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No Man whatever having lent his Money to the Government on the Credit of a Parliamentary Fund has been Defrauded of his Property . . . The Goodness of the Publick Credit in England, is the reason why we shall never be out of Debt. . . . Let us be, say I, a free Nation deep in Debt, rather than a Nation of Slaves owing Nothing.
    -Anonymous English pamphleteer (1719)

The essential premise of this book is apparently well known in economic circles and was once well known in political/philosophical circles, but I'd certainly not heard it put so bluntly: the rise of democracy, and particularly its triumph over alternative forms of government in warfare, is inextricably intertwined with the rise of public debt. Mr. MacDonald explains this notion and the purposes of his text as follows:
Countries with representative institutions are able to borrow more cheaply than those with autocratic governments. There are several plausible reasons. One is that constitutional governments are (on the whole) constrained by law and are therefore more trustworthy counterparties for the private individuals who lend them money. Another is that elected governments identify their interests with those of society as a whole; and there are advantages for society as a whole in having smoothly running credit markets that go beyond the direct gains accruing to the state. The implication is that once bond markets come into play, the outlook for arbitrary forms of government dims.

Such arguments envisage democratic institutions and credit markets as two distinct forces. The connection between the two is simply that democracies are better able than autocracies to come to terms with the dictates of public credit. This was how the matter was seen in the eighteenth century. When the thinkers of the Enlightenment looked for the roots of political liberty, they did not seek the answer in the history of public credit. They looked instead to ancient political freedoms, which had once been enjoyed by the peoples of Europe, but which had since been usurped by kings. Countries where liberty reigned, such as England and Holland, had merely fought back against royal usurpations more successfully; and it was up to other nations to do the same if they wished to recover their freedom. These ideas have fallen into discredit. Although anthropologists may agree that tribal life is characterized by an absence of autocratic state power, few, if any, political theorists or historians are willing to see a direct chain of descent from such primitive freedom to modern democratic constitutions.

The growth of democracy is now seen not as a recovery of lost freedoms, but as an economic imperative for the advancement of society. High levels of technology require an educated workforce, and a high-output economy requires wealthy consumers. These parallel forces push inexorably toward mass participation in politics; and it seems that above a certain level of income per capita it is hard to prevent democracy from taking root even in autocratic societies. Conversely, societies that insist on retaining rigid state control are unable to advance economically beyond a certain point. This argument can address only the modern world, however. The requirements of an advanced economy cannot explain the English, American, or French Revolutions. After all, these countries were still at "Third World" levels of development.

The alternative theory -- that democratic institutions were a response to the requirements of war finance at a time when the invention of public debt had altered the old political equations -- answers this objection. This line of reasoning, however, leaves unanswered a number of questions. How does one explain the existence of political liberty in other periods of history? After all, the democracy of Athens cannot be explained by either of the theories advanced so far. Is it really true that the political freedoms enjoyed by societies in earlier times have no connection at all with rise of modern democratic institutions, except in the fond dreamings of seventeenth- and eighteenth-century thinkers? And finally, why did bond markets come into existence in the first place, and why in Europe and not elsewhere?

In order to answer these questions, this book looks back centuries, even millennia, before the eighteenth century, and then looks afresh not only at the events leading up to the French Revolution, but at all the military and political upheavals that followed in its wake over the ensuing centuries. It turns out that while the government bond market may be, on one level, an impersonal economic force, it also has a profoundly political dimension. It was this political dimension of public credit that was the vital source of its strength in assisting the rise of democratic forms of government.
When you see it laid out like that it seems quite obvious, and as Mr. MacDonald goes exhaustively through the history the basic point seems nearly inarguable. And when he cites someone like Montesquieu, speaking in 1748:
General rule: one can raise higher taxes, in proportion to the liberty of the subjects; and one is forced to moderate them to the degree that servitude increases.
we realize that this was pretty much settled doctrine when modern democracy was coming into being but that, whether intentionally or accidentally, we've lost sight of it.

Unfortunately the whole book isn't quite so easy to follow, nor so intuitive. Sadly, I have to admit that at times I couldn't follow all the nuances of the economics he cites. However, there's enough here that even an economically illiterate laymen, like me, can comprehend to make the book well worthwhile and the recovery of his core thesis seems vital if we're to understand the original bases and maybe the eternal requirements of free societies.

