Category Archives: The Debt Trap

Greek Truth Committee on Public Debt – Preliminary Report (Executive Summary)

Truth Committee on Public Debt

Preliminary report

The Truth Committee on Public Debt (Debt Truth Committee) was established on April 4, 2015, by a decision of the President of the Hellenic Parliament, Ms Zoe Konstantopoulou, who confided the Scientific Coordination of its work to Dr. Eric Toussaint and the cooperation of the Committee with the European Parliament and
other Parliaments and international organizations to MEP Ms Sofia Sakorafa.

Members of the Committee have convened in public and closed sessions, to produce this preliminary report, under the supervision of the scientific coordinator and with the cooperation and input of other members of the Committee, as well as experts and contributors.

The preliminary report chapters were coordinated by:

Bantekas Ilias
Contargyris Thanos
Fattorelli Maria Lucia
Husson Michel
Laskaridis Christina
Marchetos Spyros
Onaran Ozlem
Tombazos Stavros
Vatikiotis Leonidas
Vivien Renaud

With contributions from:
Aktypis Héraclès
Albarracin Daniel
Bonfond Olivier
Borja Diego
Cutillas Sergi
Gonçalves Alves Raphaël
Goutziomitros Fotis
Kasimatis Giorgos
Kazakos Aris
Lumina Cephas
Mitralias Sonia
Saurin Patrick
Sklias Pantelis
Spanou Despoina
Stromblos Nikos
Tzitzikou Sofia

The authors are grateful for the advice and input received from other members of the Truth Committee on Public Debt as well as other experts, who contributed to the Committee’s work during the public sessions and hearings and the closed or informal consultations.

The authors are grateful for the valuable assistance of Arnaoutis Petros Konstantinos, Aronis Charalambos, Bama Claudia, Karageorgiou Louiza, Makrygianni Antigoni and Papaioannou Stavros.

Executive Summary

In June 2015 Greece stands at a crossroads of choosing between furthering the failed macroeconomic adjustment programmes imposed by the creditors or making a real change to break the chains of debt. Five years since the economic adjustment programme began, the country remains deeply cemented in an economic, social, democratic and ecological crisis. The black box of debt has remained closed, and until a few months ago no authority, Greek or international, had sought to bring to light the truth about how and why Greece was subjected to the Troika regime. The debt, in the name of which nothing has been spared, remains the rule through which neoliberal adjustment is imposed, and the deepest and longest recession experienced in Europe during peacetime.

There is an immediate democratic need and social responsibility to address a range of legal, social and economic issues that demand proper consideration. In response, the President of the Hellenic Parliament established the Truth Committee on Public Debt (Debt Truth Committee) in April 2015, mandating the investigation into the creation and the increase of public debt, the way and reasons for which debt was contracted, and the impact that the conditionalities attached to the loans have had on the economy and the population. The Truth Committee has a mandate to raise awareness of issues pertaining to the Greek debt, both domestically and internationally, and to formulate arguments and options concerning the cancellation of the debt.

The research of the Committee presented in this preliminary report sheds light on the fact that the entire adjustment programme, to which Greece has been subjugated, was and remains a politically orientated programme. The technical exercise surrounding macroeconomic variables and debt projections, figures directly relating to people’s lives and livelihoods, has enabled discussions around the debt to remain at a technical level mainly revolving around the argument that the policies imposed on Greece will improve its capacity to pay the debt back. The facts presented in
this report challenge this argument.

All the evidence we present in this report shows that Greece not only does not have the ability to pay this debt, but also should not pay this debt first and foremost because the debt emerging from the Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and

It has also come to the understanding of the Committee that the unsustainability of the Greek public debt was evident from the outset to the international creditors, the Greek authorities, and the corporate media. Yet, the Greek authorities, together with some other governments in the EU, conspired against the restructuring of public debt in 2010 in order to protect financial institutions. The corporate media hid the truth from the public by depicting a situation in which the bailout was argued to benefit Greece, whilst spinning a narrative intended to portray the population as deservers of their own wrongdoings.

Bailout funds provided in both programmes of 2010 and 2012 have been externally managed through complicated schemes, preventing any fiscal autonomy. The use of the bailout money is strictly dictated by the creditors, and so, it is revealing that less than 10% of these funds have been destined to the government’s current expenditure.

This preliminary report presents a primary mapping out of the key problems and issues associated with the public debt, and notes key legal violations associated with the contracting of the debt; it also traces out the legal foundations, on which unilateral suspension of the debt payments can be based. The findings are presented in nine chapters structured as follows:

Chapter 1, Debt before the Troika, analyses the growth of the Greek public debt since the 1980s. It concludes that the increase in debt was not due to ex4 cessive public spending, which in fact remained lower than the public spending of other Eurozone countries, but rather due to the payment of extremely high rates of interest to creditors, excessive and unjustified military spending, loss of tax revenues due to illicit capital outflows, state recapitalization of private banks, and the international imbalances created via the flaws in the design of the Monetary Union itself. Adopting
the euro led to a drastic increase of private debt in Greece to which major European private banks as well as the Greek banks were exposed. A growing banking crisis contributed to the Greek sovereign debt crisis. George Papandreou’s government helped to present the elements of a banking crisis as a sovereign debt crisis in 2009 by emphasizing and boosting the public deficit and debt.

Chapter 2, Evolution of Greek public debt during 2010-2015, concludes that the first loan agreement of 2010, aimed primarily to rescue the Greek and other European private banks, and to allow the banks to reduce their exposure to Greek government bonds.

Chapter 3, Greek public debt by creditor in 2015, presents the contentious nature of Greece’s current debt, delineating the loans’ key characteristics, which are further analysed in Chapter 8.

Chapter 4, Debt System Mechanism in Greece reveals the mechanisms devised by the agreements that were implemented since May 2010. They created a substantial amount of new debt to bilateral creditors and the European Financial Stability Fund (EFSF), whilst generating abusive costs thus deepening the crisis further. The mechanisms disclose how the majority of borrowed funds were transferred directly to financial institutions. Rather than benefitting Greece, they have accelerated the privatization process, through the use of financial instruments.

Chapter 5, Conditionalities against sustainability, presents how the creditors imposed intrusive conditionalities attached to the loan agreements, which led directly to the economic unviability and unsustainability of debt. These conditionalities, on which the creditors still insist, have not only contributed to lower GDP as well as higher public borrowing, hence a higher public debt/GDP making Greece’s debt more
unsustainable, but also engineered dramatic changes in the society, and caused a humanitarian crisis. The Greek public debt can be considered as totally unsustainable at present.

Chapter 6, Impact of the “bailout programmes” on human rights, concludes that the measures implemented under the “bailout programmes” have directly affected living conditions of the people and violated human rights, which Greece and its partners are obliged to respect, protect and promote under domestic, regional and international law. The drastic adjustments, imposed on the Greek economy and society as a whole, have brought about a rapid deterioration of living standards, and remain incompatible with social justice, social cohesion, democracy and human rights.

Chapter 7, Legal issues surrounding the MoU and Loan Agreements, argues there has been a breach of human rights obligations on the part of Greece itself and the lenders, that is the Euro Area (Lender) Member States, the European Commission, the European Central Bank, and the International Monetary Fund, who imposed these measures on Greece. All these actors failed to assess the human rights violations as an outcome of the policies they obliged Greece to pursue, and also directly violated the Greek constitution by effectively stripping Greece of most of its sovereign rights. The agreements contain abusive clauses, effectively coercing Greece to surrender significant aspects of its sovereignty. This is imprinted in the choice of the English law as governing law for those agreements, which facilitated
the circumvention of the Greek Constitution and international human rights obligations. Conflicts with human rights and customary obligations, several indications of contracting parties acting in bad faith, which together with the unconscionable character of the agreements, render these agreements invalid.

Chapter 8, Assessment of the Debts as regards illegitimacy, odiousness, illegality, and unsustainability, provides an assessment of the Greek public debt according to the definitions regarding illegitimate, odious, illegal, and unsustainable debt adopted by the Committee.

Chapter 8 concludes that the Greek public debt as of June 2015 is unsustainable, since Greece is currently unable to service its debt without seriously impairing its capacity to fulfill its basic human rights obligations. Furthermore, for each creditor, the report provides evidence of indicative cases of illegal, illegitimate and odious debts.

Debt to the IMF should be considered illegal since its concession breached the IMF’s own statutes, and its conditions breached the Greek Constitution, international customary law, and treaties to which Greece is a party. It is also illegitimate, since conditions included policy prescriptions that infringed human rights obligations. Finally, it is odious since the IMF knew that the imposed measures were undemocratic, ineffective, and would lead to serious violations of socio-economic rights.

Debts to the ECB should be considered illegal since the ECB over-stepped its mandate by imposing the application of macroeconomic adjustment programmes (e.g. labour market deregulation) via its participation in the Troika. Debts to the ECB are also illegitimate and odious, since the principal raison d’etre of the Securities Market Programme (SMP) was to serve the interests of the financial institutions, allowing the major European and Greek private banks to dispose of their Greek bonds.

The EFSF engages in cash-less loans which should be considered illegal because Article 122(2) of the Treaty on the Functioning of the European Union (TFEU) was violated, and further they breach several socio-economic rights and civil liberties. Moreover, the EFSF Framework Agreement 2010 and the Master Financial Assistance Agreement of 2012 contain several abusive clauses revealing clear misconduct on the part of the lender. The EFSF also acts against democratic principles, rendering these particular debts illegitimate and odious.

The bilateral loans should be considered illegal since they violate the procedure provided by the Greek constitution. The loans involved clear misconduct by the lenders, and had conditions that contravened law or public policy. Both EU law and international law were breached in order to sideline human rights in the design of the macroeconomic programmes. The bilateral loans are furthermore illegitimate, since they were not used for the benefit of the population, but merely enabled the private creditors of Greece to be bailed out. Finally, the bilateral loans are odious since the lender states and the European Commission knew of potential violations, but in 2010 and 2012 avoided to assess the human rights impacts of the macroeconomic adjustment and fiscal consolidation that were the conditions for the loans.

The debt to private creditors should be considered illegal because private banks conducted themselves irresponsibly before the Troika came into being, failing to observe due diligence, while some private creditors such as hedge funds also acted in bad faith. Parts of the debts to private banks and hedge funds are illegitimate for the same reasons that they are illegal; furthermore, Greek banks were illegitimately recapitalized by tax-payers. Debts to private banks and hedge funds are odious, since major private creditors were aware that these debts were not incurred in the best interests of the population but rather for their own benefit. The report comes to a close with some practical considerations.

