Posted by Kenneth Anderson:
Bond Markets and Republics:
http://volokh.com/archives/archive_2009_05_31-2009_06_06.shtml#1244055443
The Duc de Saint-Simon, in his famous Memoirs, wrote of his opposition
to Louis' embrace of John Law's "System" of a French state bank
issuing paper money, back when Law proposed the scheme in 1715. The
estimable Saint-Simon noted, with extraordinary shrewdness, that such
a "System," a state bank with the ability to issue fiat money and
float bonds, could only work
in a republic or in a monarchy like England, whose finances are
controlled by those alone who furnish them, and who only furnish as
much as they please. But in a State which is weak, changeable, and
absolute, like France, stability must necessarily be wanting to it;
since the King, or in his name a mistress, a minister or favorites
... may overthrow the Bank -- the temptation to which would be too
great, and at the same time too easy.
The comparison (emphasis added) is arresting - the republic of
merchants, self-controlling from self-interest alone the issuance of
debt and paper money by the sovereign, as against absolutist France,
"absolute" and therefore "weak." And later the Duc goes on to remark
that absolutist France must lose wars to parliamentary England,
because the absolute Louis must borrow for his wars at interest rates
far exceeding those of England, whose war bonds are sufficiently
largely purchased voluntarily by its own population as to be trusted
by foreign investors as well. The English can conduct many more
campaigns over many more years than the French.
I draw this from the marvelous book by James Macdonald, [1]A Free
Nation Deep in Debt: The Financial Roots of Democracy (FSG 2003),
which is even better on these topics of financial-political history
than Niall Ferguson's early, then-still academic work on the bond
markets and war.
But the lesson is not precisely what one might first have thought -
that excessive government debt is the road to ruin. It is. The lesson
of Macdonald's book is a determinedly libertarian one. Provided that
the bond financing is provided voluntarily by those who will have to
service and pay it through their taxes, and who will have to bear the
risks of the bonds losing value if the money supply is inflated to
void the debt, and who will bear the risk of default by the state
(enough among the citizenry so that foreign investors do not dilute
those conditions and re-align those interests), then debt is a
mechanism that chains government.
The title, A Free Nation Deep in Debt, comes from an anonymous
eighteenth century pamphlet, expressing a common view of the
philosophes, that sovereign debt owed to a state's own
citizen-creditors, was a bulwark against absolutism, despotism and
tyranny. Much of the rest of Macdonald's book goes on to show
historically how the relationship between citizenry and
creditor/bondholder was gradually broken both from 'within'
parliamentary republican society as class interests within society
increasingly diverged along with the political power attached to them,
and from 'without' through increasing amounts of foreign investment
that gradually re-aligned incentives of state, citizens, and foreign
creditors alike from what they were when foreign creditors rode along
with the citizen-creditors.
So a question is, given two admittedly stylized conditions --
'citizen-creditors' or, alternatively, the separation of the economic
bondholders from the political citizens, which is to say, the
separation of economic ownership from political control -- which
better characterizes where we are headed today. The existence of high
levels of state debt as such, for the very particular purposes of this
question, does not answer things. The question asks the relationship
between economic ownership and political control. A 'republic of
merchants' or a state that is absolutist, weak, and changeable?
References
1.
http://www.amazon.com/Free-Nation-Deep-Debt-Financial/dp/0691126321/ref=sr_1_1?ie=UTF8&s=books&qid=1244053927&sr=1-1
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