A Free Nation Deep in Debt: The Financial Roots of Democracy

by James Macdonald

Book Overview

Nowadays, the idea that the way a country borrows its money is connected to what kind of government it has comes as a surprise to most people. But in the eighteenth century it was commonly accepted that public debt and political liberty were intimately related. In A Free Nation Deep in Debt , James Macdonald explores the connection between public debt and democracy in the broadest possible terms. He starts with some fundamental questions: Why do governments...

• Format: Hardcover
• Language: English
• ISBN: 0374171432
• ISBN13: 9780374171438
• Release Date: January 2003
• Publisher: Farrar Straus Giroux
• Length: 576 Pages
• Weight: 2.10 lbs.
• Dimensions: 1.8" x 6.4" x 9.2"

Customer Reviews

This book offers relentless proofs that public debt works

I have not finished this marvelously over-written book but I can tell you I no longer look at the U.S.'s problems the same way. This book of history has much to say about our current problems with social security, health insurance and the Middle East. The most impressive insight I have taken away from this book is that a King with a hoard of gold is no match to a republic where everyone willingly shares the debt load, no matter how great that debt is. You have to wonder if the U.S./U.K. would do better in Iraq if they spent more time setting up money markets. I also understand why the Palestinians refusal to use direct deposit will forever keep them poor and undeveloped.

England's Democracy versus France's Ancien Regime

MacDonald argues that democracy arose to allow governments to borrow for war from their people. There is superb chapter on France versus England in eighteenth century. England had half the GNP of France, but it was always able to outspend France in their wars. England relied on 3% perpetual debt, readily marketable by holders, with published information about budget and single market indicator of England's credit rating. Plus England was run by "heroic citizen-creditors" who were willing to entrust their capital to Bank of England (for loan for war) because they ran the government and were sure they would get taxes to make the debt sound. France had kings who defaulted on a whim, a bramble bushof borrowing instruments, a terribly inefficient tax system, with lots of exemptions for their aristocrats, no public information and a lousy resale market. French citizen did not lend to France. England paid 3% on its debt and France paid 11% on its debt as the Revolution neared. England carried debt of double its GNP and France went bankrupt which killed the ancien regime with debt of 2/3d of GNP. Terrific story. MacDonald is concise and accurate summarizer of the literature on issues (American Revolutionary War debt) that I know about.

An excellent history of public debt and its role in developi

This book is not what you think. The title suggests the repeat of the theme exposed by Paul Kennedy in the 80s in his book "The Rise and Fall of Great Powers." But, the two books advance almost symmetrically opposed theories. Paul Kennedy suggested that great powers eventually decline because they can't withstand the fiscal burden of maintaining a nonproductive military effort to govern their empire (the Imperial Overstretch concept). Macdonald instead advances that a public bond market is a nation?s best tool in raising funds for emergencies such as warfare. In Kennedy's book debt is bad. In Macdonald it is good.Macdonald's argument starts with the fiscal stress associated with having to raise huge amount of funds in preparation for warfare. In such situation, raising taxes is impractical. Often tax rates would have had to double or treble to raise adequate funds to finance wars throughout history. A government can?t do that without causing a revolution. Often what states and government did before the advent of well developed public bond markets was to mine their grounds (or grounds of conquered territories) for mineral riches (gold and silver). The states would then hoard these gold reserves as funds available for a rainy day (war). But, as Macdonald points out this treasure hoarding was most inefficient from an economic standpoint.Public debt markets became a much preferred alternative to treasure hoarding for financing wars. This was true for several reasons. Treasure hoarding represented a huge amount of wasted capital not reinvested in the economy where it could have generated rapidly rising living standards for society at large. Bond financing (public debt) was so much more flexible a tool for war financing than an ongoing tasking treasure hoarding mechanism. Comparing two countries, one being a bond borrower, the other a treasure hoarder, one could readily observe that the bond borrower economy would grow much faster, and that it would have an easier time to finance wars when and as needed. Typically, you run out of gold reserve faster than you run out of a state's borrowing capacity.But, for a public debt market to thrive you need democratic institutions. In democracies, the motivation of the government and its citizen are aligned. This facilitates a trust between the creditors (citizens) and the borrower (the government). As a result, democratic governments can borrow more and at a lower interest costs then other governments. In other words, the creditors of a democratic government assess a lower credit and counterparty risk to a democratic government, and therefore demand a lower risk premium (lower interest rates). This is Macdonald's main argument. Therefore, he concludes that the pressure to create public credit markets to finance wars was an impetus to create public debt markets and in turn to develop democratic institutions.Macdonald's theory is so current. Today, it is self evident that the countries who h

