A Free Nation Deep in Debt: The Financial Roots of Democracy
James Macdonald, Princeton University Press, 2006, ix + 564 pages, £12.95 (paperback).
James Carville, adviser to Bill Clinton’s successful election campaign in 1991, once famously reflected that if he could be reincarnated he’d like to come back as the bond market. In the campaign war room, it had seemed that the bond market was a sight more powerful than the most powerful politician on earth. It’s since become a commonplace of the globalisation debate that international financial markets constrain all governments, which some see as a welcome restraint and others as a pernicious and undemocratic influence.
This fascinating history of government borrowing from the Bronze Age to the early 20th Century addresses exactly this question of the relationship between government borrowing and the form of government. James Macdonald – a former investment banker – argues that the evolution of the bond market and the development of democracy were intimately intertwined, giving plenty of colourful historical detail along the way. While he accepts that other important factors played a part in the development of parliamentary democracies in Europe and the young United States, including technology and other institutions, he suggests that borrowing from the public to pay for wars forced monarchs and autocrats to accept democratic concessions. The growing strength of democratic institutions in turn made it possible for the governments of parliamentary democracies to borrow more than their autocratic counterparts. A virtuous circle of finance and governance was born.
The argument that constitutional governments find it easier to raise loans because they are limited by law, so lenders can have more confidence about recovering their money, is not new. MacDonald’s new twist is that legal form alone doesn’t explain the growth of borrowing to expand government between the 17th and late 20th Centuries. Rather, the identity of lenders and borrowers within the framework of democracy was key. It was always our own money. Thus James Carville’s comment could be seen as another way of pointing out the sovereignty of ‘we, the people’ in US democracy.
Except, the book argues, post-war governments breached the implicit contract, and undermined their future capacity to borrow, by permitting decades of inflation so they could erode the real value of outstanding debt and pay negative real rates of return on bonds. ‘The people’ being no fools, the pressure on democratic governments now is to keep borrowing and inflation low, while it’s the autocrats who borrow freely. Macdonald’s historical tale is told well, and persuasively, but was clearly researched and written before it became apparent that democratic US and EU governments were cheerfully resorting to extensive borrowing in the bond market again – especially president George W Bush, with his wars to finance. As I write, the Chinese savers who have been lending to President Bush appear to be starting to call in their loans. It will be a while before we know the next chapter in the story of the bond market’s contribution to democracy.
Diane Coyle
Enlightenment Economics |