What is the History of Public Debt
Debt has a long history, particularly for individuals and businesses. Public debt, on the other hand, is more complex, as it seems to not have existed until Medieval or even early Modern European states emerged. How public debt developed and its impacted helped shape modern financial institutions that have transformed economic ideas in the last few centuries.
Early History of Public Debt
In ancient societies, such as Rome, Mesopotamia, and Egypt, governments were generally creditors and not in debt. They would finance to 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, then the state would generally turn to its wealthy families for support. Wealthy families had incentive to simply give their money to the state if it meant the survival of the state, as the wealthiest families were often the ones that ruled or had the most to lose. The state could even simply confiscate wealth in order to finance its enterprises. The general pattern in antiquity, particularly in the Old World, is that the state 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 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.
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 from creditors. This made it a problem as creditors soon began to refuse to lend to kings since they realized they may not be paid back. This financial crisis for wars began to affect different monarchies throughout Europe.
Developments in the Early Modern Period
In the 17th century, England and France increasingly spared 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 course of the 17th century. During the reign of William the Orange in England in 1680s-1690s, William was engaged in the Nine Years War that saw all of the European powers fighting. William could not easily raise taxes or get loans from creditors, so the idea developed that England would have its own government bank, creating what became the Bank of England. The Tonnage Act 1694 was created to enable the Bank of England, which was the idea of Charles Montagu, 1st Earl of Halifax, who 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.
Funds were raised from private investors and the bank bought government stock and issued securities, equivalent to bonds, while giving lending notes to the government. The securities acted as contracts and would give individuals 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 was able to 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. 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 the creation of small notes, £10, as this allowed more borrowing for smaller denominations. Over the course of the rest of the 18th century, the Bank had a greater role in the economy not only for the government but also in financing more enterprise 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 soon failed.
Modern Characteristics of Public Debt
With the creation of the Bank of England, 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 as the basis of currency value, which initially helped currencies to 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. Other countries were not as lucky. The new independent countries 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 power to forgive debts and, similar to early government institutions in antiquity, would simply allow indebted countries to walk free. Other times the terms were rewritten in regards to servicing the debts.