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The Janus of Debt
By Harold James

With the US again flirting with a default crisis as Republicans balk at raising the national debt ceiling, and with government debt levels everywhere reaching new highs following COVID-19, questions about the proper role of debt have returned. The truth seems to be that sustainability of government borrowing is as much about politics as economics.

Debt is back in the headlines. The COVID-19 pandemic has compelled an enormous expansion of public borrowing, and odd fiscal rules setting a ceiling on government debt in the United States have left that country flirting once again with the possibility of sovereign default.

According to the law on the books, $28.5 trillion in federal debt is too much. If Congress continues to insist on this position, the US will exceed its debt limit this month, and chaos will ensue. The world needs the US dollar to keep functioning as a safe asset and as the foundation of a global payment system for cross-border transactions. There is a new nervousness in bond markets around the world.

How much debt is too much? How does one know when consolidation is the right approach? And how should it be carried out? The division of views on such questions is neatly captured in an anecdote from debt-laden contemporary Britain. Chancellor of the Exchequer Rishi Sunak thinks that a massively overweight man with high blood pressure should not eat another hamburger. But Prime Minister Boris Johnson suspects that another hamburger won’t make too much of a difference to a patient already in that condition.

A version of Johnson’s position was in vogue in imperial Austria, where it was said that, “A bisserl was geht immer” (“You can always do a little something”). Likewise, in testimony before the UK Committee on National Debt and Taxation (the Colwyn Committee) in 1927, John Maynard Keynes argued that “the difference between a large and very large internal debt should make a scarcely appreciable difference.”

As much as some politicians and economic analysts like to complain about the dangerous consequences of rising government, corporate, and personal debt, it would appear that we need even more debt to confront mounting health, climate, and security challenges. Even the activists demanding a biblically inspired debt jubilee also ultimately want more debt, because they recognize that a mortgage on the future is the only way to meet present needs.


Judging by aggregate figures on government and corporate liabilities, it is easy to believe that the world is drowning in debt. That is why it is good to have books like In Defense of Public Debt, wherein University of California, Berkeley economist Barry Eichengreen and his co-authors remind us of the positive role that debt can play – and often has played – over long periods of time. Although debt imposes repayment obligations that can become uncomfortable and burdensome when interest rates rise, those obligations tie the global economy together and make trade and payments possible.

Debt is a very old idea, as is the dilemma that it produces. Archaeologists and historians generally agree that debt is considerably older than money or coins. Clay cuneiform tablets from 7500-3350 BCE Mesopotamia record Sumerian debt contracts measured in units of grain or animals (sheep). The significance of debt for relationships between people has been an enduring issue for most of recorded history.

Accordingly, the evolution of debt was central to early ethical theories. All of Plato’s virtues – temperance, prudence, courage, and justice – can be developed either internally from one’s character or faculties or from external social influences. Courage, later often re-described as the virtue of fortitude, was expressed by meeting obligations and not running away from them.

Debt was thus a central feature in the development of civil society and the concept of responsibility. Our debts are a key element in our sense of personhood, because they force us to recognize that we are bound by our past actions, and thus have a continuous identity. You know who I am and can therefore rely on me. Without that trust, cooperation beyond the level of the household is impossible.

But, of course, debts can also be oppressive, creating chains of obligation and even bondage and peonage, as in many pre-modern societies. The institution has regularly deprived people of their humanity, simply because circumstances change: accidents, natural disasters, health emergencies, or misjudgments can make a debt impossible to repay. Hence, many religions – including Judaism, Christianity, and Islam – developed prohibitions against usury. Indeed, Islam still prohibits charging interest on loans, with Islamic law advocating various equity or risk-sharing elements in all financial instruments. Precisely because it excludes interest, Islamic law has been singled out by some commentators as a superior basis for operating a modern economy.

In the early days of debt thousands of years ago, there appeared to be an easy way of bridging the gap between debt as the progenitor of responsibility, civility, and order, and debt as a source of distress and disorder: make debt a government matter. This was the prevailing view throughout classical antiquity, and it has a parallel in the modern notion that governments are uniquely capable of creating a secure or stable asset, thereby providing a public good.

In very different ways, the books discussed here each use history to examine the conundrum of debt as both a necessity and a potential problem. Two of the books seek to understand debt through an examination of deep history; two consider the particular pathologies of debt crises; and one frames the issue as one of fundamental economic logic.


Eichengreen and his co-authors offer a comprehensive historical perspective on public debt. Public debt contracts emerged as a peculiarly central feature of European history, largely owing to the proliferation of political organizations and territorial units across the continent. In this environment, innovation in debt contracts correlated with other kinds of financial innovation. Because credible debt instruments create a source of collateral and liquidity, they tend to fire up corporate and private lending, too.

