A Free Nation Deep in Debt

Princeton University Press , Oxford . 2006 . ix+564 pp. Paperback £12.95 . This significant volume is a timely first-class history of public finance from Croesus' 10%-spoils-of-victory technique to the barely visible ripple made on American public debt by the war on terror. Borrowing the felicitous title and his main thesis from an 18th-century anonymous Scotsman (pp. 3, 206), the author offers an interesting blend of encyclopaedic historical evidence, an outstanding technical expertise on early (and not so early) financial markets, and a very articulate and engaging prose, all put to the service of a very exciting argument. As a cherry on the cake, the author meets with great ease the linguistic challenge of dealing first hand with primary and secondary sources in most European languages. We have here a truly scholarly attempt at putting into a long-run perspective the riddle that ‘liberty and credit are always united’ (p. 3); or, in other words, that the rise of democracies as the dominant powers is closely linked with the progressive emergence of an ‘art of public borrowing’ according to which the people who provided the money also controlled the government. The book is organized in nine chronologically ordered chapters preceded by a short introduction and followed by an equally brief conclusion. The introduction sets up the author's main thesis. Partially challenging (without, however, dismissing) the idea of an nearly exclusive link between the industrial revolution and the English, American and French political revolutions, Macdonald intends to provide an alternative, or maybe a complementary, explanation to the rise of modern democracy by discussing the history of war finance. Starting with illustrations way back in the ancient times, his main thesis is that ‘once wars could only be financed by borrowing, the outlook for autocracy dimmed’ (p. 5). Hence, when the art of public borrowing developed by Italian city-states of medieval Italy as a ‘democratic’ alternative to the traditional treasure chest technique, the autocratic regimes were doomed. Even if such a process took centuries to reach its apex with the bourgeois-rentier citizen-creditor between 1850 and 1950, Macdonald sees thus the roots of the classical 18th-century constitutional democracy being also largely explained by the rise of ... the bond market: ‘it is no coincidence that public borrowing and parliamentary government both originated in Europe’ (p. 6). In fine, this book is also an important (though frustrating) contribution to the understanding of a good deal of why today such a traditional technique seems to have all but disappeared. In an all too brief epilogue, the author offers some tantalizing reflections on the modern ‘disappearance of the hero of [his] tale, the citizen creditor’ (p. 471). Rising inflation rates from the 1960s onwards (how could one induce the public to buy bonds at negative real interest rates?), the massive drop of public borrowing requirements as a percentage of GNP and the warring economic interest groups heralded the rapid demise of the old ties between democracy and the bond market, even if this divorce probably found its origin way back in the 19th century with the programmed separation between taxpayers and creditors linked to the progressive introduction of universal suffrage. As a matter of fact, both post-war high growth rate and the intense debate about the redistribution of income eventually contributed to the end of this carefully constructed connection between democracy and the bond market. Moreover, the internationalization of the bond and credit markets probably also mirrors the change in governments' views of public credit. With China being currently, and by far, the main US Treasury bills holder, the old patriotic and democratic aura attracting American citizen-investors to buy government bonds is well and truly dead. Though intellectually highly interesting, the author's main argument is unfortunately nowhere presented in a concentrated analytical fashion. In fact, and despite too brief an attempt in the introduction (pp. 3–8), Macdonald only irregularly takes stock of the evolution of his central argument as his historical narrative unfolds. It is somewhat frustrating for the reader to have to dig out and connect these various passages, sometimes casually offered in the course of the central technical discussion on the evolution of the financial markets (see, for example, pp.74–5, 132,141, 231–2, 258, 272–7, 304, 370–2, 401, 414, 442, 470–3). In particular, the crucial Anglo–Dutch–American finance model only appears formally, and without warning, in Chapter 5, which is devoted to the (already) disastrous French public finance under Louis XIV (p. 180); and it is only through the following chapters, and in a somewhat unsystematic fashion, that we begin to understand exactly its central importance to the whole argument. Similarly, and despite a host of references to political philosophers, constitutional writers and leading politicians across England, Europe and the United States, Macdonald does not really attempt to link his fascinating technical material on public finance with the growth of political theory. How and why have the nature and consequences of public (and of course war) finance come to set the agenda for coherent political action? Be it in the powerful 16th-century Spanish monarchy, or during the endless 18th-century wars between the two equally oligarchic kingdoms of England and France, or within the seafaring or landlocked continental republics, political theory did not ignore economics and public finance. As a matter of fact, and in particular during the Enlightenment period during which Macdonald's argument takes a decisive turn, the interdependence between politics and the economy emerged as one, if not the central topic of political theory. Hume, Smith, Turgot or Burke, Mirabeau and Necker are obvious examples that come to mind. Such a synthesis à la Hirschman or à la Hont was probably not Macdonald's intention (in particular in view of the enormous time span covered in his book). This remarkable technical analysis of the history of financial markets (and the numerous gems it contains) nonetheless makes his book an essential contribution to one rather neglected but crucial aspect of the idea of democracy

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