3, describes clearly the time when these debt amnesties were proclaimed: “Every creditor shall cancel any loan they have made to a fellow Israelite. They shall not require payment from anyone among their own people, because the LORD’s time for cancelling debts has been proclaimed. You may require payment from a foreigner, but you must cancel any debt your fellow Israelite owes you.”

      Just as lending is almost as old as civilization, so, too, is predatory lending. The modern Rabbinical scholar Jacob Milgrom writes in Leviticus 17–22 that King Urukagina of Lagash (c. 2400 BCE), one of the first enactors of debt amnesty, saw that “officials stole property and land from citizens, forced them to sell their houses, demanded exorbitant rates for essential services, [and] imposed unjust taxes. Impoverished farmers and artisans became indentured servants.”

Debt amnesty was easiest in the earliest civilizations, when lenders were primarily the palace and the temple, since the government was simply forgiving debt it had extended to its citizens. Many of these ancient debts were not loans so much as arrears: an accrual of tax or other obligations that citizens could not pay. But over time, large merchants and landowners became significant lenders, too, and acts of debt amnesty also required that these lenders forgive debts. If by his own debt amnesty proclamation the king forgave a loan his office had extended, it was a loss borne by that king. If by proclamation the king forced other lenders to forgive debts, it was a loss borne by those lenders.

      Debt amnesty typically would cancel agrarian debts owed by the citizenry at large, return land that had been lost due to unpaid debt, and liberate bondservants, who were often family members pledged as collateral for loans. Amnesty was limited and enacted only occasionally. It applied to the debt of owner-occupants alone and wasn’t for the rich or for businessmen’s mercantile debts, so in a sense ancient debt amnesties were “means tested.” Economist and historian Michael Hudson, one of the very few to predict the 2008 financial crisis, has studied ancient debt extensively, and I draw on his work here. He explains, “Only subsistence landholdings were returned to the customary holders, not townhouses and other wealth over and above the basic subsistence needs of citizens. So the aim was not equality as such, but the assurance of self-support land and production for the citizenry.”

These civilizations used terms such as “return” and “straightening out” to describe debt amnesty, and the objective, as Hudson writes, was to ensure that each family had the land and resources they needed for sustenance, unburdened by debt. The act meshed with these societies’ prevailing idea of cyclical time rather than linear time. With debt amnesty, everyone could return to land that their family had once owned but lost to a lender. Family members lost to debt bondage returned home, and the family was given a new, debt-free beginning. This cyclical paradigm, of course, mirrored the cycles of planting and harvest that formed the sole context of their lives. Things always ended. Things always had to begin again. (Superficially, the idea of time and debt as cyclical and renewing instead of linear lingers today with modern sports teams, which start each season with a clean slate of no wins or losses.)

Proclamations of debt amnesty were ad hoc, but often announced at the beginning of a king’s reign. Most members of Hammurabi’s Babylonian dynasty, for example, inaugurated their rule with a new proclamation of debt amnesty. One Babylonian king issued four acts of debt amnesty during his forty-year reign. An invading king could promise debt amnesty to a city’s inhabitants to entice them to side with him and turn on their ruler. By the same token, an incumbent king could use debt amnesty to keep a population from siding with an invader.

      The ancient Israelites took debt relief an important step further: they removed it from the realm of a king’s whims and encoded it into their laws, making it recur the year after every seven cycles of seven years. Debt relief changed from an ad hoc to a structural aspect of the economy. The Israelites called it Jubilee, after the ram’s horn, or yobel (featured on the cover of this book), that was sounded for the joyous proclamation of this freedom from the burden of debt.

      Jubilee brought liberation from debt and a restoration and renewal of these societies and economies.

The Private Debt Problem in the Twenty-First Century

      Today, we find ourselves with a similar private sector debt accumulation problem, and the idea of strategic debt amnesty or jubilee is arguably more urgent than ever. We were drowning in debt before the Covid-19 crisis, and now we are deluged by it.

“Total debt,” as it will be used in this book, means the sum of public and private sector debt, and private sector debt is comprised of business and household debt, including student loans, mortgages, auto loans, small business loans, credit card debt, and more. In 1951, total debt stood at 128 percent of US national GDP. By the end of 2019, this figure had doubled to 258 percent (see Chart 1). Government debt has also increased markedly and gets the most attention, but we should be more concerned about the rapid growth in private sector debt. From 1951 to 2019, US government debt grew from 74 percent to 108 percent of GDP, but US private sector debt grew even faster, almost tripling from 54 percent to 150 percent. Private debt is necessary and can boost economic growth, but high debt levels, whether for individuals or businesses or both, burden and stunt this growth.

      As both the government and American households and businesses used debt to fight the economic collapse caused by the Covid-19 pandemic, these debt ratios continued to spike. From December 2019 to December 2020, total private debt surged by $2.1 trillion, from 150 to 164 percent of annual GDP, making the climb back from the damage all the more arduous, while government debt grew from 108 to 133 percent.

      Private debt has almost always been a larger and more consequential factor than government debt in economic outcomes, if for no other reason than its sheer magnitude. Globally, in countries that together total 90 percent of all GDP, public debt totals roughly $70 trillion, while private sector debt totals $123 trillion. GDP growth in developed countries is also more closely correlated to private sector than public sector debt growth.

       Chart 1

       Sources – Federal Reserve, BEA, Treasurydirect.gov

Since GDP is essentially a measurement of our national income, the ratio of private debt to GDP is the national equivalent of the “debt-to-income” ratio a lender uses when they evaluate your application for a car loan or a mortgage. The higher the ratio, the heavier your debt burden. Debt growth is generally faster than GDP growth in developed economies, and this state of affairs is referred to as “financialization” or “financial deepening.”

Financialization has been lauded by some economists as the hallmark of a mature economy, but it is, to the contrary, the very thing that eventually overburdens households and businesses with debt and slows an economy. For major countries whose governments have “monetary sovereignty” – that is, countries that control their own monetary system, create their own money, and borrow in their own currency – government debt is far less likely to end with default. That’s because those governments can create money to pay back public debts. But households and businesses have no such luxury, and thus private debt is much more likely to default.

It’s not just a problem in the United States (see Charts 2 through 5). From 1990 to 2019 in China, the private (non-central government) sector debt-to-GDP ratio rocketed from 87 percent to