Thursday, November 3, 2011

Can continuous loaning reduce or increase the public debt of a country? Let's go back in history and see.

Between 1822 and 1826  Great Britain which was at the time  a world power as an intention of goodwill(?) offered loans to the countries of Latin America which were under Spanish and Portuguese colonial occupation.The loans were worth of 23 million golden sterlings. We can compare this aid like the Marshall plan undertaken by U.S.A for helping the severely damaged from the WW2 European countries.

These loans were about to be used by the countries to develop an infrastructure, create new working positions for the impoverished population, and develop and prospering economy.Once the loan was approved immediately its amount was reduced by taxation,interest and various expenses.Latin America received the remaining money which which were...7 million sterlings. However those who received the loan should repay the whole amount of the loan and not the amount that eventually ended up in their countries.

One of those loans was given to Argentina in 1824  by the British bank Baring brothers with a guarantee from the British bureaucracy. From the one million sterlings again because of some economic factors only 575.000 were given to Argentina in banknotes instead of pure gold as it was agreed.The governments of these countries were consisted of corrupted aristocrats who were in the sphere of influence of various European countries As a result not even a sterling was used for the development of their countries. There was no infrastructure created no industrial developement and generally there were no positive conditions for these countries to cut the colonial economic bonds with the Europeans.On the contrary the money was spent for personal reasons of the members of the governments and inevitably some years later Argentina was not able to pay the instalments of a loan that technically never received.

The British were not upset for the inability of Argentina to repay the loan.By showing generosity(?) they approved new loans for Argentina so that it could be able to pay the instalments of the old loans.This procedure became permanent . Argentina was receiving new loans in banknotes from which as usual the 50% of money remained in Britain for taxation and etc. Argentina was  paying with that money the instalments of previous loans in the price they were approved and not in the price of money which eventually were received by Argentina.

The first loan which ended up in the pockets of aristocrats was fully repaid in the end of 19th century. With the interest rate Argentina repaid a loan of 500.000 sterlings giving back 4 million sterlings.When Argentina repaid its first loan the whole amount that it owed to Britain for the subsequent loans was 130 million sterlings. This was nearly 260 times higher than the initial amount of money loaned by Britain to Argentina.

This was just a prologue of what was coming 100 years later in 2001.

Wherever you see Argentina replace the name with Greece. And wherever you see Britain replace it with banks. There you go, now we now that history is recursive.

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