In particular, his treatment of WWII and after must be of interest to anyone who cares about human freedom and stands as something of a rebuke to those who believe that the history of the West represents an endless march of progress in this regard. For if, as Mr. MacDonald argues, WWI represented the apotheosis of "democratic" financing and the advantage it conveyed in waging war, then by WWII it had become apparent that the ability of government to raise the money it required had become disconnected from any direct dependence on the willingness of the citizenry to voluntarily lend to it:
Events in communist Russia and Nazi Germany had proved that resources could be extracted by means other than conventional finance. The new economic theories of Keynes and others emphasized the role of the state as economic engineer. as a result, public finance, in the conventional sense, was now seen as only a part of a wider process by which the state could acquire control of the resources it needed for war. The rationing of goods and services could force people to save rather than spend their incomes. The closure of the credit markets to private borrowers could force these savings directly into the coffers of the state without the need for time-consuming patriotic bond drives. The introduction of payroll schemes that deducted income taxes (or compulsory savings) at source allowed levels of direct taxation that were unheard of before. With a judicious exploitation of these new techniques, there seemed to be no limit to the portion of the national product that the state might commander. No wonder that there arose a new maxim of war finance: 'The limits of an all-out war are physical and psychological, not financial.' In other words, it was no longer the last dollar that tipped the scales but last bullet and the last drop of blood.
Indeed, as Mr. MacDonald says, both the fascist and the democratic sides in WWII financed their wartime expenditures in the same way, raising the question of just how much that democracy had deteriorated. The key difference, and it is important but perhaps not sufficient, is that the democracies had previously received permission from their citizens to confiscate money, even if not quite that much and not in quite those ways and that it remained possible to hold government accountable for these extractions.

Still, one can't help but share in Mr. MacDonald's obviously melancholic sentiment, when by the end of the book he's describing present day bond markets, globalized and largely indifferent to the nature of the country whose bonds they're handling:
Bond buyers seek to increase their returns while maintaining liquidity and controlling their exposure to risk. There is nothing patriotic or intrinsically democratic about the process. It is not that democracy and bond markets are hostile to one another. The old ties, once so powerful, still linger somewhere in the recesses of memory. In the meantime, the two remain on cordial terms. Credit markets still generally rank democracies more favorably than other forms of government. For all practical purposes, however, the venerable marriage between public credit and democratic government, so vital; a factor in the history of the world, has been dissolved.
This dissolution has to be a concern if democratic government is to be preserved (restored?) in the years ahead. And while Mr. MacDonald does not propose any reforms based on his analysis, two do readily come to mind. First, payroll deduction should be done away with. If the income tax is to remain, taxpayers should have to write a check to pay it. This would both show them exactly how much government is taking from them and create the possibility that a mass revolt might occur, and people refuse to write them, in a case where government had over-stepped what the polity is willing to allow. Second, the debts of tyrannies should in no case be assumed by their democratic successors. So, for instance, the debts that a Saddam Hussein, a Kim Jong-il, a Fidel Castro, a Robert Mugabe, etc., has been allowed to run up should be imputed to them personally, not to the nations they hold in thrall. It is to be hoped that the bond markets would quickly punish all dictatorships if this were to happen even just a couple of times.

Democratic freedom has been too hard won and has prevailed for too short a duration for us to be sanguine about ignoring a history and a warning such as Mr. MacDonald has provided here. No one who reads his discussion of how tightly interwoven public finance and political liberty have been historically--and the way the two have combined to provide the wherewithal to fight wars to preserve the latter--can fail to be concerned that this now seems to be a near-forgotten thing of the past. Looking at the reluctance of Western Europe today to pay for wars to protect and extend democracy, we may even have to be concerned that, with their massive and still growing social welfare schemes, they've reached the outer edge of that WWII maxim--perhaps there are financial limits on their capacity to wage war. Mr MacDonald teaches us much about the financial roots of our democratic past, but the ultimate value of the book may lie in what he's implicitly told us about our possibly less and less democratic future.


Grade: (B+)


See also:

James MacDonald Links:

    -BOOK SITE: Free Nation Deep in Debt (Written Voices)
    -CHAT: Debt and Democracy: with James MacDonald (Washington Post Online, 2/03/03)
    -ESSAY: Patriot Gains (Phillip Longman, December 1, 2002, The Washington Monthly)
    -REVIEW ESSAY: Is Public Indebtedness Essential to Democracy and Freedom?: a review of James Macdonald, A Free Nation Deep in Debt: The Financial Roots of Democracy and Bruce H. Mann, Republic of Debtors: Bankruptcy in the Age of American Independence (Forrest MacDonald, Claremont Review of Books)
    -REVIEW: of A Free Nation Deep in Debt: The Financial Roots of Democracy By James Macdonald (Michele Wucker, Washington Post)
    -REVIEW: of A Free Nation Deep in Debt (Phillip Longman, Washington Monthly)
    -REVIEW: of A Free Nation Deep in Debt (Dr. Jonathan Dolhenty, Radical Academy)

Book-related and General Links:

    Who's Afraid of the National Debt?: The Virtues of Borrowing as a Tool of National Greatness (Lawrence A. Hunter, Steve Conover, 07/25/2001, IPI Policy Report)
    -ARCHIVE: Debt, History of: From debtors’ prison to student loan debt, six stories from the archive (The Editors, December 18, 2020, J-STOR)