Why can't governments ever balance their books? Just what's the deal between debt & democracy...?
WHAT'S THE RELATIONSHIP between debt and democracy? Glancing at today's towering national deficits, you might think that the one undermines the other.
Fact is, however, they've always shuffled together – with debt propping up what we've come to call democracy more often than not – as James MacDonald shows in his excellent A Free Nation Deep in Debt: The Financial Roots of Democracy.
"Countries with representative institutions are able to borrow more cheaply than those with autocratic governments," concludes MacDonald after surveying (and detailing) some 5,000 years of royal and state borrowing and debt defaults.
You might want to argue with what democracy means here, of course. One class of voter has to keep lending money – in return for an annual gain, paid out of taxation – to fund those promises made to less well-off electors. In the middle, or even identical with one or both classes, tax-payers keep losing wealth to keep the merry-go-round spinning.
Either that, or the "public" debt goes into default, stuffing the lenders in time-honored tradition.
But you can't argue such matters in the absence of history. And no history we've stumbled across (so far) lays the government bond market bare quite like MacDonald's big book.
Starting from the tribal tributes of pre-history...and running through the imperial grain stores of Babylon and Ancient Egypt to the "voluntary" taxes of Greece and Rome...onto the early city states of Italy (with their banking dynasties)...and then the birth of perpetual national debts (and thus the modern bond market) in Holland and England...A Free Nation is detailed, beautifully researched, and yet a light pleasure to read.
Well, it's a pleasure if you find the history of finance anything but deathly dull. Which we do here at BullionVault. Because this stuff might just be important. And if not, at least it makes for a fascinating diversion.
Most diverting is MacDonald's history of how tributes to one's local war-lord or feudal master have since morphed into today's US Treasury bonds. These ancient tributes weren't simply made to help the war-lord look grand. They were in fact the first form of tax – a tax needed to finance (or more often, feed and clothe) the war-lord's own household. (Before Gold Mining became widespread enough to make that metal money, these tributes were usually paid in grain, cattle, wool, beer and such.)
As settled cities developed and became ever-more complex, so the machinery of government grew in size and complexity, too. By the time Plato was pondering the first Greek republics, "free born" citizens – obliged to fight neighboring states if they wanted to retain their freedoms – took offence at being forced to pay taxes.
Only defeated tribes and slaves should be made to pay tribute! And how very odd to the idiot concept of "No taxation without representation".
But what if these early taxes were made "voluntary"...or even became "repayable" a few months or years from now? Never mind that these taxes were rarely repaid, either in full or on time; never mind that the same issue – of freeborn citizens being "asked" to make loans that worked more like taxes – would return again in Florence 1,500 years later. Public debt had been born, and this year's $2 trillion bond drive by the US government is merely the latest (if largest!) attempt to settle promises, made through democracy with cash raised as debt.
The title, like so much else in James MacDonald's deep history, comes from the very dustiest corner of the archives, taken from an 18th century English pamphlet which spotted how defeating the French required a constant cycle of loans. "A free nation deep in debt" sums up the paradox that still underlies today's government bond markets. (The frequency of sovereign defaults might make you wary of buying official paper today, however...)
Almost as long as the sweep of history it covers, A Free Nation should sit on your shelves somewhere between the more populist blockbusters of Niall Ferguson and those dry, dusty tomes you keep vowing to read but too often ignore.
Look out for the hardback going cheap second-hand. Failing that, just get the paperback now...before higher taxation and towering bond sales crowd out yet more of your free-born spending power.
At least you'll understand quite where you sit in the long, long history of debt and democracy.