Debt and sovereignty: the lost lessons.

• Author: Mitchell, Brian Patrick
• Position: Essay

In an earlier article entitled "The Moral Hazard of Modern Banking," I, in effect, warned: Beware of bankers. Bankers think they're smarter than other people and often use their smarts to get the better of others in less than honest ways. While some readers thought I was too hard on bankers, I did not deliver a blanket condemnation of usury. In fact, I noted that a blanket condemnation of usury in the Christian West was misguided, that debt is not always bad, and that we owe most of our modern material blessings to the system of debt we call capitalism. The problem is that, in the pursuit of happiness and the fight against communism, we lost sight of capitalism's dark side, the inherent danger of debt. (1)

That danger is only now dawning on us once again. It is a danger to each of us individually inasmuch as we all labor under the burden of mortgages and consumer debt. It is also a danger to us collectively as a nation and even as a civilization. Every week we hear new warnings about the threat to the nation's credit ratings. The national debt is roughly 100 percent of our gross national product, and the people who lend to the federal government are beginning to worry that they will not get their money back. Yet without continuous borrowing, the nation cannot possibly sustain its accustomed lifestyle. Something has got to give.

In this article I want to offer a brief history of public borrowing as the basis of the way to think about the impact of debt on national sovereignty. My principal source is A Free Nation Deep in Debt: The Financial Roots of Democracy, a book by James Macdonald, an erstwhile investment banker from Oxford, England. (2) Macdonald took his title from an anonymous pamphleteer writing in 1719 in praise of "publick credit" as the key to British independence. The complete sentence was, "Let us be, say I, a free Nation deep in Debt, rather than a Nation of Slaves owing Nothing." (3) Macdonald argues that a greater ability to borrow gave republics a decisive edge over monarchies, thus accounting for the steady decline in monarchies around the world. I shall focus mostly on the British experience because I think it best illustrates the lessons learned by European republics that were later forgotten by our modern mass democracies. But I am going to start a little further back in history so as to get the fundamentals of public finance right.

When all the world was ruled by kings, every king kept a "war chest," a hoard of precious gems and metals that could be easily traded for arms or food. When the hoard ran out, there was little that a king could do. He could not borrow money because, for a very long time, there was no one from whom a king could borrow. Most of the world's wealth was under the control of rival kings. The little that was not under their control was in the hands of persons who could not trust a king with a loan. After all, who could force a king to pay?

This is an important point to remember in thinking about debt and sovereignty. The wise man knows that borrowing makes the borrower servant to the lender, but also that the power of the lender over the borrower is dependent upon a sovereign power sufficient to make the borrower pay up. That sovereign power may be merely moral, when shame is enough to compel repayment, but it is usually also...