Bond Markets and Republics:

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, 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 highly 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?