The problem of public debt arises today

The problem of public debt arises today with extreme urgency on the economic, political and media scene

By a game of perverted dominoes, several countries of the European Community are on the verge of bankruptcy (Ireland, Greece) or endangered by the explosion of their public debt (Portugal, Spain, Italy), while the United States are undermined by their abyssal deficit.

The sharpness of the financial crisis and the disarray of policies unable to curb it explain the panic that has gripped the markets and the anguish that has invaded the citizens. Not that the question of the US debt or deficit of European states was ignored at the time of the Maastricht Treaty in 1992, but the turn of events since 2008 gives it the unenviable status of unheard-of peril.

It is the single currency and the European construction which are threatened; beyond that, the whole economic system is cracking before our eyes. Yet the public debt has a very long history, rich in defaults, failed reforms, but also spectacular recoveries. It is not unimportant to recall that few states have been able to do without public debt. However, if the Roman Empire was always looking for money, it never mobilized negotiable receivables on a market to finance itself and if there were loans, they were made in a punctual way, without there is the slightest inclination to rely on a permanent state debt.

In the Middle Ages, the Italian cities (Venice, Florence …) were the instigators of a system of public debt. The need to pay mercenaries for incessant conflicts between cities, and the presence of wealthy merchants, with sprawling banking networks, encouraged the use of this financial convenience

The process, combined with some confusion between the public purse and the money of the big families, had the merit of providing the merchants (Florentines and others …) an excellent opportunity to enrich themselves more, as to all the creditors It had the disadvantage of fueling murderous rivalries between factions and severe disorders.

With their personal fortune, Italian bankers lent to all Europe. It was not without risk. When the King of England, Edward III, was unable to pay his debts at the beginning of the Hundred Years’ War, it was the large Italian banks that had lent him inconsiderately who paid the price. They went bankrupt, without anyone feeling obliged to fly to their rescue. So there is an excellent way to get rid of the public debt is not to pay its creditors and this panacea was reused several times later. Disadvantage: subsequently, lenders do not rush necessarily to bring their money back to the impecunious state.

In France, Saint Louis was the first to heavily burden the state.

His successors increased the problem by a policy of strengthening the royal authority and intervention outside the kingdom. We know the reputation of Philip the Fair, “the king counterfeiter”. To capture a part of the metal in circulation by successive remakes, to play on the currency by constant devaluations and evaluations, it is the third method to circumvent the problem.

Until Louis XIV and the Regency included, all French monarchs will use this solution. But that was not enough. Philip the Fair is also known for persecuting Jews and Templars. It was good for him not only not to pay his debt but to get his hands on the property of his creditors. Squeezing or extorting funds is an effective response.
Over the following centuries, if the increasing needs of the monarchy were roughly covered in peacetime by the tax levy from the disasters of the Hundred Years War, the debt was deepened with each major conflict. Much of this credit was drained by borrowing on the City Hall from Francis I, and by the sale of offices.

The first passed through the City of Paris channel which offered more guarantees for the lenders than the royal power. The second was to fill the burdens (administrative functions) for a fee, knowing that they were marketable and transferable. It had been downright swallowed up by a state debt that did not say its name to a real public debt competing with that which hitherto could have been used by financiers.

During the first years of the reign of Louis XIV, the debt remained contained by an economic policy on financial management and an aggressive customs policy inspired by Colbert. The reduction of public spending and protectionism, therefore, represent two other possible outcomes. Unfortunately, with the death of Louis XIV, following long and difficult wars, the debt reached again worrying levels. It can be estimated at some 3 billion pounds, say a good ten years of state revenue, perhaps 80% of gross domestic product (GDP), while the crushing service of debt largely explained a deficit estimated at 80 million a year.

To cope with this situation, the power operated several levers.

After having examined the accounts, the king imposed fines on the financiers or agents of the fisc, accused of having extorted funds during the years of financial distress of the reign of Louis XIV. He then undertook to reorganize the tax administration to save money in the machinery of management of public funds. But all this was only expedients.

The governor’s government thought it had found the solution with Law’s system. The issuance of paper money by a state bank, coupled with the creation of a joint-stock company, made it possible to repay the creditors and pay the suppliers. In total, about 2.5 billion pounds of paper money was issued. The bankruptcy of the system in 1720 put everything into question. After the bankruptcy, the accounts had to be cleared and the depositors better compensated, while a hunt for speculators brought in nearly 200 million pounds.

At the end of this disaster, the Treasury was not totally loser since the debt was reduced by half. The issue of paper money is another way to solve financial problems, even if the adverse effects of this medication cannot be ignored: rising prices and interest rates …

During the eighteenth century, the debt problem inherited and enhanced by the growing needs of the state and the wars haunted governments. The financial controllers constantly talked about tax reform without undertaking it, as the suppression of the privilege enjoyed by the richest (nobility in the lead) aroused opposition, and so the increase in the burden on some provinces better treated than the others was politically explosive. It had to be borrowed and other channels had been used, including the creation of more and more life annuities that proved disastrous for the Treasury.

In 1788, the debt amounted to about 4 billion pounds, while state revenue hardly exceeded 500 million and expenditure reached 630 million. As far as it can be calculated, it certainly exceeded 80% of GDP. It must be said that the French intervention in the American war of independence, alone, cost 1 billion. At that time, debt service absorbed about half of the budget and indebtedness grew inexorably. It was necessary to resign oneself to summoning the States-General to ask for subsidies. The rest is known politically.