Establishing credibility thus became a key challenge for large states – a process that was much more complex than in the compact settings of Italian city-states. Even rich early modern states, such as in the Netherlands, foundered when they could not centralize enough.

For thousands of years, public debt arose primarily out of the need to finance military activity, and high levels of debt constantly threatened to undermine rulers’ credibility. Reducing public debt became somewhat synonymous with good government. One of the most impressive features of In Defense of Public Debt is its systematic accounting of approaches to debt reduction (and debt increases). Are debt levels reduced more effectively by fiscal rectitude or by pursuing higher levels of growth (which can reduce the debt burden and provide more taxable resources)? Is it better to inflate away debt – as in the notorious German interwar hyperinflation – or to push for debt restructuring (adjusting the relationship of the debt stock to payment flows)?

In the authors’ telling, one of the best approaches was that of nineteenth-century Britain, which underwent a century of debt consolidation between 1815 and 1914; but France after the Franco-Prussian War and the United States after the Civil War could boast of similar achievements. The authors also consider modern cases, but most of these examples are highly unusual. They include Norway, with its exceptional oil resources; Belgium, which exercised massive political will as part of the project of European monetary unification; and Singapore, which is relatively small.

The book also shows that there is a case to be made for the fiscal-consolidation approach, as demonstrated in the post-1945 period. The authors rightly take issue with those who attribute the reduction of debt-to-GDP levels in the United Kingdom or the US primarily to central-bank monetary expansion coupled with financial repression (when capital controls meant that investors could not freely move out of sterling assets in the UK).

The upshot is that there are times when it is best to keep debt at sustainable levels, and times when it is necessary to incur debt to meet exceptional challenges. Moreover, these cases are linked: the argument for fiscal restraint and consolidation in good times is that it is important to store up borrowing capacity for the next inevitable crisis. COVID-19 provides a striking case in point: no one would deny that the pandemic called for an expensive emergency response. All the books discussed here, and every responsible commentator, agrees on that much at least.

Eichengreen and his co-authors offer a sophisticated account of the conditions – that is, the underlying political economy – in which fiscal restraint is possible. Consolidation is easiest when there is a strong creditor interest. Indeed, the whole story of the English financial revolution – as analyzed in a classic article by Douglass C. North and Barry R. Weingast – is that the institutions created in the 1690s, including the Bank of England, were credible precisely because the creditors sat in parliament and could ensure that there were no defaults.

One might assume that such institution-building becomes more difficult with democratization, and with the pressure of potential beneficiaries of state redistribution who are not creditors. But this conclusion is not quite warranted, because there is a widespread general interest in monetary stability. Episodes of inflation often produce destructive political dynamics as powerful interest groups use their leverage on the state and ratchet up fiscal commitments.

Here, In Defense of Public Debt shows that in times of strong political consensus and low polarization, it is easier to build resistance against the kinds of ratchet effects that lead to large debt increases. Seen in this light, the notorious case of the 1920s German hyperinflation was not just a product of war (other countries dealt differently with the aftermath of World War I), but of revolution and the breakdown of social cohesion.

But, as the authors also emphasize, “relying on inflation helped seal the fate of Germany’s interwar democracy.” This insight is equally relevant to the debate over debt as a response to the pandemic. As a separate strand of analysis suggests, societies in which there is both consensus and a substantial amount of confidence in government are more likely to deal effectively with the public-health issues raised by the coronavirus. In short, the conditions that make for sound debt management also support societal resilience.


To many observers, the most obvious way of dealing with debt is to grow out of it, with governments pursuing spending and regulatory policies designed to boost economic growth as much as possible. But this approach can become a trap. In the 1970s, it was fashionable to suggest that government spending might reduce debt ratios by increasing the denominator, GDP. Instead, major advanced economies ended up with stagflation.

In Defense of Public Debt shows that the growth option was Europeans’ preferred approach from the 2000 Lisbon Agenda onwards. And the same view has also been embraced fully by US President Joe Biden’s administration. As Biden explained last month, “my plan will … create jobs, make us more competitive, and grow our economy and lessen – lessen, not increase – inflationary pressure.”

But history offers plenty of warnings about this sort of calculation. Even in interwar Germany, inflation didn’t really work as intended: there was still debt, and it was still highly destabilizing. In 1931: Debt, Crisis, and the Rise of Hitler, economic historian Tobias Straumann of the University of Zurich offers an impressive, fast-paced narrative account of the crucial phase in Germany’s Great Depression, underscoring the point about consensus and the politics of debt made by Eichengreen and his co-authors.

Breaking with what has become conventional wisdom, Straumann does not see the politicians of the Depression era – particularly Heinrich Brüning, known as the “Hunger Chancellor” – as having made bad choices in pushing austerity when they did. The fact was that there were no good choices in Weimar Germany’s atmosphere of intense polarization.

