In Defense of Public Debt
The long history of state borrowing and when it is sustainable.
Summary
Eichengreen, El-Ganainy, Esteves and Mitchener write a history of sovereign borrowing from the Italian city-states through to the pandemic, arguing that public debt has been the instrument that allowed states to fight wars, build infrastructure and respond to crises, and that the case against it is frequently made without reference to what it has actually done.
The historical material covers the development of sovereign borrowing capacity as an institutional achievement: the city-state funded debts, the Dutch and British financial revolutions, the connection between representative institutions and creditworthiness, and the observation that states which could borrow cheaply defeated states which could not. They cover the nineteenth-century bond markets, war finance, the interwar defaults, the postwar debt reductions achieved through growth and financial repression, and the modern debate about sustainability.
Their analytical argument is that debt sustainability depends on the relationship between the interest rate and the growth rate, that this relationship has favoured debtors for most of the postwar period, and that the correct question is what the borrowing is used for rather than what the ratio is. They are not advocates of unlimited borrowing and they cover the crises and defaults in detail.
The book is scholarly and readable. It is a position in a live argument and readers should recognise it as such: the debt sustainability question turns on assumptions about future interest rates and growth that the authors treat more optimistically than critics do, and the 2021 publication predates the interest rate increases that changed those assumptions substantially.
Key takeaways 7
- The capacity to borrow was an institutional achievement, and states that could borrow cheaply consistently defeated states that could not.
- Representative institutions raised sovereign creditworthiness because they gave creditors confidence that the state would be held to its commitments.
- Debt sustainability depends on the relationship between the interest rate and the growth rate rather than on any particular debt-to-output ratio.
- Postwar debt reductions were achieved principally through growth and financial repression rather than through fiscal surpluses.
- The correct question about public borrowing is what the proceeds are used for, since debt funding productive investment differs from debt funding consumption.
- Sovereign defaults have been resolved through negotiation for centuries, and the machinery for doing so is well developed even though no formal bankruptcy regime exists.
- Emergency borrowing capacity is what allowed states to respond to wars, depressions and pandemics, and a state without it has no response available.
Who should read it
Investors in sovereign debt and readers of fiscal policy debate who want the historical case for public borrowing stated by economic historians.
About Barry Eichengreen
Professor of economics and political science at the University of California, Berkeley, and economic historian of international monetary systems.
Golden Fetters established the standard account of the interwar gold standard: fixed exchange rates transmitted deflation across borders, and recovery began in each country only after it left the peg. The later books apply that monetary-history method to reserve-currency status, the euro, sovereign debt capacity and the 2008 policy response.
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