Chapter 9, Legal foundations for repudiation and suspension of the Greek sovereign debt, presents the options concerning the cancellation of debt, and especially the conditions under which a sovereign state can exercise the right to unilateral act of repudiation or suspension of the payment of debt under international law. Several legal arguments permit a State to unilaterally repudiate its illegal, odious, and illegitimate debt. In the Greek case, such a unilateral act may be based on the following arguments: the bad faith of the creditors that pushed Greece to violate national law and international obligations related to human rights; preeminence of human rights over agreements such as those signed by previous governments with creditors or the Troika; coercion; unfair terms flagrantly violating Greek sovereignty and violating the Constitution; and finally, the right recognized in international law for a State to take countermeasures against illegal acts by its creditors, which purposefully damage its fiscal sovereignty, oblige it to assume odious, illegal and illegitimate debt, violate economic self-determination and fundamental human rights. As far as unsustainable debt is concerned, every state is legally entitled to invoke necessity in exceptional situations in order to safeguard those essential interests threatened by a grave and imminent peril. In such a situation, the State may be dispensed from the fulfilment of those international obligations that augment the peril, as is the case with outstanding loan contracts. Finally, states have the right to declare themselves unilaterally insolvent where the servicing of their debt is unsustainable, in which case they commit no wrongful act and hence bear no liability.

People’s dignity is worth more than illegal, illegitimate, odious and unsustainable debt.

Having concluded its preliminary investigation, the Committee considers that Greece has been and still is the victim of an attack premeditated and organized by the International Monetary Fund, the European Central Bank, and the European Commission. This violent, illegal, and immoral mission aimed exclusively at shifting private debt onto the public sector.

Making this preliminary report available to the Greek authorities and the Greek people, the Committee considers to have fulfilled the first part of its mission as defined in the decision of the President of the Hellenic Parliament of 4 April 2015. The Committee hopes that the report will be a useful tool for those who want to exit the destructive logic of austerity and stand up for what is endangered today: human rights, democracy, peoples’ dignity, and the future of generations to come.

In response to those who impose unjust measures, the Greek people might invoke what Thucydides mentioned about the constitution of the Athenian people: “As for the name, it is called a democracy, for the administration is run with a view to the interests of the many, not of the few” (Pericles’ Funeral Oration, in the speech from Thucydides’ History of the Peloponnesian War).

The Russian Loan and the IMF’s One-Two Punch: Ukraine Denouement

The Russian Loan and the IMF’s One-Two Punch

Ukraine Denouement


The fate of Ukraine is now shifting from the military battlefield back to the arena that counts most: that of international finance. Kiev is broke, having depleted its foreign reserves on waging war that has destroyed its industrial export and coal mining capacity in the Donbass (especially vis-à-vis Russia, which normally has bought 38 percent of Ukraine’s exports). Deeply in debt (with €3 billion falling due on December 20 to Russia), Ukraine faces insolvency if the IMF and Europe do not release new loans next month to pay for new imports as well as Russian and foreign bondholders.

Finance Minister Natalia Yaresko announced on Friday that she hopes to see the money begin to flow in by early March.[1] But Ukraine must meet conditions that seem almost impossible: It must implement an honest budget and start reforming its corrupt oligarchs (who dominate in the Rada and control the bureaucracy), implement more austerity, abolish its environmental protection, and make its industry “attractive” to foreign investors to buy Ukraine’s land, natural resources, monopolies and other assets, presumably at distress prices in view of the country’s recent devastation.

Looming over the IMF loan is the military situation. On January 28, Christine Lagarde said that the IMF would not release more money as long as Ukraine remains at war. Cessation of fighting was to begin Sunday morning. But Right Sector leader Dmytro Yarosh announced that his private army and that of the Azov Battalion will ignore the Minsk agreement and fight against Russian-speakers. He remains a major force within the Rada.

How much of Ukraine’s budget will be spent on arms? Germany and France made it clear that they oppose further U.S. military adventurism in Ukraine, and also oppose NATO membership. But will Germany follow through on its threat to impose sanctions on Kiev in order to stop a renewal of the fighting? For the United States bringing Ukraine into NATO would be the coup de grace blocking creation of a Eurasian powerhouse integrating the Russian, German and other continental European economies.

The Obama administration is upping the ante and going for broke, hoping that Europe has no alternative but to keep acquiescing. But the strategy is threatening to backfire. Instead of making Russia “lose Europe,” the United States may have overplayed its hand so badly that one can now think about the opposite prospect. The Ukraine adventure turn out to be the first step in the United States losing Europe. It may end up splitting European economic interests away from NATO, if Russia can convince the world that the epoch of armed occupation of industrial nations is a thing of the past and hence no real military threat exists – except for Europe being caught in the middle of Cold War 2.0.

For the U.S. geopolitical strategy to succeed, it would be necessary for Europe, Ukraine and Russia to act against their own potential economic self-interest. How long can they be expected to acquiesce in this sacrifice? At what point will economic interests lead to a reconsideration of old geo-military alliances and personal political loyalties?

The is becoming urgent because this is the first time that continental Europe has been faced with such war on its own borders (if we except Yugoslavia). Where is the advantage for Europe supporting one of the world’s most corrupt oligarchies north of the Equator?

America’s Ukrainian adventure by Hillary’s appointee Victoria Nuland (kept on and applauded by John Kerry), as well as by NATO, is forcing Europe to commit itself to the United States or pursue an independent line. George Soros (whose aggressive voice is emerging as the Democratic Party’s version of Sheldon Adelson) recently urged (in the newly neocon New York Review of Books) that the West give Ukraine $50 billion to re-arm, and to think of this as a down payment on military containment of Russia. The aim is old Brzezinski strategy: to foreclose Russian economic integration with Europe. The assumption is that economic alliances are at least potentially military, so that any power center raises the threat of economic and hence political independence.

The Financial Times quickly jumped on board for Soros’s $50 billion subsidy.[2] When President Obama promised that U.S. military aid would be only for “defensive arms,” Kiev clarified that it intended to defend Ukraine all the way to Siberia to create a “sanitary cordon.”

First Confrontation: Will the IMF Loan Agreement try to stiff Russia?

The IMF has been drawn into U.S. confrontation with Russia in its role as coordinating Kiev foreign debt refinancing. It has stated that private-sector creditors must take a haircut, given that Kiev can’t pay the money its oligarchs have either stolen or spent on war. But what of the €3 billion that Russia’s sovereign wealth fund loaned Ukraine, under London rules that prevent such haircuts? Russia has complained that Ukraine’s budget makes no provision for payment. Will the IMF accept this budget as qualifying for a bailout, treating Russia as an odious creditor? If so, what kind of legal precedent would this set for sovereign debt negotiations in years to come?

International debt settlement rules were thrown into a turmoil last year when U.S. Judge Griesa gave a highly idiosyncratic interpretation of the pari passu clause with regard to Argentina’s sovereign debts. The clause states that all creditors must be treated equally. According to Griesa (uniquely), this means that if any creditor or vulture fund refuses to participate in a debt writedown, no such agreement can be reached and the sovereign government cannot pay any bondholders anywhere in the world, regardless of what foreign jurisdiction the bonds were issued under.

This bizarre interpretation of the “equal treatment” principle has never been strictly applied. Inter-governmental debts owed to the IMF, ECB and other international agencies have not been written down in keeping with private-sector debts. Russia’s loan was carefully framed in keeping with London rules. But U.S. diplomats have been openly – indeed, noisily and publicly – discussing how to “stiff” Russia. They even have thought about claiming that Russia’s Ukraine loans (to help it pay for gas to operate its factories and heat its homes) are an odious debt, or a form of foreign aid, or subject to anti-Russian sanctions. The aim is to make Russia “less equal,” transforming the concept of pari passu as it applies to sovereign debt.

Just as hedge funds jumped into the fray to complicate Argentina’s debt settlement, so speculators are trying to make a killing off Ukraine’s financial corpse, seeing this gray area opened up. The Financial Times reports that one American investor, Michael Hasenstab, has $7 billion of Ukraine debts, along with Templeton Global Bond Fund.[3] New speculators may be buying Ukrainian debt at half its face value, hoping to collect in full if Russia is paid in full – or at least settle for a few points’ quick run-up.

The U.S.-sponsored confusion may tie up Russia’s financial claims in court for years, just as has been the case with Argentina’s debt. At stake is the IMF’s role as debt coordinator: Will it insist that Russia take the same haircut that it’s imposing on private hedge funds?

This financial conflict is becoming a new mode of warfare. Lending terms are falling subject to New Cold War geopolitics. This battlefield has been opened up by U.S. refusal in recent decades to endorse the creation of any international body empowered to judge the debt-paying capacity of countries. This makes every sovereign debt crisis a grab bag that the U.S. Treasury can step in to dominate. It endorses keeping countries in the U.S. diplomatic orbit afloat (although on a short leash), but not countries that maintain an independence from U.S. policies (e.g., Argentina and BRICS members).

Looking forward, this position threatens to fracture global finance into a U.S. currency sphere and a BRICS sphere. The U.S. has opposed creation of any international venue to adjudicate the debt-paying capacity of debtor nations. Other countries are pressing for such a venue in order to save their economies from the present anarchy. U.S. diplomats see anarchy as offering an opportunity to bring U.S. diplomacy to bear to reward friends and punish non-friends and “independents.” The resulting financial anarchy is becoming untenable in the wake of Argentina, Greece, Ireland, Spain, Portugal, Italy and other sovereign debtors whose obligations are unpayably high.

The IMF’s One-Two Punch leading to privatization sell-offs to rent extractors            

IMF loans are made mainly to enable governments to pay foreign bondholders and bankers, not spend on social programs or domestic economic recovery. Sovereign debtors must agree to IMF “conditionalities” in order to get enough credit to enable bondholders to take their money and run, avoiding haircuts and leaving “taxpayers” to bear the cost of capital flight and corruption.

The first conditionality is the guiding principle of neoliberal economics: that foreign debts can be paid by squeezing out a domestic budget surplus. The myth is that austerity programs and cuts in public spending will enable governments to pay foreign-currency debts – as if there is no “transfer problem.”

