What is the History of Public Debt?

Figure 1. William of Orange was given the idea to create the concept of public debt by creating the Bank of England.

Debt has a long history, particularly for individuals and businesses. On the other hand, public debt is more complex, as it seems not to have existed until Medieval or even early Modern European states emerged. Public debt developed and shaped modern financial institutions that have transformed economic ideas in the last few centuries.

Were ancient Empires such as Rome in debt?

In ancient societies, such as Rome, Mesopotamia, and Egypt, governments were generally creditors and not in debt. They would finance institutions or individuals at given lending rates. At times of war or major state projects, funds would be raised through taxes and directly used if there was an immediate crisis where the state-required financial support, the state would generally turn to its wealthy families.

Wealthy families had an incentive to give their money to the state if it meant the survival of the country, as the most affluent families were often the ones that ruled or had the most to lose. The state could even confiscate wealth to finance its enterprises. The general pattern in antiquity, particularly in the Old World, is that the country would allow creditors to loan individuals and debt.

The state would periodically issue decrees to forgive debts, particularly in periods where debt levels became high and could threaten the overall economy. This approach also proved popular for rulers, particularly if forgiving debts did not hurt the rulers but mainly affected debt collectors. Even if debt forgiveness affected the state's finances, this forgiveness of debts could be seen as less painful than allowing too many people to default.[1]

In the contentious European wars of the late Medieval period and early Modern period, kings began to finance their wars using debt. Initially, kings could raise taxes and then directly finance their wars. However, it became increasingly hard for kings to keep order by raising taxes in times of war, particularly as wars became frequent. It was simply easier to borrow. Kings also believed they were put in place by God, so they often had little to fear creditors.

This was a problem because creditors soon refused to lend to kings since they realized they might not be paid back. This created financial crises for monarchs, particularly when wars became long, and began to affect different monarchies throughout Europe.[2]

Which countries first created public debt?

Figure 2. The Bank of North America was the first institution in the United States to finance public debt.

In the 17th century, England and France increasingly sparred for influence in Europe and the emerging sea trade across the North Atlantic. Initially, both countries would finance their wars through taxes or creditors, but this became harder over the 17th century. During the reign of William the Orange in England in the 1680s-1690s, he was engaged in the Nine Years War. This war resulted in a fight between all of the major European powers. William could not quickly raise taxes or get loans from creditors, so the idea developed that England would have its government bank, creating the Bank of England (Figure 1).

The Tonnage Act of 1694 was created to enable the Bank of England. The idea of a national bank was developed by Charles Montagu, 1st Earl of Halifax. He saw the Bank of England as a company that could benefit by being the sole Bank that could issue monetary notes and provide banking privileges to the wealthy and nobility.[3]

Funds were raised from private investors, and the Bank of England bought government stock and issued securities equivalent to bonds while giving lending notes to the government. The securities acted as contracts and would provide individuals with return on those investments, while the funds given by the individual could be used to finance debt. Businesses and individuals also were allowed to deposit money. This created a pool of funding for the government that it could use without directly going to Parliament to raise taxes or use other creditors.

Now, William III could finance his wars. Initially, the Bank of England was not a government institution but a private company created through a charter. However, as the government saw it useful to its efforts, it began to depend on the Bank more and increasingly incorporate it into its policies. In 1708, the government let the Bank have sole rights to create currency notes. Notes did not have fixed values, as they do today, but could be changed by agreement.

Within a year, the government also made it a monopoly, as other large banks were not allowed, and other banks could not issue notes. By 1720, the '£' sign was created, and by 1745 notes had fixed values of £20 to £1000. In the Seven Years war, another major conflict with France led to creating small notes, £10, as this allowed more borrowing for smaller denominations. Throughout the rest of the 18th century, the Bank had a more significant role in the economy, not only for the government but also in financing more enterprises throughout the country, including increasing trade. The system proved a success for England, and other countries in Europe began to copy the system by the end of the century. In 1782, the Bank of Spain was created, and in 1800, the Bank of France was established.

The Bank of North America was the first public bank in the United States, but it was soon replaced by the United States Bank (Figure 2). These institutions tried to copy the system in England and attempted to create a system of public debt financing.[4]

What does Modern Public Debt look like?

