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A Free Nation Deep in Debt
The Financial Roots of Democracy
By James Macdonald
Farrar, Straus and Giroux
HC, 564 pgs. US$30/C$47
ISBN: 0-3741-7143-2

The cost of freedom

By Steven Martinovich
web posted February 24, 2003

A Free Nation Deep in DebtIt is James Macdonald's contention that political freedom and public debt were inseparable for much of human history. From the earliest Greek city states until the end of the First World War, he writes in A Free Nation Deep in Debt, government looked to its citizens in time of great need. Few wars, whether of offensive or defensive nature, have not occurred without the citizen playing the role of creditor.

War is expensive business and its cost has rapidly increased over the centuries. The earliest days of human political history saw most wars financed by stored treasure or surplus. Although it sounds prudent to only spend the money you have, it is also an inflexible system. As Macdonald points out, the fall of the Roman Empire was in part caused by Rome's inability to raise the money necessary to defend itself. It was believed that only the conquered paid taxes which necessarily limited the ability of the state to finance its activities.

Direct taxation may have been difficult to impose but governments do have a unique talent for separating people and their money. Utilizing the argument that citizenship brings responsibilities as well as privileges, governments at war convinced their citizens to loan money with the promise of returns. That system survived, with only minor changes, until the Second World War. For over two millennia governments looked within to finance their activities.

Borrowing money, however, brings with it certain requirements and challenges. Governments that are dismissive of the concerns of the marketplace find out quickly that it becomes more expensive to borrow money. Chronic mismanagement could even find a government unable to borrow money. In short, as Macdonald shows, the freer the nation and the more transparent its functioning the better its ability to raise money.

"What was the crucial element that made public borrowing natural in democracies, but unnatural in autocracies? The answer lies in the identity of borrowing and lenders. Divine, or semidivine, autocrats are unlikely to perceive lenders as their equals. In democracies, the opposite is true. As long as the state borrows from its citizens, there is no divergence of interest between borrower and lenders, for the two are one and the same," Macdonald writes.

A poor credit rating and a few extra percentage points tacked on to the loans of autocrats and the poorly managed inevitably gave freer nations an advantage. Throughout history, Macdonald illustrates, freer nations have nearly always been able to borrow more money at cheaper rates which, although hardly a guarantee of success, allowed several to fend off the unwelcome attention of their neighbors, as the English nation of shopkeepers did to Napoleonic France.

Of course, public borrowing eventually also brought with it the dreaded taxation that prompted the rise of borrowing in the first place. As borrowing became a more international activity, foreign capital could influence a government's agenda. With the ability to borrow vast amounts of money, government has grown in terms of both size and sophistication.

The system survived until the end of the Second World War. The increasing international nature of finance, the decline in trust of government and inflationary fears combined to kill off borrowing from one's citizens. Today, only a small portion of most government's debt is held by the public. It would take a third world war, writes Macdonald, to find out whether government would resort to its old way of financing.

Whether A Free Nation Deep in Debt succeeds depends on the reader's perspective. Small government types probably won't care for Macdonald's primary thesis given how public debt has allowed a massive expansion of government while others may nod in agreement. Regardless it is a fine example of historical research and an impressive entry in the field of political economy.

Steven Martinovich is a freelance writer in Sudbury, Ontario.

Buy James Macdonald's A Free Nation Deep in Debt at Amazon.com for only $21 (30% off)

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