The reality is that austerity causes deeper economic shrinkage and widens the budget deficit. And no matter how much domestic revenue the government squeezes out of the economy, it can pay foreign debts only in two ways: by exporting more, or by selling its public domain to foreign investors. The latter option leads to privatizing public infrastructure, replacing subsidized basic services with rent-extraction and future capital flight. So the IMF’s “solution” to the deb problem has the effect of making it worse – requiring yet further privatization sell-offs.

This is why the IMF has been wrong in its economic forecasts for Ukraine year after year, just as its prescriptions have devastated Ireland and Greece, and Third World economies from the 1970s onward. Its destructive financial policy must be seen as deliberate, not an innocent forecasting error. But the penalty for following this junk economics must be paid by the indebted victim.

In the wake of austerity, the IMF throws its Number Two punch. The debtor economy must pay by selling off whatever assets the government can find that foreign investors want. For Ukraine, investors want its rich farmland. Monsanto has been leasing its land and would like to buy. But Ukraine has a law against alienating its farmland and agricultural land to foreigners. The IMF no doubt will insist on repeal of this law, along with Ukraine’s dismantling of public regulations against foreign investment.

International finance as war

The Ukraine-IMF debt negotiation shows is why finance has become the preferred mode of geopolitical warfare. Its objectives are the same as war: appropriation of land, raw materials (Ukraine’s gas rights in the Black Sea) and infrastructure (for rent-extracting opportunities) as well as the purchase of banks.

The IMF has begun to look like an office situated in the Pentagon, renting a branch office on Wall Street from Democratic Party headquarters, with the rent paid by Soros. His funds are drawing up a list of assets that he and his colleagues would like to buy from Ukrainian oligarchs and the government they control. The buyout payments for partnership with the oligarchs will not stay in Ukraine, but will be moved quickly to London, Switzerland and New York. The Ukrainian economy will lose the national patrimony with which it emerged from the Soviet Union in 1991, still deeply in debt (mainly to its own oligarchs operating out of offshore banking centers).

Where does this leave European relations with the United States and NATO?

The two futures

A generation ago the logical future for Ukraine and other post-Soviet states promised to be an integration into the German and other West European economies. This seemingly natural complementarity would see the West modernize Russian and other post-Soviet industry and agriculture (and construction as well) to create a self-sufficient and prosperous Eurasian regional power. Foreign Minister Lavrov recently voiced Russia’s hope at the Munich Security Conference for a common Eurasian Union with the European Union extending from Lisbon to Vladivostok. German and other European policy looked Eastward to invest its savings in the post-Soviet states.

This hope was anathema to U.S. neocons, who retain British Victorian geopolitics opposing the creation of any economic power center in Eurasia. That was Britain’s nightmare prior to World War I, and led it to pursue a diplomacy aimed at dividing and conquering continental Europe to prevent any dominant power or axis from emerging.

America started its Ukrainian strategy with the idea of splitting Russia off from Europe, and above all from Germany. In the U.S. playbook is simple: Any economic power is potentially military; and any military power may enable other countries to pursue their own interest rather than subordinating their policy to U.S. political, economic and financial aims. Therefore, U.S. geostrategists view any foreign economic power as a potentially military threat, to be countered before it can gain steam.

We can now see why the EU/IMF austerity plan that Yanukovich rejected made it clear why the United States sponsored last February’s coup in Kiev. The austerity that was called for, the removal of consumer subsidies and dismantling of public services would have led to an anti-West reaction turning Ukraine strongly back toward Russia. The Maidan coup sought to prevent this by making a war scar separating Western Ukraine from the East, leaving the country seemingly no choice but to turn West and lose its infrastructure to the privatizers and neo-rentiers.

But the U.S. plan may lead Europe to seek an economic bridge to Russia and the BRICS, away from the U.S. orbit. That is the diplomatic risk when a great power forces other nations to choose one side or the other.

The silence from Hillary

Having appointed Valery Nuland as a holdover from the Cheney administration, Secretary of State Hillary Clinton joined the hawks by likening Putin to Hitler. Meanwhile, Soros’s $10 million on donations to the Democratic Party makes him one of its largest donors. The party thus seems set to throw down the gauntlet with Europe over the shape of future geopolitical diplomacy, pressing for a New Cold War.

Hillary’s silence suggests that she knows how unpopular her neocon policy is with voters – but how popular it is with her donors. The question is, will the Republicans agree to not avoid discussing this during the 2016 presidential campaign? If so, what alternative will voters have next year?

This prospect should send shivers down Europe’s back. There are reports that Putin told Merkel and Holland in Minsk last week that Western Europe has two choices. On the one hand, it and Russia can create a prosperous economic zone based on Russia’s raw materials and European technology. Or, Europe can back NATO’s expansion and draw Russia into war that will wipe it out.

German officials have discussed bringing sanctions against Ukraine, not Russia, if it renews the ethnic warfare in its evident attempt to draw Russia in. Could Obama’s neocon strategy backfire, and lose Europe? Will future American historians talk of who lost Europe rather than who lost Russia?

Michael Hudson’s book summarizing his economic theories, “The Bubble and Beyond,” is now available in a new edition with two bonus chapters on Amazon. His latest book is Finance Capitalism and Its Discontents.  He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, published by AK Press. He can be reached via his website,


[1] Fin min hopes Ukraine will get new IMF aid in early March – Interfax,

5:40AM ET on Friday Feb 13, 2015 by Thomson Reuters

[2] “The west needs to rescue the Ukrainian economy,” Financial Times editorial, February 12, 2015.

[3] Elaine Moore, “Contrarian US investor with $7bn of debt stands to lose most if Kiev imposes haircut,” Financial Times, February 12, 2015.


Dollar Deception: How Banks Secretly Create Money

 Dollar Deception: How Banks Secretly Create Money

by Ellen Brown (Web of Debt) July 3, 2007

It has been called “the most astounding piece of sleight of hand ever invented.” The creation of money has been privatized, usurped from Congress by a private banking cartel. Most people think money is issued by fiat by the government, but that is not the case. Except for coins, which compose only about one one-thousandth of the total U.S. money supply, all of our money is now created by banks. Federal Reserve Notes (dollar bills) are issued by the Federal Reserve, a private banking corporation, and lent to the government.1 Moreover, Federal Reserve Notes and coins together compose less than 3 percent of the money supply. The other 97 percent is created by commercial banks as loans.2

Don’t believe banks create the money they lend? Neither did the jury in a landmark Minnesota case, until they heard the evidence. First National Bank of Montgomery vs. Daly (1969) was a courtroom drama worthy of a movie script.3 Defendant Jerome Daly opposed the bank’s foreclosure on his $14,000 home mortgage loan on the ground that there was no consideration for the loan. “Consideration” (“the thing exchanged”) is an essential element of a contract. Daly, an attorney representing himself, argued that the bank had put up no real money for his loan. The courtroom proceedings were recorded by Associate Justice Bill Drexler, whose chief role, he said, was to keep order in a highly charged courtroom where the attorneys were threatening a fist fight. Drexler hadn’t given much credence to the theory of the defense, until Mr. Morgan, the bank’s president, took the stand. To everyone’s surprise, Morgan admitted that the bank routinely created money “out of thin air” for its loans, and that this was standard banking practice. “It sounds like fraud to me,” intoned Presiding Justice Martin Mahoney amid nods from the jurors. In his court memorandum, Justice Mahoney stated:

Plaintiff admitted that it, in combination with the Federal Reserve Bank of Minneapolis, . . . did create the entire $14,000.00 in money and credit upon its own books by bookkeeping entry. That this was the consideration used to support the Note dated May 8, 1964 and the Mortgage of the same date. The money and credit first came into existence when they created it. Mr. Morgan admitted that no United States Law or Statute existed which gave him the right to do this. A lawful consideration must exist and be tendered to support the Note.

The court rejected the bank’s claim for foreclosure, and the defendant kept his house. To Daly, the implications were enormous. If bankers were indeed extending credit without consideration – without backing their loans with money they actually had in their vaults and were entitled to lend – a decision declaring their loans void could topple the power base of the world. He wrote in a local news article:

This decision, which is legally sound, has the effect of declaring all private mortgages on real and personal property, and all U.S. and State bonds held by the Federal Reserve, National and State banks to be null and void. This amounts to an emancipation of this Nation from personal, national and state debt purportedly owed to this banking system. Every American owes it to himself . . . to study this decision very carefully . . . for upon it hangs the question of freedom or slavery.

Needless to say, however, the decision failed to change prevailing practice, although it was never overruled. It was heard in a Justice of the Peace Court, an autonomous court system dating back to those frontier days when defendants had trouble traveling to big cities to respond to summonses. In that system (which has now been phased out), judges and courts were pretty much on their own. Justice Mahoney, who was not dependent on campaign financing or hamstrung by precedent, went so far as to threaten to prosecute and expose the bank. He died less than six months after the trial, in a mysterious accident that appeared to involve poisoning.4 Since that time, a number of defendants have attempted to avoid loan defaults using the defense Daly raised; but they have met with only limited success. As one judge said off the record:

If I let you do that – you and everyone else – it would bring the whole system down. . . . I cannot let you go behind the bar of the bank. . . . We are not going behind that curtain!5

From time to time, however, the curtain has been lifted long enough for us to see behind it. A number of reputable authorities have attested to what is going on, including Sir Josiah Stamp, president of the Bank of England and the second richest man in Britain in the 1920s. He declared in an address at the University of Texas in 1927:

The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin . . . . Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of a pen, they will create enough money to buy it back again. . . . Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in. . . . But, if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit.

Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta in the Great Depression, wrote in 1934:

We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon.6

Graham Towers, Governor of the Bank of Canada from 1935 to 1955, acknowledged:

Banks create money. That is what they are for. . . . The manufacturing process to make money consists of making an entry in a book. That is all. . . . Each and every time a Bank makes a loan . . . new Bank credit is created — brand new money.7

Robert B. Anderson, Secretary of the Treasury under Eisenhower, said in an interview reported in the August 31, 1959 issue of U.S. News and World Report:

[W]hen a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.

How did this scheme originate, and how has it been concealed for so many years? To answer those questions, we need to go back to the seventeenth century.

The Shell Game of the Goldsmiths

In seventeenth century Europe, trade was conducted primarily in gold and silver coins. Coins were durable and had value in themselves, but they were hard to transport in bulk and could be stolen if not kept under lock and key. Many people therefore deposited their coins with the goldsmiths, who had the strongest safes in town. The goldsmiths issued convenient paper receipts that could be traded in place of the bulkier coins they represented. These receipts were also used when people who needed coins came to the goldsmiths for loans.

