The Latin Difference

This constitutional approach limited the scope for wasteful spending on luxurious court life (as well as on military adventure), which had been the hallmark of early modern autocratic monarchy. The result was a dramatic reduction in the British state’s borrowing costs and the emergence of a well-functioning capital market, which caused private borrowing costs to fall as well. Representative government, and its logical outgrowth, the democratic principle, became part of the classic model of good debt management.

The alternative model to British constitutionalism was ancien régime France. Official bankruptcy, a regular occurrence, required prolonging maturities on state debt and reducing interest payments. But this solution raised the cost of new borrowing, so France began to consider the British model. The problem was that the imitation was imperfect.

After the conclusion of the American War of Independence, instead of returning to the old model of default, which had been applied as recently as 1770, the French elite did everything it could to avoid that outcome. Fearing that the system was fragile, the government opened its coffers in 1787, bailing out private investors who had lost in an immense speculative scheme to corner shares in a reorganized East India Company.

But there was an immediate problem: the existing tax system had reached its limits, and no more revenue could be raised without ending time-honored privileges and immunities. In the end, the only viable course was massive confiscation – the creation of biens nationaux as the basis for the issuance of state debt. But that measure, instead of restoring financial calm, led to an escalation of expectations regarding what the state could and should do, and exacerbated social tensions.

Adherence to the principle of non-default produced the French Revolution, the lesson being that political systems will collapse if they take on too much debt and try to pay at any cost. The situation was the reverse of Britain. In France, there was no adequately functioning market that differentiated among risks. The state’s commitments became incredible as it absorbed losses produced in the non-functioning market.

The French experience exacted a high long-term price: French society was poorer relative to Britain in the century after the Revolution. But the French Revolution also produced a powerful and attractive myth of social transformation. Far from discrediting the flawed approach to debt management, the nation, which succeeded absolutist monarchy as the basis of political authority, remained wedded to statist solutions.

Harold James, Professor of History and International Affairs at Princeton University and Professor of History at the European University Institute, Florence, is the author of Making the European Monetary Union.

Copyright: Project Syndicate, 2013.

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