The burden of external debt (in the form of war reparations) played a critical role in creating these political conditions. As Straumann shows, it was Adolf Hitler’s campaign against a new reparations program (the 1929 Young Plan) that brought the National Socialists back from the political wilderness. In a famous footnote in his memoirs, published in 1929, a former British ambassador to Berlin, Lord D’Abernon, averred that Hitler had faded into oblivion since his release from Landsberg prison. But with German society so deeply divided, it was impossible to get a majority in parliament, and every failure or controversy led to even greater polarization.


Moving to the present, Columbia University historian Adam Tooze, who has also written extensively on Germany and the interwar failures, has produced a genuinely global narrative chronicle of the explosion of central bank-financed debt in response to the COVID-19 pandemic. His approach in Shutdown reprises that of Crashed, his 2018 account of the 2008 financial crisis; but, for obvious reasons, the new book lands in the middle of the events it examines, like a history of WWI written in 1915.

One is reminded of the great fourteenth-century Florentine historian Giovanni Villani, who wrote in his Nuova Cronica that “this plague lasted until __.” The blank was never filled in, because Villani died of the plague. Similarly, plenty more twists and turns are likely in the current pandemic, none of which we can yet know or understand.

Tooze’s basic framework is borrowed from a schema outlined by Chen Yixin, the secretary-general of the Communist Party of China’s Central Political and Legal Affairs Commission. The goal is to establish linkages between different facets of multiple crises through backflow, convergence, layering, linking, amplification, and induction. This may sound complicated, but so is any worldwide crisis.

In Tooze’s account, we see again how polarization can stand in the way of debt consolidation. In the US, politicians nowadays view spending as a way of winning elections: buying votes through stimulus measures in the traditional way, altered only by the novelty of the crisis. The unexpectedly high vote for Donald Trump in the 2020 presidential election may have owed something to the government checks that (rather unusually) bore his name. And not surprisingly, a Democratic administration and Congress is looking to push up spending before the 2022 midterm elections.

A central part of Tooze’s account is what he terms “feverish speculation” about the role of central banks in monetizing stimulus spending. In his analogy, “government debt is the rocket fuel of market finance.” He thinks there is an “obvious” connection between the logic of “functional finance” as developed after World War II and what has now been (re-)popularized as “Modern Monetary Theory.” But MMT is applicable only in countries that have full monetary sovereignty, and thus probably can’t be practiced in most of the world. It offers a peculiarly American solution, one that has the effect of increasing inequality at the level of the international order.

Another problem, of course, is that if you are dependent on non-residents trusting your currency, there are clear limits to how far you can go in embracing MMT’s prescriptions. The current debt-ceiling discussion shows that even the US is susceptible to such realities.

One reason why central bankers don’t think like MMT adherents is that they are concerned with international monetary relations (and this becomes truer the smaller and more open the country is). As Tooze correctly points out, the central banks that have bought massive quantities of debt during the pandemic have made a point of insisting that “this had nothing to do with funding the government.” He concludes that, “the logic the central banks preferred to subordinate themselves to was that of the financial system.”

An appealing, but also problematic, feature of the book lies in its attempt at an overall argument: namely, that the COVID-19 crisis represents “a general crisis of neoliberalism.” Tooze explains this framing as a way of “finding our historical bearings.” The pandemic, he observes, is “the first comprehensive crisis of the Age of the Anthropocene,” the moment when Gaia bites back against human excesses.

The claim about neoliberalism certainly matches current political rhetoric: one would be hard-pressed nowadays to find someone who is openly in favor of “neoliberalism.” But unless this term is understood simply as the free or unrestricted movement of people (and goods and money), it is hard to see precisely how it links up with the pandemic.

After all, any system that did not radically restrict mobility would have allowed for mass infections from a highly contagious virus. As it happens, Villani saw the Black Death as a divine punishment for the excesses of his own time. Was that plague also the result of neoliberalism?

Tooze’s second point – that Gaia is fighting back (the modern equivalent of Villani’s divine intervention) – seems more evident in the hurricanes, tornadoes, wildfires, droughts, and floods of recent years. Those events, increasingly attributed to climate change, are much more clearly linked to environmental degradation and risk.

Tooze is right to point out that the pandemic has exposed a lack of capacity for coordinated action in the face of a vast environmental challenge. And yet this is surely one area where it is too early to tell how we will do. Tooze himself is moderately encouraged by recent European efforts to put green technology at the center of the post-pandemic recovery and rebuilding effort.


A critical issue to consider is how government debt should be used. Is it better to buy political advantage or prepare for the longer-term future (which would amount to paying off a different kind of debt – to nature)? Such questions immediately raise the broader issue of the limits of political action. The COVID-19 response was unique in that it occurred in an economic environment in which interest rates had already been driven down by governments’ and central banks’ responses to a previous crisis (the 2008 crash).