The mischief began when the goldsmiths noticed that only about 10 to 20 percent of their receipts came back to be redeemed in gold at any one time. They could safely “lend” the gold in their strongboxes at interest several times over, as long as they kept 10 to 20 percent of the value of their outstanding loans in gold to meet the demand. They thus created “paper money” (receipts for loans of gold) worth several times the gold they actually held. They typically issued notes and made loans in amounts that were four to five times their actual supply of gold. At an interest rate of 20 percent, the same gold lent five times over produced a 100 percent return every year, on gold the goldsmiths did not actually own and could not legally lend at all. If they were careful not to overextend this “credit,” the goldsmiths could thus become quite wealthy without producing anything of value themselves. Since only the principal was lent into the money supply, more money was eventually owed back in principal and interest than the townspeople as a whole possessed. They had to continually take out loans of new paper money to cover the shortfall, causing the wealth of the town and eventually of the country to be siphoned into the vaults of the goldsmiths-turned-bankers, while the people fell progressively into their debt.8

Following this model, in nineteenth century America, private banks issued their own banknotes in sums up to ten times their actual reserves in gold. This was called “fractional reserve” banking, meaning that only a fraction of the total deposits managed by a bank were kept in “reserve” to meet the demands of depositors. But periodic runs on the banks when the customers all got suspicious and demanded their gold at the same time caused banks to go bankrupt and made the system unstable. In 1913, the private banknote system was therefore consolidated into a national banknote system under the Federal Reserve (or “Fed”), a privately-owned corporation given the right to issue Federal Reserve Notes and lend them to the U.S. government. These notes, which were issued by the Fed basically for the cost of printing them, came to form the basis of the national money supply.

Twenty years later, the country faced massive depression. The money supply shrank, as banks closed their doors and gold fled to Europe. Dollars at that time had to be 40 percent backed by gold, so for every dollar’s worth of gold that left the country, 2.5 dollars in credit money also disappeared. To prevent this alarming deflationary spiral from collapsing the money supply completely, in 1933 President Franklin Roosevelt took the dollar off the gold standard. Today the Federal Reserve still operates on the “fractional reserve” system, but its “reserves” consist of nothing but government bonds (I.O.U.s or debts). The government issues bonds, the Federal Reserve issues Federal Reserve Notes, and they basically swap stacks, leaving the government in debt to a private banking corporation for money the government could have issued itself, debt-free.

Theft by Inflation

M3, the broadest measure of the U.S. money supply, shot up from $3.7 trillion in February 1988 to $10.3 trillion 14 years later, when the Fed quit reporting it. Why the Fed quit reporting it in March 2006 is suggested by John Williams in a website called “Shadow Government Statistics“, which shows that by the spring of 2007, M3 was growing at the astounding rate of 11.8 percent per year. Best not to publicize such figures too widely! The question posed here, however, is this: where did all this new money come from? The government did not step up its output of coins, and no gold was added to the national money supply, since the government went off the gold standard in 1933. This new money could only have been created privately as “bank credit” advanced as loans.

The problem with inflating the money supply in this way, of course, is that it inflates prices. More money competing for the same goods drives prices up. The dollar buys less, robbing people of the value of their money. This rampant inflation is usually blamed on the government, which is accused of running the dollar printing presses in order to spend and spend without resorting to the politically unpopular expedient of raising taxes. But as noted earlier, the only money the U.S. government actually issues are coins. In countries in which the central bank has been nationalized, paper money may be issued by the government along with coins, but paper money still composes only a very small percentage of the money supply. In England, where the Bank of England was nationalized after World War II, private banks continue to create 97 percent of the money supply as loans.9

Price inflation is only one problem with this system of private money creation. Another is that banks create only the principal but not the interest necessary to pay back their loans. Since virtually the entire money supply is created by banks themselves, new money must continually be borrowed into existence just to pay the interest owed to the bankers. A dollar lent at 5 percent interest becomes 2 dollars in 14 years. That means the money supply has to double every 14 years just to cover the interest owed on the money existing at the beginning of this 14 year cycle. The Federal Reserve’s own figures confirm that M3 has doubled or more every 14 years since 1959, when the Fed began reporting it. 10That means that every 14 years, banks siphon off as much money in interest as there was in the entire economy 14 years earlier. This tribute is paid for lending something the banks never actually had to lend, making it perhaps the greatest scam ever perpetrated, since it now affects the entire global economy. The privatization of money is the underlying cause of poverty, economic slavery, underfunded government, and an oligarchical ruling class that thwarts every attempt to shake it loose from the reins of power.

This problem can only be set right by reversing the process that created it. Congress needs to take back the Constitutional power to issue the nation’s money. “Fractional reserve” banking needs to be eliminated, limiting banks to lending only pre-existing funds. If the power to create money were returned to the government, the federal debt could be paid off, taxes could be slashed, and needed government programs could be expanded. Contrary to popular belief, paying off the federal debt with new U.S. Notes would not be dangerously inflationary, because government securities are already included in the widest measure of the money supply. The dollars would just replace the bonds, leaving the total unchanged. If the U.S. federal debt had been paid off in fiscal year 2006, the savings to the government from no longer having to pay interest would have been $406 billion, enough to eliminate the $390 billion budget deficit that year with money to spare. The budget could have been met with taxes, without creating money out of nothing either on a government print press or as accounting entry bank loans. However, some money created on a government printing press could actually be good for the economy. It would be good if it were used for the productive purpose of creating new goods and services, rather than for the non-productive purpose of paying interest on loans. When supply (goods and services) goes up along with demand (money), they remain in balance and prices remain stable. New money could be added without creating price inflation up to the point of full employment. In this way Congress could fund much-needed programs, such as the development of alternative energy sources and the expansion of health coverage, while actually reducing taxes.


1 Wright Patman, A Primer on Money (Government Printing Office, prepared for the Sub-committee on Domestic Finance, House of Representatives, Committee on Banking and Currency, 88th Congress, 2nd session, 1964).

2 See Federal Reserve Statistical Release H6, “Money Stock Measures,” (February 23, 2006); “United States Mint 2004 Annual Report,” Ellen Brown, Web of Debt, (2007), chapter 2.

3 “A Landmark Decision,” The Daily Eagle (Montgomery, Minnesota: February 7, 1969), reprinted in part in P. Cook, “What Banks Don’t Want You to Know,” (June 3, 1993).

4 See Bill Drexler, “The Mahoney Credit River Decision,” .

5 G. Edward Griffin, “Debt-cancellation Programs,” (December 18, 2003).

6 In the Foreword to Irving Fisher, 100% Money (1935), reprinted by Pickering and Chatto Ltd. (1996).

7 Quoted in “Someone Has to Print the Nation’s Money . . . So Why Not Our Government?”, Monetary Reform Online, reprinted from Victoria Times Colonist (October 16, 1996).

8 Chicago Federal Reserve, “Modern Money Mechanics” (1963), originally produced and distributed free by the Public Information Center of the Federal Reserve Bank of Chicago, Chicago, Illinois, now available on the Internet; Patrick Carmack, Bill Still, The Money Masters: How International Bankers Gained Control of America (video, 1998), text.

9 James Robertson, John Bunzl, Monetary Reform: Making It Happen (2003), page 26.

10 Board of Governors of the Federal Reserve, “M3 Money Stock (discontinued series),” .

Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Brown’s eleven books include the bestselling Nature’s Pharmacy, co-authored with Dr. Lynne Walker, which has sold 285,000 copies.

Fiat money is unconstitutional in the United States

The Federal Reserve Act
is Unconstitutional

In order to fully understand the following documents there needs to be an explanation of the background behind the case.

Please note that the assignment of the case to Judge Mahoney was through standard lawful practices and that the Chief Justice of the Minnesota Supreme Court assigned an associate justice to assist in the trial

These action give total and complete lawful jurisdiction to the actions of the Court

We will now let the participants set the stage.



A Minnesota Trial Court’s decision holding:

  • the Federal Reserve Act unconstitutional and VOID
  • holding the National Banking Act unconstitutional and VOID
  • declaring a mortgage acquired by the First National Bank of Montgomery, Minnesota in the regular course of its business, along with the foreclosure and
  • the sheriff’s sale, to be VOID

This decision, which is legally sound, has the effect of declaring all private mortgages on real and personal property, and all U.S. and State bonds held by the Federal Reserve, National and State Banks to be null and VOID.

This amounts to an emancipation of this nation from personal, national and State debt purportedly owed to this banking system.

Every True American owes it to himself/herself, to his or her country, and to the people of the world for that matter, to study this decision very carefully and to understand it, for upon it hangs the question of freedom or slavery

by: Jerome Daly, Attorney at Law
28 East Minnesota Street
Savage, Minnesota 55378
February 7, 1969


On May 8, 1964 the writer executed a Note and Mortgage to the First National Bank of Montgomery, Minnesota, which is a member of the Federal Reserve Bank of Minneapolis. Both Banks are private owned and are a part of the Federal Reserve Banking System.

In the Spring of 1967 the writer was in arrears $476.00 in the payments on this Note and Mortgage. The Note was secured by a Mortgage on real property in Spring Lake Township in Scott County, Minnesota. The Bank foreclosed by advertisement and bought the property at a Sheriff’s Sale held on June 26, 1967 and did not redeem with the 12 month period of time allotted by law after the Sheriff’s Sale.

The Bank brought the Action to recover the possession to the property in the Justice of the Peace Court at Savage, Minnesota. The first 2 Justices were disqualified by Affidavit of Prejudice. The first by the writer and the Second by the Bank. A third one refused to handle the case. It was then sent, pursuant to law, to Martin V. Mahoney, Justice of the Peace, Credit River Township, Scott County, Minnesota, who presided at a Jury trial on December 7, 1968. The Jury found the Note and Mortgage to be void for failure of a lawful consideration and refused to give any validity to the Sheriff’s Sale. Verdict was for the writer with costs in the amount of $75.00.

The president of the Bank admitted that the Bank created the money and credit upon its own books by which it acquired or gave as consideration for the Note; that this was standard banking practice, that the credit first came into existence when they created it; that he knew of no United States Statutes which gave them the right to do this. This is the universal practice of these Banks. The Justice who heard the case handed down the opinion attached and included herein. Its reasoning is sound. It will withstand the test of time. This is the first time the question has been passed upon in the United States. I predict that this decision will go into the History Books as one of the great Documents of American History. It is a huge cornerstone wrenched from the temple of Imperialism and planted as one of the solid foundation stones of Liberty.



