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Spring
Books Democracy finds its roots in debt and war
A FREE NATION DEEP IN
DEBT: THE FINANCIAL ROOTS OF DEMOCRACY by James Macdonald Farrar,
Straus and Giroux, 564 pages, $30 |
Reviewed by GERALD
SMITH
The primary thesis of this book is straightforward, but prolonged,
and can be stated as follows: First, the history of Western civilization has
been determined by those nations who could dominate in times of warfare.
Second, the nation that was able to dominate in times of war was the nation
that in times of emergency could borrow funds to prosecute the wars in which
they were involved.
Third, hence the need of national governments for some financial
mechanism that would allow them to borrow money quickly and efficiently in
times of emergency. Fourth, democracies had an innate advantage to borrow funds
in times of emergencies because of the identity of borrowers and lenders.
Fifth, the ultimate conclusion of this book is that democracies arose in the
western world largely because of this financial/military advantage that
democracies enjoyed over autocracies. Hence the title of this book: A Free
Nation Deep in Debt: The Financial Roots of Democracy.
In order to prove this thesis, James Macdonald has explored the
connection between public debt that had been brought about by wars and
democracy in the broadest possible terms. As a result, this book is a sweeping
history of how nations governments finance their wartime activities
beginning with biblical times when Moses divides up the spoils of warfare
between the warriors and the community, all the way to a thorough explanation
of how in this country post-World War II government policies induced inflation.
That inflation largely paid the bills for World War II by reducing the real
value of U.S. Treasury savings bonds.
According to Macdonald, the earliest known government recourse to
borrowing from citizen creditors was in the city-state of Venice in 1164.
Rather than taxing the citizens, this money was raised on a voluntary basis
from 12 wealthy families. However, just three years later in 1167, there was
the first instance of a forced loan, which came to be the hallmark of Venetian
and Italian borrowing throughout the Middle Ages. It probably should be noted
that most of these loans were never repaid so, in effect, they became the taxes
that the governments were initially attempting to avoid.
Next, the story of government citizen debt jumps to the
Netherlands. This narrative of the 80-year war for the independence of the
Dutch may be the most impressive example of the power of citizen creditors. The
Dutch waged war from 1568 to 1648. By the end of the war, the Netherlands had
transformed itself into an independent and extraordinarily wealthy republic. On
the other side, this war led to ruin for the Spanish Empire.
How were the Dutch able to take on an empire of 20 million and
win? The Dutch were fighting on their home territory in the cause of their own
freedom, but according to Macdonald, this was not the only explanation. The
Dutch also had to raise sums that could match those of Spain, sums that seemed
almost unimaginable for a nation that numbered less than 1.5 million. The only
way to approach the problem was to draw in full on the inherent financial
advantages of a republic of merchants and borrow to the hilt, which is just
what the Dutch were able to do. Macdonald credits this to the fact that the
Netherlands was a republic while Spain was a monarchy.
The next act in this story moves to England versus France.
However, the ending will be the same. The nation that financed its wars with
citizen creditors would be the eventual winner. England had come to
parliamentary rule through a long and involved path during the 16th, 17th and
early part of the 18th century but by 1750 not only would its citizens be
willing to contribute more in way of taxes, but they would also happily lend
extra funds at low rates of interest, confident in the good faith of their
government. As Macdonald notes: In the century that followed
[Napoleons] defeat, the financial principles of Frances great
rival, England, reigned triumphant, and informed observers were inclined to the
opinion that the advance of humankind must inevitably lead to the diffusion of
parliamentary government and credit-based public finance.
According to Macdonald, this state of affairs remained all the way
to World War II. Once again, the nations at war borrowed from their citizens to
finance the war. However, something new happened at the end of this war. After
World War II, it became the official policy of the government that there would
be no deflation, as there had been after every previous war, as the previous
governments kept faith with the creditors. Instead there was inflation. As a
result all the bondholders who had saved to finance World War II had their
wealth eroded by this inflation.
Macdonald closes his narrative with the thesis that this result
will have a large impact on any future wartime borrowing. Perhaps it will not
be possible in the future for democracies to fund their wars by borrowing from
citizens as it has been in the past.
Gerald Smith is professor of economics at Minnesota State
University, Mankato, Minn.
National Catholic Reporter, February 7,
2003
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