Among the many virtues of my Princeton University colleague (and sometime co-author) Markus Brunnermeier’s The Resilient Society is that it explicitly asks how long the apparent free lunch of low-to-zero-cost debt can continue. As OECD Chief Economist Laurence Boone warns, “it’s not free money forever.” In a striking passage, Brunnermeier suggests that government debt is not just financial rocket fuel, as Tooze has it, but also “essentially a bubble,” a Ponzi scheme.

Brunnermeier points out that central banks are walking an increasingly precarious tightrope between deflation and inflation. Initially, COVID-19 seemed to present a deflationary threat as economies around the world shut down. Unprecedentedly large fiscal stimulus packages still did not push up the price level, because the payments to households were simply put into banks, which then held the money as excess reserves at the central bank. The Federal Reserve held claims on the US government, of which it is a part.

This kind of response might be good both politically and economically, insofar as it makes everyone more confident about the future by offering a sort of insurance against bad outcomes. But what happens if there is a moment of widespread doubt about the future? That could pose a risk to the global secure asset, the dollar, and thus to the basis of the global financial system.

Moreover, there is also the risk that success in this instance could normalize intervention by economic authorities to provide an underpinning of confidence. Once that happens, the exceptionality of the response evaporates, creating renewed doubt and uncertainty.


Ludger Schuknecht’s Public Spending and the Role of the State offers valuable historical lessons for thinking about the current surge of government debt. It presents the story of debt over the past 150 years (a somewhat shorter-term picture than In Defense of Public Debt). An economist who has worked at the International Monetary Fund, the European Central Bank, the OECD, the German Ministry of Finance, and now the Asian Infrastructure Investment Bank, Schuknecht provides a meticulously argued account of the evolution of government spending.

But he also goes further, by setting out to measure the effectiveness of past spending in terms of education and health. His approach thus deals with the critical question surrounding public debt. As we have seen, it is worth incurring debt in some circumstances, but only if the money is spent on objectives that correspond to public goods around which a long-term consensus exists. Establishing that consensus is an urgent task for all societies.

The key is to determine the effectiveness of spending, and how to measure it. Many governments, Schuknecht argues, have been spending too much compared to what they are delivering, thereby jeopardizing economic and financial stability. This has been especially true in developed countries, where government debt rose faster than that of emerging markets over the past 20 years.

Schuknecht traces an exponential rise in public debt after the post-war stabilization era. This came in two waves: first, in the high-interest-rate, low-growth phase of the early 1980s, and then again in the recession of the early 1990s. “At a time of record debt and spending,” he writes, “… many governments are under pressure from public discontent and are at risk of promising even more spending and creating higher expectations than they can fulfil. It is not possible to satisfy all the calls for social, financial or industry support. The perception of ‘all-round’ insurance also undermines the spirit of individual responsibility and risk-taking, which are the essential ingredients of a dynamic market economy.”

Schuknecht attributes the current crisis not to neoliberalism but to a return of Keynesian thinking in the boom of the late 1990s and early 2000s. He also argues that a low-interest-rate environment may obscure the necessity of choosing how and how much to invest in the future. This brings us back full circle to Eichengreen and his co-authors, who draw a distinction between an economic and a moral view of debt.

But perhaps it would be helpful first to make a distinction between morality and politics. In the moral view, public debt is bad, as it represents a burden that current generations pass on to the unborn. In the high-minded political view, debt in democracies is good, because it creates solidarity. And in the low-minded political view, it is good because it wins elections and brings other rewards.

Economic thinking about debt and what it offers, meanwhile, should focus on short- and long-term trade-offs. What can be done now that makes for a better future? The point about current generations owing something to subsequent generations is not trivial moralizing: it is at the heart of the current discussion about climate policy.

A Ponzi-like ballooning of government debt would destroy the instruments with which governments might hope to tackle the expensive task of carbon abatement. Preventing that devastation requires mapping out a viable course for public debt. Once again, we see how debt can both shackle us and offer us the means to salvation.

(Markus K. Brunnermeier, The Resilient Society, Endeavor Literary Press, 2021, Barry Eichengreen, Asmaa El-Ganainy, Rui Esteves, and Kris James Mitchener, In Defense of Public Debt, Oxford University Press, 2021, Ludger Schuknecht, Public Spending and the Role of the State: History, Performance, Risk and Remedies, Cambridge University Press, 2020, Tobias Straumann, 1931: Debt, Crisis, and the Rise of Hitler, Oxford University Press, 2019 and Adam Tooze, Shutdown: How Covid Shook the World’s Economy, Viking, 2021.)

Harold James is Professor of History and International Affairs at Princeton University. A specialist on German economic history and on globalization, he is a co-author of The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, Making the European Monetary Union, and The War of Words.
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