The “Credit River Decision” handed down by a jury of 12 on a cold day in December, in the Credit River Township Hall, was an experience that I’ll never forget.

The Chief Justice of the Minnesota Supreme Court had phoned me a week before the trial and asked me if I would be an associate justice in assisting Justice Martin V. Mahoney since he had never handled a jury trial before. I accepted, and it took me two hours to get my car running in the 22 below zero weather.

I got to the courtroom about 30 minutes before trial, and helped get the wood stove going, since the trial was being held in an unheated storeroom of a general store. This was the first time I met Justice Mahoney, and I was impressed with his no nonsense manner of handling matters before him. My object was to help pick the jury, and to keep Jerome Daly and the attorney representing the Bank of Montgomery from engaging in a fist fight. The courtroom was highly charged, and the Jury was all business.

The banker testified about the mortgage loan given to Jerome Daly, but then Daly cross examined the banker about the creating of money “out of thin air,” and the banker admitted that this was standard banking practice. When Justice Mahoney heard the banker testify that he could “create money out of thin air,” Mahoney said, “It sounds like fraud to me.” I looked at the faces of the jurors, and they were all agreeing with Mahoney by shaking their heads and by the looks on their faces.

I must admit that up until that point, I really didn’t believe Jerome’s theory, and thought he was making this up. After I heard the testimony of the banker, my mouth had dropped open in shock, and I was in complete disbelief. There was no doubt in my mind that the Jury would find for Daly.

Jerome Daly had taken on the banks, the Federal Reserve Banking System, and the money lenders, and had won.

It is now twenty eight years since this “Landmark Decision,” and Justice Mahoney is quoted more often than any Supreme Court justice ever was. The money boys that run the “private Federal Reserve Bank” soon got back at Mahoney by poisoning him in what appeared to have been a fishing boat accident (but with his body pumped full of poison) in June of 1969, less than 6 months later.

Both Jerome Daly and Justice Martin V. Mahoney are truly the greatest men that I have ever had the pleasure to meet. The Credit River Decision was and still is the most important legal decision ever decided by a Jury. – Bill Drexler


The above-entitled action came on before the Court and a Jury of 12 on December 7, 1968 at 10:00 am. Plaintiff appeared by its President Lawrence V. Morgan and was represented by its Counsel, R. Mellby. Defendant appeared on his own behalf.

A Jury of Talesmen were called, impaneled and sworn to try the issues in the Case. Lawrence V. Morgan was the only witness called for Plaintiff, and Defendant testified as the only witness in his own behalf.

Plaintiff brought this as a Common Law action for the recovery of the possession of Lot 19 Fairview Beach, Scott County, Minn. Plaintiff claimed title to the Real Property in question by foreclosure of a Note and Mortgage Deed dated May 8, 1964, which Plaintiff claimed was in default at the time foreclosure proceedings were started.



First National Bank of Montgomery, Plaintiff vs Jerome Daly, Defendant


The above entitled action came on before the Court and a Jury of 12 on December 7, 1968 at 10:00 am. Plaintiff appeared by its President Lawrence V. Morgan and was represented by its Counsel, R. Mellby. Defendant appeared on his own behalf.

A Jury of Talesmen were called, impaneled and sworn to try the issues in the Case. Lawrence V. Morgan was the only witness called for Plaintiff and Defendant testified as the only witness in his own behalf.

Plaintiff brought this as a Common Law action for the recovery of the possession of Lot 19 Fairview Beach, Scott County, Minn. Plaintiff claimed title to the Real Property in question by foreclosure of a Note and Mortgage Deed dated May 8, 1964 which Plaintiff claimed was in default at the time foreclosure proceedings were started.

Defendant appeared and answered that the Plaintiff created the money and credit upon its own books by bookkeeping entry as the consideration for the Note and Mortgage of May 8, 1964 and alleged failure of the consideration for the Mortgage Deed and alleged that the Sheriff’s sale passed no title to plaintiff.

The issues tried to the Jury were whether there was a lawful consideration and whether Defendant had waived his rights to complain about the consideration having paid on the Note for almost 3 years.

Mr. Morgan admitted that all of the money or credit which was used as a consideration was created upon their books, that this was standard banking practice exercised by their bank in combination with the Federal Reserve Bank of Minneapolis, another private Bank, further that he knew of no United States Statute or Law that gave the Plaintiff the authority to do this. Plaintiff further claimed that Defendant by using the ledger book created credit and by paying on the Note and Mortgage waived any right to complain about the Consideration and that the Defendant was estopped from doing so.

At 12:15 on December 7, 1968 the Jury returned a unanimous verdict for the Defendant.

Now therefore, by virtue of the authority vested in me pursuant to the Declaration of Independence, the Northwest Ordinance of 1787, the Constitution of United States and the Constitution and the laws of the State of Minnesota not inconsistent therewith;


1. That the Plaintiff is not entitled to recover the possession of Lot 19, Fairview Beach, Scott County, Minnesota according to the Plat thereof on file in the Register of Deeds office.

2. That because of failure of a lawful consideration the Note and Mortgage dated May 8, 1964 are null and void.

3. That the Sheriff’s sale of the above described premises held on June 26, 1967 is null and void, of no effect.

4. That the Plaintiff has no right title or interest in said premises or lien thereon as is above described.

5. That any provision in the Minnesota Constitution and any Minnesota Statute binding the jurisdiction of this Court is repugnant to the Constitution of the United States and to the Bill of Rights of the Minnesota Constitution and is null and void and that this Court has jurisdiction to render complete Justice in this Cause.

The following memorandum and any supplementary memorandum made and filed by this Court in support of this Judgment is hereby made a part hereof by reference.

Dated December 9, 1968
Credit River Township

Scott County, Minnesota


The issues in this case were simple. There was no material dispute of the facts for the Jury to resolve.

Plaintiff admitted that it, in combination with the federal Reserve Bank of Minneapolis, which are for all practical purposes, because of their interlocking activity and practices, and both being Banking Institutions Incorporated under the Laws of the United States, are in the Law to be treated as one and the same Bank, did create the entire $14,000.00 in money or credit upon its own books by bookkeeping entry. That this was the Consideration used to support the Note dated May 8, 1964 and the Mortgage of the same date. The money and credit first came into existence when they created it. Mr. Morgan admitted that no United States Law Statute existed which gave him the right to do this. A lawful consideration must exist and be tendered to support the Note. See Ansheuser-Busch Brewing Company v. Emma Mason, 44 Minn. 318, 46 N.W. 558. The Jury found that there was no consideration and I agree. Only God can create something of value out of nothing.

Even if Defendant could be charged with waiver or estoppel as a matter of Law this is no defense to the Plaintiff. The Law leaves wrongdoers where it finds them. See sections 50, 51 and 52 of Am Jur 2nd “Actions” on page 584 – “no action will lie to recover on a claim based upon, or in any manner depending upon, a fraudulent, illegal, or immoral transaction or contract to which Plaintiff was a party.”

Plaintiff’s act of creating credit is not authorized by the Constitution and Laws of the United States, is unconstitutional and void, and is not a lawful consideration in the eyes of the Law to support any thing or upon which any lawful right can be built.

Nothing in the Constitution of the United States limits the jurisdiction of this Court, which is one of original Jurisdiction with right of trial by Jury guaranteed. This is a Common Law action. Minnesota cannot limit or impair the power of this Court to render Complete Justice between the parties. Any provisions in the Constitution and laws of Minnesota which attempt to do so is repugnant to the Constitution of the United States and void. No question as to the Jurisdiction of this Court was raised by either party at the trial. Both parties were given complete liberty to submit any and all facts to the Jury, at least in so far as they saw fit.

No complaint was made by Plaintiff that Plaintiff did not receive a fair trial. From the admissions made by Mr. Morgan the path of duty was direct and clear for the Jury. Their Verdict could not reasonably been otherwise. Justice was rendered completely and without denial, promptly and without delay, freely and without purchase, conformable to the laws in this Court of December 7, 1968.


FORWARD: The above Judgment was entered by the Court on December 9, 1968. The issue there was simple – Nothing in the law gave the Banks the right to create money on their books. The Bank filed a Notice of Appeal within 10 days. The Appeals statutes must be strictly followed, otherwise the District Court does not acquire Jurisdiction upon Appeal. To effect the Appeal the Bank had to deposit $2.00 with the Clerk within 10 days for payment to the Justice when he made his return to the District Court. The Bank deposited two $1.00 Federal Reserve Notes. The Justice refused the Notes and refused to allow the Appeal upon the grounds that the Notes were unlawful and void for any purpose. The Decision is addressed to the legality of these Notes and the Federal Reserve System.

The Cases of Edwards v. Kearnzey and Craig v. Missouri set out in the decision should be studied very carefully as they bear on the inviolability of Contracts. This is the crux of the whole issue. Jerome Daly.

SPECIAL NOTATION. Justice Mahoney denied the use of Federal Reserve Notes, since they represent debt instruments, not true money, from being used to pay for the appeal process itself. In order to get this overturned, since the bank’s appeal without the payment being recognized was out of time, it would have required that the Bank of Montgomery, Minnesota bring a Title 42, Section 1983 action against the judicial act of Justice Mahoney for a violation of the Constitution of the United States under color of law or authority, and if successful, have the case remanded back to him to either retry the case or allow the appeal to go through. But the corrupt individuals behind the bank(s) were unable to ever elicit such a decision from any federal court due to the fact that because of their vile hatred for him and what he had done to them and their little Queen’s Scheme, had him murdered (same as them murdering him) just about 6 months later. And so, the case stands, just as it was. Amazingly, if they hadn’t been so arrogant about the value of their federal reserve notes and paid the Justice just 2 measly silver dollars, or else 4 measly half dollars, or else 8 measly quarters, or else 20 measly dimes, or else 40 measly nickels, or else 200 measly pennies, they could have had their appeal and would not have had to get blood on their hands.

As it is, they are now known for their bloody ways, and the day will come when the American people will reap vengeance upon them for such a heinous and villainous act. Amen.

December 9, 1968
Justice Martin V. Mahoney
Credit River Township

Scott County, Minnesota

Note: It has never been doubted that a Note given on a Consideration which is prohibited by law is void. It has been determined; by independent of Acts of Congress, that sailing under the license of an enemy is illegal. The emission of Bills of Credit upon the books of these private Corporations for the purpose of private gain is not warranted by the Constitution of the United States and is unlawful. See Craig v. Mo. 4 Peters Reports 912. This Court can tread only that path which is marked out by duty. M.V.M.

