Public debt: Difference between revisions
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==History== | ==History== | ||
In 1720s | Modern debt institutions evolved gradually. Loans were typically highly nontransparent, with ill-specified interest rates and repayment schedules and often no specific dates on which principal repayments would be made. A king's promise to "repay" could often be removed as easily as the lender's head. Borrowing was frequently strongly coercive in nature. Early history is replete with examples of whole families who were slaughtered simply to seize their lands and other land. In thirteenth-century France, the [[Templars]] (of Crusades fame) were systematically exiled by the French kings, who seized their wealth.<ref name="Reinhart_Different">Carmen M. Reinhart and Kenneth S. Rogoff. [http://press.princeton.edu/titles/8973.html "This Time is Different"], ''Princeton University Press'', ISBN 978-0-691-14216-6, p.69. Referenced 2011-07-11.</ref> | ||
In 1720s in [[England]], the Prime Minister [[Wikipedia:Robert Walpole|Sir Robert Walpole]] has introduced the [[sinking fund]], a funding system designed to pay down England's public debt. Taxes, which had before been laid on for limited periods, were rendered perpetual, and the fund should not be used for any other purpose. The government obtained a reduction on the interest of the public debt. The savings were added to the fund and it was for some time regularly applied to the discharge of debt. But soon, the principle of an inviolable sinking fund was abandoned. During the wars which were waged while it subsisted, the whole of its produce was applied to the expense of the war; and even in time of peace, large sums were abstracted from it for current services. The sinking fund has greatly increased debt instead of diminishing it.<ref name="Ricardo_debt">David Ricardo. [http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Ftitle=205&chapter=38605&layout=html&Itemid=27 "Funding System An Article in the Supplement to the Fourth, Fifth and Sixth Edition of the Encyclopaedia Britannica 1820], Part of: The Works and Correspondence of David Ricardo, Vol. 4 Pamphlets and Papers 1815-1823; 11 vols (Sraffa ed.). Referenced 2010-06-24.</ref> | |||
From then on, government debt never needed be repaid. It was enough to create a regular and dependable source of revenue and use it to pay the annual interest and the principal of maturing bonds. Then for every retired bond would be sold a new one. In this way, a national debt could be made perpetual. Walpole's system proved its worth in financing British overseas expansion and imperial wars in the eighteenth and nineteenth centuries. The government could now maintain a huge peacetime naval and military establishment, readily fund new wars, and need not retrench afterward. The British Empire was built on more than the blood of its soldiers and sailors; it was built on debt. The ever-growing debt had the ancillary benefit of attaching the interests of wealthy creditors to the government. This example was not lost on some leaders of the infant American Republic, [[Wikipedia:Alexander Hamilton|Alexander Hamilton]] for one.<ref name="Trask_debt">H.A. Scott Trask. [http://mises.org/article.aspx?control=1419 "Perpetual Debt: From the British Empire to the American Hegemon"], Mises Daily, January 2004. Referenced 2010-06-24.</ref> | From then on, government debt never needed be repaid. It was enough to create a regular and dependable source of revenue and use it to pay the annual interest and the principal of maturing bonds. Then for every retired bond would be sold a new one. In this way, a national debt could be made perpetual. Walpole's system proved its worth in financing British overseas expansion and imperial wars in the eighteenth and nineteenth centuries. The government could now maintain a huge peacetime naval and military establishment, readily fund new wars, and need not retrench afterward. The British Empire was built on more than the blood of its soldiers and sailors; it was built on debt. The ever-growing debt had the ancillary benefit of attaching the interests of wealthy creditors to the government. This example was not lost on some leaders of the infant American Republic, [[Wikipedia:Alexander Hamilton|Alexander Hamilton]] for one.<ref name="Trask_debt">H.A. Scott Trask. [http://mises.org/article.aspx?control=1419 "Perpetual Debt: From the British Empire to the American Hegemon"], Mises Daily, January 2004. Referenced 2010-06-24.</ref> | ||
Revision as of 20:37, 11 July 2011