With the Bank of England's creation, the English government began to successfully pay its public debt even when it reached high levels. In the Napoleonic Wars of the first decade of the 19th century, debt reached 200% of GDP. In the early 19th century, governments began to make gold based on currency value, which initially helped currencies stabilize and gave some confidence in notes issued by governments. During the 19th century, the increasing wealth of the United Kingdom, and the government's success in paying its debt down, lowered debt in the United Kingdom.

However, at times, the Bank struggled and was bailed out by wealthy private individuals, particularly the Rothschild family. The weakening of the Bank allowed others to push for the liberalization of banking, leading to the 1825-1826 Bank Charter Act that helped spread large banking. Other countries were not as lucky as the United Kingdom when it came to financing debt. The newly independent states of Latin American in the 1820s were able to get loans from the bond market in London, as the United Kingdom became the central country for government finance. Some of the countries defaulted; however, the Bank of England did have the power to forgive debts and, similar to new government institutions in antiquity, would allow indebted countries to walk free.

Other times the terms were rewritten in regards to servicing the debts. The next set of global crises occurred during the two World Wars and the Great Depression. The Great Depression led to the last time a state within the United States, Arkansas, default on its debt obligations. Countries from the 1920-1930s increasingly found it hard to pay their debts, leading to debt payments to be rescheduled and new payment agreements to be created. By this time, credit ratings began to emerge. John Knowles Fitch, in 1913 had created the concept of credit ratings, which became the AAA through the D rating system. This rating system could be applied to countries and companies and was soon used to gauge country's ability to borrow.

Initial rates for lending thus became affected by a country's rating. This system and tightening processes for issuing government debt led to a few developed countries defaulting by the late 20th century.[5]

However, World War II, and its destruction of many advanced economies, created many problems for countries. Many countries found themselves bankrupt after the devastation of the war. The International Monetary Fund (IMF) and the World Bank were developed to help in such cases. Both institutions began to finance states and their enterprises; these institutions were seen as being comparable to the New Deal of the 1930s, where they would help stimulate financial growth in countries affected by the devastation. With the linkage of politics with these international financial institutions, debt soon became a major political issue used in the Cold War.

Generally, it became easier for major and developed countries to secure loans as they were more likely to pay off debts at regular intervals. Only in very recent times did this change, with Greece in 2015 becoming the first developed country to default on loans after the Banking Crisis of 2008-2009. The generally high debt ratings for developed countries has allowed them to more recently borrow at rates of 80% or more of their GDP, which some see as a potential future crisis as public debt now has been increasing.[6]


Government debt, or public debt, was a new concept that did not originate until the late 17th century. Before simply spending what they had, governments only had limited options to raise funds for wars or other enterprises. This changed with the founding of the Bank of England that other countries later emulated. In the 20th century, international institutions began to fund public debt, with the World Bank and the IMF's founding near and after the end of World War II.


  1. For more on early debt in antiquity, see: Hudson, Michael. 2018. ...And Forgive Them Their Debts: Lending, Foreclosure, and Redemption from Bronze Age Finance to the Jubilee Year. ISLET.
  2. For more on how wars in Europe changed finances for states, see: Glete, Jan. 2002. War and the State in Early Modern Europe: Spain, the Dutch Republic, and Sweden as the Fiscal-Military States, 1500-1660. Warfare and History. London ; New York: Routledge.
  3. For more on the Tonnage Act and its effect, see: Kynaston, David. 2017. Till Time's Last Sand: A History of the Bank of England, 1694-2013. London ; New York: Bloomsbury Publishing, an imprint of Bloomsbury Publishing Plc.
  4. For more on how the Bank of England evolved and how that influenced public financing and debt, see: Slater, Martin. 2018. The National Debt: A Short History. London: Hurst & Company.
  5. For more on how 19th-century finances changed as public institutions developed, see: Eichengreen, Barry, Robert Alan Feldman, Jeffrey B. Liebman, Jürgen von Hagen, and Charles Wyplosz, eds. 2011. Public Debts: Nuts, Bolts and Worries. Geneva Reports on the World Economy 13. Geneva: ICMB, Internat. Center for Monetary and Banking Studies.
  6. For more on the IMF and World Bank in an age of increasing public debt, see: Esteves, Rui Pedro, ElGanainy, Asmaa A, Mitchener, Kris James, and Eichengreen, Barry. 2019. Public Debt Through the Ages. INTERNATIONAL MONETARY FUND.