Public Debt and Political Union
The controversy over empire in 1776 has shown the close connection between public debt and political union. In the current discussions of aiding economic recovery from the ongoing pandemic, similar issues are at stake.
Lina Weber
12. Oct. 2020
E
xtraordinary times open up possibilities for measures that were hitherto unthinkable. The global pandemic of Covid-19 is hitting the economy hard. Lockdowns, the breaking of global supply chains, and the closure of borders plunge European states deep into recession. To absorb the shock, governments resort to public debt. Germany suspended its policy of the schwarze Null that supplemented its constitutional debt brake instituted in 2011 to finance the biggest economic stimulation program in its modern history. Germany is, at the same time, one of the countries that agreed only hesitantly to a communitisation of debt within the European Union. In May, the investor and philanthropist George Soros suggested that the EU contracts perpetual bonds, also known as consols, to mitigate the economic blow of the pandemic and to save its integrity. The principal debt of perpetual bonds is not to be repaid, making them cheaper to service than the currently used long-term bonds. And since the member states would be obliged only to pay the interest rate, so Soros argues, this might lead to a degree of mutualisation and integration acceptable to all.
Taking a decision on any controversial topic takes time in the EU. Its 27 member states have particular interests. Unanimity is the operating principle and always difficult to achieve. Using communal bonds to finance a Corona recovery fund is attractive to those national governments that have a low credit rating. A communitisation of public debt lowers the overall borrowing costs since the risk is spread. Those member states with a high credit rating were reluctant to agree to ‘Coronabonds’ since they feared that a potential bankruptcy of any of the other EU members might burden their own national taxpayers. The governments of the Netherland and of Germany in particular demanded that the distribution of communally lent money is conditional upon domestic reforms. Since the EU is well experienced in negotiating, a compromise was eventually found. The member states agreed upon a €750 billion recovery plan that is to be financed through bonds issued by the Commission on behalf of the EU. The bonds’ maturity varies between 3 and 30 years and thus differ substantially from the perpetual bonds proposed by Soros. To service and repay the new liabilities in the longer term, the Commission proposes to increase its financial resources through measures such as a digital tax.
While the EU discusses the communitisation of public debt to stimulate economic activity, the opposite is happening in its former member state the United Kingdom. Nicola Sturgeon, the first minister of Scotland, has repeatedly asked the central government in Westminster to extend the devolved government’s borrowing powers so that the nation can shape its own response to the pandemic. Gaining financial ‘flexibility’, Sturgeon carefully avoids the terms autonomy or independence, would help the Scottish government meet Scotland’s particular needs and restructure the economy.
Implicit in all these current discussions of public debt are questions of sovereignty and political union that become clearly visible if we look at the history of state finance. Historically, the evolution of long-term national debt and state formation were closely connected. Introduced in the Italian city states of the Renaissance, public borrowing was used by the Dutch Provinces to fight for their independence against Spain in the late sixteenth century. The first territorial state to introduce a long-term funded debt was England in the 1690s, which had incorporated Wales in the sixteenth century and became Great Britain after the Anglo-Scottish Union of 1707. For governments in need of money, borrowing from the public was an attractive alternative to raising taxes. The primary purpose for the state to spend money, until the evolution of the welfare state in the late nineteenth century, was warfare. Its ability to successfully use public credit enabled Britain to fight its French competitor and to expand globally without undermining economic growth in the eighteenth century. At the same time, the debt grew substantially and with it the tax burden. The global dimension of the Seven Years’ War (1756-63) left Great Britain with a debt almost twice the size as before, without regular provisions for its repayment. To meet the financial challenge, the British government levied direct taxes upon its American colonies. The resulting resistance lead to the outbreak of war in 1775 and independence in 1776.
John Bull Dediée aux petits messr. Anglois.
Satirical print: 1781-1782. British Museum.
In the discussion of Britain’s empire during this critical time, the close connection between public debt and political union came to the fore. Both proponents and opponents to the American cause not only debated the justness of colonialists’ demands but also the financial impact that losing the profitable colonies would have on Britain’s tottering finances. The Irish-born statesmen William Petty, 2nd Earl of Shelburne gave several speeches in the House of Lords on the issue. He believed that American independence would be an economic disaster for Britain and would cause its ruin. But he also acknowledged the legitimacy of American demands and wanted peace. His proposed solution was a debt union. If the American colonies would contribute towards discharging Britain’s national debt, they would gain wide-ranging liberties in return. North Americans would be able to administer their own government and raise their own revenue, while London would continue to determine trade policies and international relations. The Welsh dissenting minister Richard Price, who worked closely with Shelburne, agreed and reprinted parts of Shelburne’s speech in his famous Observations on the Nature of Civil Liberty. Adam Smith formulated a very similar proposal to resolve Britain’s financial difficulties. In his highly influential Wealth of Nations, he argued that the national debt had been incurred to defend the empire that had brought liberty, prosperity, and the Protestant religion to its colonies. Therefore, Smith considered it just that the North Americans and the Irish would contribute towards repaying the loans. In exchange for communising the debt, he suggested that Britain granted the colonies political representation in Parliament and removed commercial restrictions upon them.
On the other side of the discussion too, public debt was closely connected to political union. Thomas Paine was instrumental in changing American public opinion from resistance to rebellion. In his widely distributed pamphlet Common Sense, Paine stated that reconciliation with the British motherland would be disastrous, that monarchy was a system of injustice and oppression, and that the American colonies should unite to become powerful and prosperous. If the North Americans wanted to be successful, they needed a strong navy and a common government. For that end, Paine proposed borrowing money from the public, ‘No nation ought to be without a debt. A national debt is a national bond: and when it bears no interest, is in no case a grievance.’ Servicing and discharging a debt was a commitment. It created a shared interest and helped political integration.
Of course, the situation in 1776 differed fundamentally from the current Covid crisis. Yet, looking back can help us realise that our own perspective on public debt is shaped by historical conditions. Examples from the past that are sensitive to changed circumstances can inform our public discussions, question political decisions, and encourage alternative ways of thinking. The controversy over empire in 1776 has shown the close connection between public debt and political union. In the current discussions of aiding economic recovery from the ongoing pandemic, similar issues are at stake. Soros’ proposal of consols implies a commitment of all EU member states to service a debt in perpetuity. It comes as no surprise that he was campaigning against Brexit. Making communal bonds dependent on reforms, which the EU has agreed to, interferes with national politics. Granting more borrowing powers to the Scottish government would make the devolved nation more independent from the central government in London. Unprecedent challenges do call for radical solutions. Public debt can help European economies to absorb the shock. However, the long-term consequences and political implications should not only be implied but openly debated.
Dr Lina Weber is a Postdoctoral Fellow at the University of St Andrews where she works as part of the Leverhulme-funded After The Enlightenment Project with a focus on Dugald Stewart and political economy.