Public debt or government debt are obligations of governments to pay certain sums to the holders at some future time. Public debt is distinguished from private debt, which consists of the obligations of individuals, business firms, and nongovernmental organizations.[1]
History
Modern debt institutions evolved gradually. Loans were typically highly nontransparent, with ill-specified interest rates and repayment schedules and often no specific dates on which principal repayments would be made. A king's promise to "repay" could often be removed as easily as the lender's head. Borrowing was frequently strongly coercive in nature. Early history is replete with examples of whole families who were slaughtered simply to seize their lands and other land. In thirteenth-century France, the Templars (of Crusades fame) were systematically exiled by the French kings, who seized their wealth.[2]
In 1720s in England, the Prime Minister Sir Robert Walpole has introduced the sinking fund, a funding system designed to pay down England's public debt. Taxes, which had before been laid on for limited periods, were rendered perpetual, and the fund should not be used for any other purpose. The government obtained a reduction on the interest of the public debt. The savings were added to the fund and it was for some time regularly applied to the discharge of debt. But soon, the principle of an inviolable sinking fund was abandoned. During the wars which were waged while it subsisted, the whole of its produce was applied to the expense of the war; and even in time of peace, large sums were abstracted from it for current services. The sinking fund has greatly increased debt instead of diminishing it.[3]
From then on, government debt never needed be repaid. It was enough to create a regular and dependable source of revenue and use it to pay the annual interest and the principal of maturing bonds. Then for every retired bond would be sold a new one. In this way, a national debt could be made perpetual. Walpole's system proved its worth in financing British overseas expansion and imperial wars in the eighteenth and nineteenth centuries. The government could now maintain a huge peacetime naval and military establishment, readily fund new wars, and need not retrench afterward. The British Empire was built on more than the blood of its soldiers and sailors; it was built on debt. The ever-growing debt had the ancillary benefit of attaching the interests of wealthy creditors to the government. This example was not lost on some leaders of the infant American Republic, Alexander Hamilton for one.[4]
Importance
A government's ability to establish political institutions that sustain large amounts of debt repayment constitutes an enormous strategic advantage by allowing a country to marshal vast resources, especially in wartime. Arguably, one of the most important outcomes of England's "glorious revolution" of the late 1600s was a framework to promote the honoring of debt contracts, thereby conferring on England a distinct advantage over rival France. (France was at the height of its serial default era during this period.) Warfare was already becoming extremely capital intensive.
French monarchs had a habit of executing major domestic creditors (an early and decisive form of "debt restructuring"), the population came to refer to these episodes as "bloodletting". The French finance minister Abbe Terray, who served from 1768 to 1774, even opined that governments should default at least once every hundred years in order to restore equilibrium.[2]
References
- ↑ Encyclopædia Britannica. "public debt. (2011).". Referenced 2011-02-17.
- ↑ 2.0 2.1 Carmen M. Reinhart and Kenneth S. Rogoff. "This Time is Different", Princeton University Press, ISBN 978-0-691-14216-6, p.69. Referenced 2011-07-11. Cite error: Invalid
<ref>tag; name "Reinhart_Different" defined multiple times with different content - ↑ David Ricardo. "Funding System An Article in the Supplement to the Fourth, Fifth and Sixth Edition of the Encyclopaedia Britannica 1820, Part of: The Works and Correspondence of David Ricardo, Vol. 4 Pamphlets and Papers 1815-1823; 11 vols (Sraffa ed.). Referenced 2010-06-24.
- ↑ H.A. Scott Trask. "Perpetual Debt: From the British Empire to the American Hegemon", Mises Daily, January 2004. Referenced 2010-06-24.
Links
- Repudiating the National Debt by Murray N. Rothbard, first published in June, 1992
- The People Who Borrow by Sir Ernest Benn, excerpted from chapter 6 of Debt: Private and Public, Good and Bad, 1938
- The future of public debt: prospects and implications (contains pdf) by Stephen G. Cecchetti, M. S. Mohanty and Fabrizio Zampolli, Bank for International Settlements, March 2010
- What's Wrong with Government Debt by Robert P. Murphy, March 2011
- Default on Wikipedia