Thursday, January 19, 2012

Sovereign debt in historical perspective

The recent focus on sovereign debt crises has reinforced our understandable tendency to associate national debt with state weakness. Originally, however, the incurring of debt was a sign not of state weakness but of state strength. A government could not borrow until it could convince lenders that it had the ability and intent both to pay interest and (eventually) to repay the principal.

The French king Francis I, who reigned from 1515 to 1547 and presided over a period of relative growth, borrowed and ran a budget deficit. [1]
Francis I's contemporary Henry VIII also incurred crown debts (or so I recall; too lazy to find a cite for this). So did Charles V, who "financed his campaign [to be elected Holy Roman Emperor in 1519] through loans from the banker Jacob Fugger, which saddled him with significant debts." [2]

Borrowing by monarchs happened even before that. In his discussion of sovereign lending in Sovereignty: Organized Hypocrisy,
Stephen Krasner notes that "Edward III of England repudiated his debts in 1339 precipitating a financial crisis in Italy and leading to the first clearly recognizable business cycle in Europe" [3] Desmond Seward writes: "Edward III...raised vast loans from Lombard bankers,...from merchants in the Netherlands, from English wool merchants, pledging either English wool or the duties on Guyennois wine as security. Almost everyone who lent him money went bankrupt." [4]

These rulers all had their problems, and some had more serious problems than others. But those who lent them money must have thought that they were good risks. If a monarch was viewed as weak, or where there was "uncertainty of succession" [5]
, state borrowing was close to impossible. Only a relatively strong sovereign, or at least one perceived as such, could be an indebted sovereign. Eventually borrowing would contribute -- under certain specific conditions and in certain cases -- to severe weaknesses. But there was a long period in which sovereign borrowing tended to go hand-in-hand with economic growth and state-building.

Does this little bit of history have any implications for how one views today's financial crises? Probably not. But I've had this post hanging around in draft for a long time, and I figured I might as well put it up.

I. Wallerstein, The Modern World-System v.1 (1974), p.138, citing M. Wolfe, "Fiscal and Economic Policy in Renaissance France," Third Int'l Conference of Economic History, Munich 1965 (Paris: Mouton, 1968).

D. Nexon, The Struggle for Power in Early Modern Europe (2009), p.141.

3. S. Krasner, Sovereignty: Organized Hypocrisy (1999), p.129.

4. D. Seward,
The Hundred Years War (pb. ed. 1999), p.33.

Wallerstein, op. cit., p. 138.


Phil Arena said...

Glad you did decide to post it. Quite interesting.

LFC said...


Kindred Winecoff said...

Thinking this way could help us explain some anomalies. E.g., why Japan can continue to borrow at very low rates despite a high amount of prior indebtedness, while Spain is having trouble getting funding with far less outstanding debt. In modern democracies, "ability to repay" may be less important than "willingness to repay". This may or may not be a change from prior periods.

Good post.

LFC said...

Thanks, interesting point re Japan and Spain -- I wasn't aware of that divergence, I don't think.