A capsule history of public debt

Until 1693, sovereign debt really was the personal obligation of the sovereign. That year, England financed a war by setting up a bank to buy public bonds, and the government – not the king – was responsible for paying them off.

That was the start of modern national debts. There had been earlier attempts, notably in the Italian republics. In some ways, the Venetians had a more sophisticated notion of public debt than we do; they did not roll over for speculators, unlike the American habit established by the corrupt Alexander Hamilton and unaltered since.

The Bank of England was a desperate expedient, but within less than 50 years, a funded, permanent public debt was recognized as a good thing. An expanding urban merchant class was amassing non-land assets at an unprecedented rate, and they needed a safe place to store them: public bonds.

Market-oriented expedients were dangerous, as the English had learned from John Law's disasters in France.

It was not yet appreciated – in Tea Party salons it is not appreciated yet – that hard money stymied economic expansion. Inflation is good and controllable. Deflation is bad and no one knows how to control it.

Jackson paid down the public debt, leading to some of slowest economic growth in our history. Franklin Roosevelt, elected as a deficit hawk, changed his mind and established the conditions for the greatest economic expansion of all time.

As an economy expands, the public debt needs to expand also. It is possible to expand public debt too much, but few people seem to understand that it is also dangerous to restrain the growth of public debt.

If you're going to have a big economy, you must have a big government. Small government ideals are the result of the economic illiteracy of Americans.

When I wrote this, I had not seen E.J. Dionne's latest column where he says:

  Gradually, establishment thinking is moving toward a new consensus that puts growth first and looks for deficit reduction over time. In the last few months, middle-of-the-road and moderately conservative voices have warned that if we cut the deficit too quickly, too soon, we could throw ourselves back into the economic doldrums — and increase the very deficit we are trying to reduce.

Here, for example, is excellent advice from the deservedly respected (and thoroughly pro-market) economic columnist Martin Wolf, offered last week in the Financial Times: “The federal government is not on the verge of bankruptcy. If anything, the tightening has been too much and too fast. The fiscal position is also not the most urgent economic challenge. It is far more important to promote recovery. The challenges in the longer term are to raise revenue while curbing the cost of health. Meanwhile, people, just calm down.”

I think Dionne is wildly overoptimistic.