JEROME DALY had his own information to reveal about this case, which establishes that between his own revealed information and the fact that Justice Martin V. Mahoney was murdered 6 months after he entered the Credit River Decision on the books of the Court, why the case was never legally overturned, nor can it be.


Jerome Daly was from Savage Minn. and a close friend of mine. The “Credit River” decision (was) where a jury in a Justice of the Peace court trial found that Federal Reserve Notes were not Moneys of Account of the United States and the court in his opinion found them to be ‘FRAUDS’.

This case was on Dec. 7, 1968 before Justice Martin V. Mahoney of Credit River Minn. and I was an associated Justice since Justice Mahoney had never tried a jury trial and I was asked by “Chief Justice of the Minnesota Supreme Court, Oscar Knutson, (commonly known as “King Knute”) to assist Justice Mahoney, since the Bank of Montgomery was represented by an attorney, and Jerome Daly was an attorney, and the case was about “Failure of Consideration” by a bank in a mortgage foreclosure on Jerome’s cabin at Prior Lake, Minn..

Justice Mahoney declared that only “Gold and Silver Coins” were moneys of account of the United States, and that the Constitution is still the LAW today. “No state shall make any “THING” but Gold and Silver Coin a tender in payment of debts…”

And of course since the Federal Government had been given only 18 to 20 powers under the Constitution it was a “Limited Government”, and according to the 9th and 10th amendments the states and the people were Sovereign, and retained for themselves all of the other rights not specifically given to the Feds.

When news of the jury’s decision was picked up by Vern Myers and written about in his newsletter, “Myers Finance and Commerce” and sent world wide the whole world was afraid to accept FRAUDS and it got so big that they had Justice Mahoney killed within 6 months and Jerome and I had a couple of close calls too.

I’ve published the book: “The Credit River Decision” for 20 years now, but sold my last copy about 6 months ago, since like Waco, no one was interested in it after the Govt put their “SPIN DOCTORS’ to work to try to discredit it. This like the “Special Appearance” really needs to be studied to learn the real truth about our “Funny Money” system of creating Money “Out of thin Air” by the Banksters.

During the trial, on cross examination the President of the “Bank of Montgomery” testified that the banks regularly “create money out of thin air.”

Jerome asked the Bank President:

“If you were just opening up your bank and no one had yet made a deposit, and I came into your bank, and wanted to take out a loan of $18,000.00, could you loan me that money?

When the Bank President said, “Yes.” I thought the jury would faint.

Jerome than said , “Does this mean that you can create money out of thin air?”

The Bank President said: “Yes. We can create money out of thin air.”

Justice Mahoney then said “IT SOUNDS LIKE FRAUD TO ME” and everybody in the court room nodded their heads indicating that they agreed with Justice Mahoney.

The jury went out and returned a verdict in favor of Jerome Daly on the basis that the Federal Reserve Notes were not legal and valid consideration for a mortgage note contract.

Those that have a copy of “The Credit River Decision” just won’t part with it, and it’s too expensive to print just a few copies, so I really don’t know where you’ll get a copy.

Good luck on your case, and I hoped that I helped you a little.

Bill Drexler


Abe Lincoln said teach the Constitution in our schools, preach it from the pulpits. We see the Internet is both and more.


Following are two letters giving a brief synopsis by Minnesota Attorney Jerome Daly, concerning his “Credit River Decision” from December 7, 1968.

I have a complete transcript of this case, including the Findings of Fact and Conclusions of Law, as well as Jerome Daly’s scathing letter to the members of the Bar, to whom Jerome refers to as “The Boys in the Back Room.”

The letter is addressed to Patrick Foley, U.S. Attorney for Minnesota on December 27, 1968, and follows below here, in addition to Jerome’s “Introduction” letter. Further below my e-mail signature line is a letter from Bill Drexler, who was an associate Justice in the Jerome Daly case in Minnesota, which you should find VERY interesting.

I had a chance to meet and confer with Jerome Daly in 1991, when he assisted me with an unlawful foreclosure on my home in Puyallup. That case is not over yet. At that time he was living out in California. He drafted some of the legal documents on my behalf. The brief he prepared in support of my position will knock your socks off. One of these days
I’ll post it with attachments, because it does take a “picture” to explain the fraud.

If any of you still have Federal Reserve Notes, circa 1920’s through the 1960’s, you know what I’m talking about. And if you research and read Public Law 90-269 of March 18, 1968 followed by the Legislative History of Public Law 94-564, and the contents of Public Law 95-147 on October 28, 1977, you will begin to understand the FRAUD that has been perpetrated by the Congress of the United States upon the People of this Nation. Public Officials need to be held STRICTLY accountable to their Oath of Office and the Law of the Land.

In my case, a certain Court Commissioner and a Superior Court Judge are yet to be prosecuted for their fraudulent perpetrations. Sometimes the wheels of “Justice” move slowly – but they will ONLY move when forced to do so by the Citizenry — “We the People” — who hold ALL the power over our ordained and established Constitution, Bill of Rights, and proper Organs of Government through Delegated Powers and Authority to Act on OUR behalf.

Perhaps after reading this you’ll begin to understand why those who are enlightened to the fraud try to deal in Coin, as it is the ONLY medium of exchange specifically authorized under the Constitution, Article I, Section 8, Clause 5 & 6, and Article I, Section 10, as well as the Coinage Act of 1792, neither of which has ever been repealed, notwithstanding the fraudulent assertions otherwise by the totally compromised and corrupted Congress and Legislatures. As the Maxim of Law states, “Fraud and Justice never dwell together.” And it should be remarked here that thanks to Congressman Philip M. Crane, you NOW have Gold and Silver Coin pursuant to Public Law 99-61 (July 9, 1985) and Public Law 99-185 (December 17, 1985).

These two Public Laws made it possible for the minting and distribution of American Gold Eagles and Silver Eagles, available at your local Coin shop. Everyone should have some real “money” in their possession; but you need to know that your PAPER Federal Reserve Note with $1 printed on it won’t buy a One Dollar Silver Eagle — you’ll have to give about $8.00 to $9.00 FRN’s for the REAL “Dollar”. Read Public Law 90-269 and you’ll understand why. The paper FRN and the Silver dollar should be at “parity”.

By the way, “FRAUD” stands not only for the crime, but “Federal Reserve Accounting Unit Device”.

Mr. Daly passed away a couple of years ago . . . but his Credit River Decision lives on, even though the members of the Bar have sought to suppress this case from public view. It is probably fitting to insert here Jerome’s “Introduction” letter of February 7, 1969, as well as a copy of the letter to the US Attorney on December 27, 1968, so you have some idea of the gravity of what occurred, and before you read what Bill Drexler, a friend of Jerome, wrote below my signature line. I quote herein the two letters, as follows:

Jerome Daly
Attorney At Law
28 East Savage Street
Savage, Minnesota 55378
December 27, 1968

Mr. Patrick Foley
United states Attorney for Minnesota
United States Court House Bldg.
Minneapolis, Minnesota
Re: First National Bank of Montgomery vs. Jerome Daly

As you are on my mailing list, at your request, attached kindly find 2 copies of a decision rendered at Credit River Twp. Justice of the Peace court on December 9, 1968 by Justice Martin V. Mahoney, who by occupation is not dependent upon the fraudulent Federal Reserve Mob for his sustenance; thus he was able to view the whole fraud, which is Global in scope, with a mind in the settled calmness of impartiality, disinterestedness, and fairness, in keeping with his Oath and with a completely friendly feeling toward the Constitution of the United States of America.

In truth and in fact the Justice of the Peace Court is the highest Court in the land as it is the closest to the People. Every Judge who is dependent upon this fraudulent Federal Reserve, National and State Banking System for his sole support is DISQUALIFIED because of self interest and had no jurisdiction to sit in review of this Judgment. If any Appellate Court, including the Supreme Court of the United States, in review of this Judgment, perpetrates a fraud upon the People by defying the Constitutional Law of the United States, Mahoney has resolved that he will convene another Jury in Credit River Township to try the issue of the Fraud on the part of any State or Federal Judge, and in an action on
my part to recover the possession if the Jury decides in my favor, the Constable and the Citizens Militia of Credit River Township will, pursuant to the Law, deliver me back into possession. So you see, this Justice of the Peace can keep the peace in Scott County, Minnesota, not with the help of these State and Federal Judges who have fled reality, but in spite of them. This Thomas Jefferson’s prophesy with reference to Chattel Slavery once again rings true; “God’s Justice will not sleep forever.”. (emphasis added – now you may understand one of the lawful purposes of the Militia!)

One wonders sometimes what the United States, and its leaders, including the Shylock usury element, did to bring on a Pea[r]l Harbor Attack on December 7, 1941, with such suddenness and devastation. It could be the Judgment of a Just God giving vent to a stored wrath in retaliation to the money changers. It is ironic in deed that the Jury should return its verdict on the same day 27 years later and the National and International Banking and Oil Mob shudder in their back rooms where they have cornered the money of the World and where they sit pulling the strings; fostering, conniving and perpetrating War with profit to themselves paid for by the blood, sweat, tears and toil of the farmer, the mechanic, the laborer and the humbler members of society; and well they might tremble, for, as they listen they can hear, with every increasing distinctness, the sound of the waves at low tide as they wash across the lonely decks of the U.S.S. Arizona with over 2,500 men entombed in her hold, with oil still seeping therefrom to the surface.

It is better to be charitable than miserly, honest than dishonest, direct than indirect, upright than underhanded, intelligent than unintelligent, to have courage than be a coward, to be free than slave, in body and in mind.

I remain, Quite Independently Yours,

/s/ Jerome Daly

P.S. Give my best wishes for a New Year to the Boys in the Back Room.


“Reason obeys itself; and ignorance does whatever is dictated to it.”
–Thomas Paine, Rights of Man (“Conclusion”)

“All laws which are repugnant to the Constitution are null and void.”
–Marbury v. Madison, 5 U.S. (2 Cranch) 137 (1803)

Please direct all comments to:

WSF 2006, Karachi: Total Debt Cancellation – ‘We don’t owe them anything’


 Bikash Sangraula, IPS

TerraVIVA, World Social Forum 2006, KARACHI,  WEDNESDAY, MARCH 29, 2006   

– Over a hundred countries in the developing world have taken to neo-liberal policies thanks to the insistence of creditors from the north, including the G8, the World Bank (WB), and the International Monetary Fund (IMF). But after 20 years, it is clear that these policies have not worked. The poor are poorer with their governments spending a lot of money to pay back loans, activists say.

