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Demystifying Alexander Nahum Sack and the doctrine of odious debt

Eric Tousaint’s study of the odious debt doctrine

by Eric Toussaint

Part 4 - Sack turned a blind eye to bankers’ malpractice regarding bond issue and rate-fixing

Sack was fully aware of the circumstances under which bankers in London, France, Germany and other major Western centres of finance issued public treasury bonds, imposing draconian conditions on the States asking for loans and manipulating the rates of those bonds.

Bankers’ abuse has been well documented. The conclusions of parliamentary enquiries, whether in Great Britain, France or the United States, were damning. Arbitration had proved necessary. Sack also knew all about speculative stock-market dabbling of private institutions holding public-debt bonds.

There were numerous public debates on all these topics throughout the 19th century, until the time when Sack wrote his book. In the run-up to the Hague Peace Conference of 1907 (see section on US policy, below), several participants, including the Argentine jurist and minister Luis M. Drago, denounced creditors’ behaviour. Yet nowhere in his work does Sack mention the possibility of nullifying a debt contract, declaring the bonds invalid, in the case of proven abusive or fraudulent behaviour on the part of creditors, usually banks. This is evidence of Sack’s bias.

When I discuss the criteria established by Sack to determine the odious nature of certain debts and creditors’ responsibility, we shall see that he envisaged creditors’ responsibility from the point of view of their complicity with odious acts perpetrated by the regimes they granted credit to. This is perfectly correct, but quite inadequate, as Sack completely ignores creditors’ responsibility at the point in time when they issue bonds on the financial markets – selling bonds at a price far below their nominal value, exorbitant commissions, very high real interest rates – and in the way they “manage” bonds once issued, that is, speculating and manipulating prices.

The fraudulent, extortionate and dishonest practices of bankers when they issue bonds should be firmly condemned and opposed, as should the manipulations they resort to afterwards. Sack deliberately decided to leave creditors a free hand in these matters.

This point clearly indicates that Sack was not on the side of those defending debtor States; his priority lay with the rights of private creditors. Sack’s refusal to take into account cases where lenders generated odious debts by imposing excessive demands on the borrowers testifies to his political and ideological orientation in favour of money-lenders.

It is all the more significant that the proposal to write off odious debts should be made by someone like Sack who was not predisposed to favouring debtors.

Despite his clear bias in favour of creditors, Sack considered that in exceptional cases debts may be written off. Sack believed that creditors should accept the cancellation of certain debts if it can be shown the government which contracted them intended to use them against the interests of the nation. The Russian jurist could not avoid pointing out that there is an important exception to the sacrosanct rule of continuity in debt repayment and a limit to private creditors’ rights: in certain circumstances, creditors must agree to the cancellation of their debt if it can be demonstrated that the debt is odious. He also accepts two fundamental points to which I shall return further on. Namely, that when there is a presumption of odious debt, it is incumbent upon the creditors to prove their good faith; and should they fail to do so, their acts may be considered as hostile to the nation.

However before we look at Sack’s definition of odious debt, there are other aspects of his position that I wish to touch upon, regarding the rights of creditors and of States in situations such as war.

Source and references:


[1] [2] [3] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20]

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