Well argued even if you don't agree with him

For the record, I won't pretend to be an expert on public debt and all its related trivia so I'll judge this book as a layman only. A Free Nation Debt in Debt is an impressive bit of research and analysis. Macdonald does a remarkable job tracing the role of public debt stretching back thousands of years in an attempt to advance the notion that democracies are inextricably tied to government funding, and indeed exist because of it. Throughout history, Macdonald argues, public debt has applied pressure on government to become more transparent to both creditors and the citizens it represents.Of course, the problem with public debt is that it necessitates taxation -- and it may irk readers to hear Macdonald judge who is under- and over-taxed -- an intimately related issue. In fact, taxation plays such a role that you could argue it's a minor character in Macdonald's story.Does A Free Nation Deep in Debt succeed? That will depend on your perspective. Small government types probably won't care for Macdonald's primary thesis while others may nod in agreement. Either way, it is a fine example of historical research. Warning: Not a casual read. You don't need a degree in economics to pick this up but don't expect to breeze through through it either.

The Relationship of Public Finance and Political Freedom

"A Free Nation Deep in Debt" is James Macdonald's first literary contribution to the field of political economy and it is rich in historical detail, a fact which may make it a challenging read for anyone unacquainted with ordinary economic history and its specific historiography. Macdonald, an investment banker for many years who now lives in Oxford, England, discusses the idea that the way a country borrows its money is associated with what kind of government it has. In his discussion, Macdonald traces the evolution of public debt from antiquity to the present, arguing that public finance and political freedom are more closely interrelated than most people realize.For those who like some structure in a book of this complexity, it can easily be divided into an introduction and four main sections. The first seven pages, with the title "Introduction: The Financial Roots of Democracy," sketches out what is to come, providing the reader with a framework for the coming text and raising the essential questions with which the author will wrestle.The first section traces the history of public finance and political freedom from the end of the Bronze Age to the end of the Dark Ages, contrasts two different types of finances -- tribal and imperial, explains the historic advantages of autocratic government, considers the critical period when some of the emerging societies settled down and civilized themselves without losing their political freedom, and, in regard to the so-called Dark Ages, asks why they had a more intense and enduring effect in western Europe than in other places. This initial section sets the stage for a comprehensive description of the relationship of public finance and political freedom in the Middle Ages and modern times.The second section deals with medieval Europe. It was to be the role of medieval Italian city-states to bring back the idea of democratic public financing and modify it so it could become a workable plan for public financing. According to Macdonald, "The system that they created, although in one way fatally flawed, set off a chain of events with results that no one could have predicted." The third section of the book continues the discussion of public finance by looking at the attempts of other European states to come to terms with the implications of the Italian strategy.The fourth and final section considers events after the French Revolution, and the author suggests that "The outcome of the Napoleonic Wars demonstrated the superiority of a political system based on the alliance of parliamentary government and public debt, but now there was a new question: Would a system created in a world of restricted citizenship and limited franchise prove compatible with universal suffrage. It was the role of the nineteenth century to find a solution to this problem. In the devastating wars of the first half of the twentieth century, this solution was put to the test." And Macdonald concludes that "The First World War was the apot