 Aminata Toure Barry from Jubilee South, an organisation working against globalisation and for debt cancellation, said that her country, Mali, has already paid eight times the loans it owes to creditors from the North. “But we are still continuing to pay. In fact, the loan principal has increased by three percent since 1980,” she said at a seminar on The Debt Cancellation Trap by G8, the International Monetary Fund and the World Bank at WSF Karachi Tuesday evening.

 While the living conditions of the poor in Mali continue to deteriorate, the Bank says that the solution to the problem is more debt, more neo-liberalism and more privatisation.

 “This does not work,” Barry said categorically. “Due to these policies, a bigger proportion of our population is without food, without schools and without health facilities.”

 The World Bank and the IMF have announced that they are cancelling debt owed by 19 countries, but critics say this is a trap.

 “The conditions attached to the offer are dangerous,” said Neil Tangri, an activist associated with Center for Economic Justice, India. “For the debt to be cancelled, they want the countries to implement more of the same policies that are impoverishing the people.”

 There is a different path to that prescribed by the G8, WB and the IMF toward debt relief. pointed out Tangri. “Let’s declare that we don’t owe them anything. Any country can pass a law and say that. Argentina has done just that.”

 A small debtor is owned by the creditor, but a big debtor owns the creditor. Countries like India and Pakistan can dictate terms with their creditors precisely because they are under a lot of debt.

 After all, the poor countries did not come under debt due to some mistake of their own, pointed out Arjun Karki, president of NGO Federation Nepal. “The countries from in the north plundered our resources during centuries of colonialism. My own country, Nepal, has borrowed billions from WB, ADB and the IMF and has followed their policies for years,” he said. “But look at where we are now. We have political instability, bad governance and civil war.”

 If history were to count, then the creditors of today probably owe more to the developing countries than vice versa.

 Then why do governments refrain from taking up the issue and declaring that they don’t owe any debt? Activists participating in the WSF Karachi pointed out the bitter fact that governments in poor countries are not always with and for the people.

 “The governments keep borrowing every year as that means a lot of easy money for those in power,” said Tangri. “For the lender, it does not matter where the money goes.”

 Even when post-disaster rehabilitation funds come to poor countries, it is often the rich that get the most, and not the poor and the affected.

 “The only way to come out of this trap is total, unconditional and immediate cancellation of debt,” said Anita Rampal from India. “Let’s make a statement: we don’t owe anything, and we are not paying back anything.”

Africa’s unfair debt trap


By Paliani Gomani Chinguwo (from Malawi)

[Initially published in Economics Society Newsletter, a publication of the University of Malawi, and in Nation, a daily newspaper in Malawi, both in 2002] 

As far as African History is concerned, probably the greatest tragedies of all time, which also satisfy the requirements to be termed a "serious crimes against humanity", were the advents of the slave trade (Trans-Atlantic & East African) and colonialism.

Caucasians brutally uprooted millions of Africans, packed them in ships like sardines, and took them to America and the Caribbean islands where their labour was inhumanly exploited. Africa was directly subjected to over 400 years of trans-Atlantic and Eastern African slavery when the slave trade spread to displace millions from their kingdoms and empires. A greater number yet, perished through slave hunting raids.

After the abolition of slavery in the west, In 1884-85 European states` delegates met in Berlin (Germany) to resolve their so-called ‘Scramble for Africa’. It was during this conference that the African continent was fragmented for the benefit of European countries. These fragments later developed into politically independent states. Renowned historians like Mark Hyman, Walter Rodney and others, have cogently put across that the colonization of Africa by the Europeans, marked the beginning of another kind of slavery in disguise, since, for about the next 90 years or so, Africa was subjected to colonial torture, plunder and exploitation in form of natural resources, forced labour, terrorism, expropriation, unfair taxation, genocide, brainwashing etc.

It is outrageous that after slavery and colonialism, Africa happens to be heavily indebted to the western nations which at one time colonized it. Cases of mismanagement and corrupt practices as a result of mediocre leadership in most governments in post-independent Africa have caused African indebtedness which accelerated over a mere 45 years. Great proportions of government revenues including substantial loans borrowed from international lending institutions to fund various developmental projects in Africa have ended up being ‘deposited’ in our government officials` personal bank accounts in the west.

Sani Abacha and Mobutu Sese Seko, former Presidents of Nigeria and Zaire respectively, are good examples of such culprits in this regard. Their personal bank accounts in the foreign banks are fat with huge sums of money realized through misappropriation of public funds and diverted loans while they were in power. Though it is widely accepted even by the so called "international community," that a great proportion of these hundreds of millions of US dollars in our leaders accounts, were obtained at the expense of poor Africans, all efforts to redeem these huge sums from those foreign banks to finance various developmental projects in Africa have so far proved futile.

Through IMF/World Bank policies that have been imposed on developing countries for the past decades, Africa has greatly been constrained to produce and export raw materials at very low prices and import-manufactured products at unreasonably higher prices. Partly, this has also kept Africa mal-developed. Chinweizu states "By holding us in their economic cage and stimulating our appetites while ruthlessly reducing our purchasing power, the western countries sharpen the competition for crumbs within and between our nations and states. We are so engrossed in these inter personal, inter ethnic and inter-locality competitions ?" (1996) "Black Redemption".

The World Against Africa: Africa Can’t Benefit from World Economic History

At the beginning of the year 1998, the external debt of sub-Saharan Africa was approximated to be $328.9 billion. To settle this heavy debt, African countries would have to pay not less than 60% or $85.4 billion of the 142.3 billion in revenues generated from their exports. Shockingly, African countries have managed to pay back at least 17% of their export earnings to the donors and international lending institutions yet, a grand total of $60.9 billion remains unpaid. To some extent it might be true that the failure to meet basic needs due to the debt burden in no small measure, contributes to the level of tension and conflict on the African continent. (Annan K.1998: Section 93).

Historically, nations with dept burdens exceeding that which currently exists with Africa have managed to negate this, but why has the world refused to see Africa in the same economic light as it has seen even Developed countries?

Japan’s Debt Trap

Business Week, May 18, 1998 

Japan’s Debt Trap


                    OFFICIAL LEVEL

PUBLIC About 100% of GDP,
DEBT or $4.5 trillion.
That's on a level with
such highly leveraged
Western countries as
Belgium, Canada, and

NONPERFORMING About $600 billion. The
BANK LOANS government has recently
admitted to that much
after claiming for years
that it was only about
$200 billion.

CORPORATE Debt exceeds equity
LIABILITIES by an average of 4
to 1 in the corporate
sector. That level is
forcing companies into
bankruptcy at a record

PROPERTY Official Level. Japan's
PRICES commercial and household
real estate is still valued
at $17.5 trillion.


PUBLIC Actual public debt could be as
DEBT much as 250% of GDP, making
Japan the most indebted nation
in the industrialized world. To
reach that number, analysts throw
in the debt of Zaito, an off-bal-
ance-sheet government lender.

NONPERFORMING More like $770 billion, according
BANK LOANS to the ratings firms. The extra
$120 billion is bank declared
nonperforming but probably
not being serviced by distressed
corporate borrowers.

CORPORATE The situation is likely to be worse,
LIABILITIES since poor accounting does not reveal
borrowings overseas or pledges to
cover the debt of corporate affiliates.
Private pension plans totaling
$600 billion are underfunded by as
much as 40%.

PROPERTY A markdown of 10% to 30% is
PRICES probably necessary. That means
households with mortgages are sit-
ting on $250 billion in paper losses.

CAFTA?s Debt Trap

FPIF Special Report
June 2005

CAFTA?s Debt Trap

By Aldo Caliari | June 2005


Criticism of the Central American Free Trade Agreement (CAFTA) currently being considered by the U.S. Congress has focused heavily on concerns that the treaty would devastate Central American farmers who would be forced to compete with heavily subsidized U.S. agribusiness.1 In addition, many Central Americans fear that the deal would perpetuate a low-road approach to development based on low wages and lax environmental enforcement and undermine government authority to ensure basic services and access to medicines. These are all valid concerns, but there is yet another danger posed by CAFTA that deserves greater attention.

Buried in the technical language of the investment chapter of the agreement are rules that would make it more difficult for the six nations that have signed the trade deal with the United States to escape heavy debt burdens or to prevent or recover from debt crises. The investment provisions of CAFTA, like other deals such as the 1994 North American Free Trade Agreement, are based on the argument that strong protections for private foreign investors will help encourage investments needed for economic growth. To this end, they require governments to comply with a long list of investor protections and grant private foreign investors the right to sue governments for damages if these obligations are violated.

For example, governments are required to treat foreign investors at least as favorably as domestic ones. This principle is known as “national treatment.” They must also ensure what is called “most favored nation? treatment, meaning that they cannot discriminate against (or give special preferences to) the investors of one country that is a party to the agreement without granting the same treatment to investors of other parties to the agreement. These rules mean that governments cannot favor domestic interests (or investors from a particular country) even if doing so would support social goals or other national interests.

The NAFTA investor protections cover a sweeping array of types of ownership interests, including loans and securities. 2 But the CAFTA rules go even further by extending the application of such protections to sovereign debt. Under NAFTA, sovereign debt is explicitly excluded.3 It is worth noting that the explicit exclusion comes after the use of the words “for greater certainty” which could be construed as meaning that the explicit exclusion was not necessary in the light of the other wording.

This is not the first time that a trade deal has covered sovereign debt. In the 2003 U.S.-Chile Agreement, specific principles on investment are explicitly made applicable to sovereign debt. The U.S.-Chile FTA contains a broad definition of investment4 that follows the standard adopted by the U.S. in its most recent BIT Model.5 This definition generally includes “bonds, debentures, loans and other debt instruments?6 In what represents a significant departure from NAFTA, the treaty explicitly makes the provisions applicable to sovereign debts issued by the Chilean government.7 These same rules are included in CAFTA.8

The rest of this article explains how the extension of CAFTA investment rules to sovereign debt places huge constraints on the ability of indebted countries to exit from a debt crisis or to protect the basic needs of its citizens.

