Abstract
The management of the national debt does not correspond to the rules for management of the personal debt of individuals, households, or business enterprises. This chapter argues that economic history is of vital importance in elucidating this difference. Economic historians explore past episodes of unusually large expansions of sovereign debt to uncover the economic consequences when taxes are raised or not, and when the money supply is increased or not. This chapter uncovers the economics of sovereign debt by surveying academic debates on a selection of such historical events, including the Mississippi and South Sea bubbles and the sovereign default of Spain.
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Notes
- 1.
- 2.
John Law was the son of a Scottish goldsmith banker, who witnessed the early stages of monetary and fiscal reform in London in the 1690s, when the Bank of England was founded. He spent his adult life advising other governments how to reform their finances. His efforts culminated in France, where the regent ruling that country in 1715 turned to Law for advice. His system, based on creating a royal bank and replacing government debt with shares in a company with monopoly rights over all foreign trade, most taxes and the mints, briefly enjoyed spectacular success. The system eventually collapsed and Law had to flee France for his life. See Murphy (1997) and Neal (2012).
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Alexander Hamilton was one of the architects of the US constitution, and was responsible for its financial policy for a large part of George Washington’s presidency.
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For the European State Finance Database, see: http://www.esfdb.org. For the Global Price and Income History Group, see: http://gpih.ucdavis.edu.
- 5.
The Drelichman-Voth data on Castile’s Fiscal Position, 1566–1596, are available to download at: https://economics.ubc.ca/faculty-and-staff/mauricio-drelichman/.
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See the contributions to Coffman and Neal (2013) for a discussion of the various commitment mechanisms used in the past to convince public creditors that sovereign debt constituted an accessible, safe and liquid investment vehicle.
Reading List
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———. 2016. Duplication without Constraints: Alvarez-Nogal and Chamley’s Analysis of Debt Policy under Philip II. Economic History Review 69 (3): 999–1006.
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Neal, L.D. (2018). Sovereign Debt and State Financing. In: Blum, M., Colvin, C. (eds) An Economist’s Guide to Economic History. Palgrave Studies in Economic History. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-96568-0_13
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