The New Status Quo for Public Finance

The New Status Quo for Public Finance

States are traditionally thought of as reliable borrowers. This might seem ironic since a state, backed by control over the use of force, is also in a privileged position to renegotiate terms of repayment. Consider that King James I and King Charles I both delayed repayment of loans, many years failing to repay any principal or interest. 

After the Glorious Revolution, however, Parliament was the dominant party in British governance, removing and replacing kings whenever its members thought it appropriate. And with the stability of this position, Parliament oversaw the largest sustainable expansion of public borrowing in history. Between 1618 and 1750, the size of the public debt increased about 100-fold, and the interest rate paid on the public debt hovered around only 3%.

The tradition of seeing the state as a reliable borrower has continued into the…

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