The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Edward Chancellor
LONDON, July 31 (Reuters Breakingviews) - Government debt markets have been around since the city-state of Venice issued its first bonds in 1171, but public debt only became tradable in the English-speaking world six centuries later. Contemporaries held conflicting views about the development. Alexander Hamilton considered it a “national blessing,” whereas fellow U.S. Founding Father James Madison saw a “public curse.” Several leading members of the Scottish Enlightenment were similarly downbeat. As public debt across the developed world escalates, their concerns are proving timely.
In his forthcoming book, “A Fabulous Debt: The Epic Story of How Bonds Built the Modern World,” the Financial Times journalist Robin Wigglesworth explains how Britain’s geopolitical ascendancy was inexorably linked to its public finances, and in particular its ability to issue vast quantities of low-cost debt. Thomas Mortimer, an 18th-century financial writer, described the nation’s bond market as “the standing miracle in policies, which at once astonishes and over-awes the state of Europe.”
Not everyone was sanguine. In his 1752 essay, “Of Public Credit,” the Scottish philosopher David Hume fretted about Britain’s newfound tendency to “mortgage the public revenues, and to trust that posterity will pay off the incumbrances contracted by our ancestors.” Access to the bond market, said Hume, allowed politicians to behave extravagantly without having immediately to raise taxes: “The practice, therefore, of contracting debt will almost infallibly be abused, in every government.”
Adam Smith, the economist who wrote “The Wealth of Nations,” claimed that the issuance of long-dated public debt “has gradually enfeebled every state that has adopted it… When national debts have once accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid.” Another Scottish contemporary, Adam Ferguson, opined that a permanent and unproductive national debt was “to be reckoned among the causes of national ruin.”
For all the advantages of public borrowing, Ferguson considered it “extremely dangerous, in the hands of a precipitant and ambitious administration, regarding only the present occasion, and imagining a state to be inexhaustible, while capital can be borrowed and the interest paid.” In the decades after these warnings were issued, however, Britain’s national debt kept expanding. No crisis appeared, however, and the country’s prosperity grew apace.
In his “History of England (1848),” Thomas Babington Macaulay mocked the debt doomsayers. Macaulay hailed Britain’s “fabulous debt” as “the greatest prodigy that ever perplexed the sagacity and confounded the pride of statesmen and philosophers. At every stage in the growth of that debt, it was seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt went on growing; and still bankruptcy and ruin were as remote as ever.”
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