A Balanced, Nuanced Story on Debt: Long-time TIE editorial advisory board member and contributor Barry Eichengreen talks to TIE Founder and Editor David Smick about his new book, In Defense of Public Debt.

TIE: Your new book, In Defense of Public Debt, is an extraordinarily well-timed addition to global discussion of sovereign debt. You effectively knock down the simplistic notions about balanced budgets and show how throughout history the gradual securitizing of loans and organizing of secondary markets for sovereign debt brought on the development of private financial markets, the management of global liquidity, and greater prosperity for the West.

I kept wondering, though, how you feel about today's political hypocrisy associated with the accumulation of public debt in the United States, particularly in the last fifty years. When Republicans are in power, increases in the debt-to-GDP ratio are deemed by them to be acceptable, while Democrats bemoan a debt-ridden economy about to fall off a cliff. When Democrats run up the debt ratio, Republicans declare Armageddon is upon us. It's not surprising that public confidence in our policy leaders is at an all-time low. Did you and your associates have the same view of debt in the 1980s when defense spending and tax cuts sent deficits and debt ever higher?

Eichengreen: There certainly is a dollop of hypocrisy in the party in power regularly dismissing concerns about rising public debt and the party out of power warning that a debt apocalypse is upon us. But what is fundamentally going on, I think, is that the party in power has a strong vested interest in the tax cuts or spending programs that are being debt financed, while the other party opposes them. Republicans from Reagan through George W. Bush and Trump favored tax cuts for the wealthy and corporate interests, and if these ended up being debt-financed, they were willing to look the other way. Democrats opposed those tax policies, so they were naturally critical of the resulting debt. Democratic presidents favor social spending even if it has to be debtfinanced. Republicans oppose those spending policies, so they were naturally critical of the resulting debt. Of course, it would be better to have an honest discussion of those tax and spending priorities rather than to fixate on the impending debt Armageddon. If only....

TIE: Your book offers a fascinating history of public borrowing going back as far as two thousand years ago with Greek city-states such as Syracuse. But, you say, sovereign borrowing really took off in Europe starting in the second half of the millennium. Why Europe? Why wasn't the Roman Empire the heyday of public borrowing? Why not China?

Eichengreen: You're really asking two different questions, David. Why not earlier? And why not elsewhere (why in Europe)? There were in fact some earlier instances of public borrowing. In the book we tell the story of borrowing by thirteen Greek city-states in the fourth century BCE, and observe that one can read about their eventual default on a marble slab now in the Fitzwilliam Museum in Cambridge. But the practice of issuing sovereign debt only "took off," as you put it, in the thirteenth and fourteenth centuries, when a constellation of prerequisites was in place. There were experienced bankers, starting with those of Tuscany, Genoa, and Venice, who could act collusively to enforce their claims. There was an ample pool of savings, accumulated through long-distance trade, to be invested in public debt. And there were nascent secondary markets on which that debt could be traded. As for why Europe, the explanation lies in the exceptional prevalence of war. After the collapse of the Carolingian Empire in 888 CE (you can see we go way back!), the continent was divided into literally hundreds of princely states. Where much of China is a great plain, Europe is divided by mountain ranges and river valleys that pose natural obstacles to the formation of large territorial states. Neighboring rulers couldn't resist the temptation to seize territory and resources when they could. They issued debt to raise armies. Others raised debt to defend themselves. The late great historical sociologist Charles Tilly put it nicely when he wrote of Europe that "War made the state, and the state made war." Our version is "War made state debt, and state debt made war."

TIE: You make the compelling case that so much of the rise in public debt was associated with the need of Europe's monarchs to finance their wars. Meeting that need led eventually to other benefits, including the prosperity brought about by modernizing credit markets. But can a case be made that had wars been less easy to finance, a lot of useless bloodshed and suffering over the centuries would have been avoided? Over the last twenty years, the United States spent a trillion dollars in Afghanistan. Would that have happened if, instead of increasing public debt (under both Republican and Democratic presidents), the American people each year faced an Afghan war surtax in their paychecks?

Eichengreen: I see where you're going, but it's a complicated counterfactual. Historically, sovereigns issued debt to raise militias and fight offensive...