National Treatment and MFN in the Context of Sovereign Debt Problems

The principles of Most Favored Nation and National Treatment were originally born in agreements dealing with trade in goods. The extension of these principles to investment is, therefore, neither a straightforward proposition, nor one exempt of controversy.9 The impacts of the insertion of these principles in investment treaties have also been widely analyzed and criticized.10 The application of these principles to sovereign debt is, in general, susceptible to the same critiques that have been made of their application to other forms of investment.

However, the extension of National Treatment and MFN principles to sovereign debt raises a number of specific issues that could prove far more harmful than the traditional application of those principles to investment in the past. Some of these issues are listed below:
1. Dismantling tools needed for the recovery of the local economy in post-crisis situations

The application of the National Treatment principle would restrict the ability of the debtor government to use tools needed for the recovery of the local economy in post-crisis situations. Applying the principle of National Treatment to sovereign debt essentially means that foreign creditors should be offered no less favorable treatment than that offered to domestic creditors.

This is important in the context of the developing country signatories of CAFTA, since, with the exception of Honduras , an important share of public debt in all these countries is owed to domestic creditors. In some of them, like Costa Rica , domestic debt is actually higher than external debt.

There are a variety of reasons why a country having to restructure its sovereign debt in order to prevent or exit a financial crisis might need to resort to offering preferential conditions to domestic creditors.

In a financial crisis, domestic creditors often suffer a “double adjustment.” First, they are typically forced to accept a “haircut” that their claims, meaning that the value of their loans is reduced by a certain percentage. Second, they often suffer the costs related to the internal adjustment, such as high interest rates.11 In fact, the impact of the restructuring on the domestic capital markets and, in turn, on the resumption of growth and repayment capacity, are important factors to take into account.12 Along similar lines, the IMF has said that “the restructuring of certain types of domestic debt may have major implications for economic performance, as a result of its impact on the financial system and the operation of domestic capital markets.”13

Third, dealing with domestic debt before dealing with the foreign might also allow the sovereign nation to rapidly return to domestic capital markets during what is likely to be a sustained interruption in access to international capital markets.14

Fourth, the debtor might also need to accord priority to domestic debt in order to protect the financial system. In this sense, it has been pointed out that sovereign debt restructuring has a double impact on the financial system. On the one hand, the impact on assets of the reduction in the value of bonds held as part of their capital by financial entities. On the other, the general increase in uncertainty, which could affect the overall credibility of the system.15 The IMF has also stated that in these cases special treatment to domestic debt might enable the debtor to protect “a core of the banking system by ensuring the availability of assets required for banks to manage capital, liquidity and exposure to market risks.”16

Last, a sovereign debtor might need to accord special treatment to domestic debtors for the same legitimate reasons that can lead it to accord special treatment to national sectors and industries, within the context of a national development strategy and in order to achieve development goals.17
2. Preventing the State from paying salaries and pensions in a debt crisis situation

The application of National Treatment to sovereign debt means that, under CAFTA, the government will be unable to prioritize domestic debt consisting of, among other things, wages, salaries, and pensions. In other words, the government is bound to treat these debts the same way it deals with foreign debts held by transnational banks and institutional investors. If its resources are enough just to cover a portion of its debts, the state will not be able to choose to direct those funds to pay wages and salaries (at least not as long as it does not devote equal amount to pay foreign creditors). CAFTA would deal a setback to states? capacity to prioritize their obligations to basic human rights and comprehensive development above the claims of foreign creditors.

Unlike an indebted private company, an indebted sovereign nation has human rights obligations and social responsibilities toward its people. This means that, in dealing with sovereign debt there are issues that cannot be addressed by strict analogies with bankruptcy principles applicable to the private sector. That is why civil society proposals for a rules-based framework have typically called for analogies to be made rather with frameworks that contemplate this special mission that the state is called to fulfill, such as Chapter 9 of U.S. Bankruptcy Law (applicable to municipalities). Whether civil society proposals call for the restructuring to preserve the ability of the state to finance the achievement of the MDGs, human rights, human needs, etc., a common element is the call to give priority to this ethical mission embodied by the state. In fact, even the IMF?s much-criticized Sovereign Debt Restructuring Mechanism proposal excluded “Wages, salaries and pensions? from its application.18
3. Reducing the leverage of debtors in a debt restructuring

By first gathering a number of supportive domestic creditors, a government’s debt restructuring offer can gain considerable clout. Th e offer of preferential conditions to these domestic creditors might be critical in order for the state to garner support from these creditors. This is especially so because some governments may find that it is easier or more advantageous to the economy that such incentives be offered to local holders of debt rather than foreign ones. If the principles of national treatment are applied to sovereign debt, as mandated by CAFTA, any incentive offered to domestic creditors would have to be offered to the foreign creditors, effectively foreclosing this avenue for the indebted country.

The offer of preferential conditions to domestic creditors was, in fact, a crucial element in enhancing the government’s leverage in Argentina “s negotiation with its private creditors after its December 2001 default (the largest sovereign default in history). In September 2003, the government released its initial proposed debt restructuring conditions , which included a 75% cut for bondholders. The government contended that this was the size of the reduction that would enable it to recover sustainable growth while ensuring that the promises of payment were kept. Some groups of bondholders quickly rejected this offer, claiming that it was woefully insufficient and, in the light of the countrx’s latest growth figures, below the capacity of the country to repay. The creditors also strongly lobbied the G7, which, directly and through the IMF, put more pressure on Argentina to improve its offer.19 With pressure mounting from the G7 and the IMF, Argentina turned to domestic pension funds that represented an improvement over the offer made to the other bondholders.20 By granting them preferential conditions, Argentina was able to reach agreement with creditors holding more than 17% of its total debt. This was a critical first step in garnering the support of a majority that, eventually, totaled 76% of the creditors.

Obviously, the space for the government to treat domestic bondholders differently from foreign ones was crucial to reaching this agreement. Such resort would have been out of reach if the government had been bound by a National Treatment of foreign debt principle.21
4. Creation of a privilege for the debt owned (or acquired) by creditors from the Party

CAFTA is technically a collection of bilateral treaties between the United States and each of the six developing nations. Thus, by requiring national treatment and MFN only for creditors from the country that is a party to the treaty, the agreement, in fact, grants seniority to the foreign investors from that country over investors from other countries.22

In addition, the treaty would affect the rights of bondholders from non-Parties to the treaty without their consent since they are, by definition, excluded from intervening in the negotiation of the bilateral agreement. For these bondholders, the bilateral can be de facto equated to an involuntary debt swap by which they might suddenly find themselves holding a downgraded instrument.

Investor-State Lawsuits and Sovereign Debt

Under CAFTA, governments that violate these investor protections can face expensive lawsuits. As under NAFTA and numerous bilateral investment treaties, CAFTA grants private foreign investors the right to bypass domestic courts and sue governments in international tribunals.23

Such “investor-state lawsuits? are highly controversial for a number of reasons.24 Many arbitration tribunals operate with an absolute lack of transparency, having no obligation to disclose relevant documents or allow any form of public participation.25 The system for choosing arbitrators has also drawn criticism, as arbitrators can be drawn from the ranks of practicing investment lawyers, without any obligation to appoint people who will be independent in the sense of not having any stake in the treaty interpretation.26

Neither do arbitral tribunals have to pay regard to legal precedents.27 This feature, which creates a lot of uncertainty in the investment arena, can become particularly troublesome when applied to potential or actual sovereign debt crises. Indeed, the main rationale for a sovereign debt bankruptcy system has been the need to provide some degree of rationality and predictability for both debtors and creditors in the messy process of exiting or sorting through a sovereign debt crisis. Clearly, an arbitration tribunal would do a poor job of addressing those concerns and would become an added element of uncertainty into the existing system.

The application of the principles of national treatment and MFN to sovereign debt will open new frontiers that might give these tribunals the authority to define difficult questions that arguably belong under the domestic jurisdiction of states.


CAFTA?s application of controversial investor protections to sovereign debt would suppress the few options available to countries trying to prevent or exit from debt crises. As shown by the experience of countries undergoing such crises, inability to exit a crisis situation might cause economic losses that far outweigh any commercial gains achieved through signing a treaty. Debt campaigners are urged to join forces with trade campaigners to raise public attention to this issue and ensure it remains front and center in the debate.

Central American activists must call on their governments to reject CAFTA. In the U.S., activists must urge Congress to also reject CAFTA on the basis that congressional support for CAFTA means condemning Central American countries to a perpetual incapacity to escape their debt problems. Members of Congress who boast of supporting the reduction of external debts for Central American countries must be reminded that most of these countries also have large stocks of private debt. CAFTA will tightly tie the hands of these countries to deal with such debt.

FPIF (online at policy analyst Aldo Caliari is Coordinator of the Rethinking Bretton Woods Project a the Center of Concern (online at


Action Aid (2003). Unlimited Companies: The Development Impacts of an Investment Agreement at the WTO.

Chang, Ha-Joon and Duncan Green (2003). The Northern WTO Agenda on Investment: Do as We Say, Not as We Did. South Centre/ CAFOD.

Correa, C. (1999). Key Issues for Developing Countries in a Possible Multilateral Agreement on Investment in International Monetary and Financial Issues for the 1990s, Vol. X.

IMF (2003). Proposed Features of a Sovereign Debt Restructuring Mechanism. Prepared by the Legal and Policy Development and Review Departments In Consultation with International Capital Markets and Research Departments. Approved by Francois Gianviti and Timothy Geithner, February 12.

IMF (2003a). IMF Discusses Possible Features of a Sovereign Debt Restructuring Mechanism. Public Information Notice No. 03/06, January 7.

IMF (2002). Sovereign Debt Restructuring Mechanism-Further Considerations. Prepared by the International Capital Markets, Legal and Policy Review Departments In Consultation with Other Departments. Approved by Gerd Hausler, Francois Gianviti and Tinothy Geithner. August 14.

IMF (2002a). The Design of the Sovereign Debt Restructuring Mechanism. Prepared by the Legal and Policy Development and Review Departments In Consultation with International Capital Markets and Research Departments. Approved by Francois Gianviti and Timothy Geithner, November 27.

IMF (2002b). IMF Board Discusses Possible Features of a New Sovereign Debt Restructuring Mechanism. Public Information Notice No. 02/106, September 24.

IMF (2003). Proposed Features of a Sovereign Debt Restructuring Mechanism. Prepared by the Legal and Policy Development and Review Departments. Approved by Francois Gianviti and Timothy Geithner, February 12.

Khor (2002). The WTO, the Post-Doha Agenda and the Future of the Trade System: A Development Perspective.

Machinea, J. (2004). Reestructuraci