The Utopia of Escaping Debt Destroys the Foundation of Society

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At the end of the 17th century, a financial miracle occurred in London: with the founding of the Bank of England, the state’s debt burden was transformed into an engine of progress. For the first time, governments could convert future revenues into present purchasing power through the issuance of bonds and banknotes – money emerged, in a sense, from debt. This new «magic of money» fascinated all of Europe.

As the Bank of England worked its magic, imitators wanted to go even further. The Scot John Law tried to set up a project to consolidate the royal debts of France. His scheme, which collapsed spectacularly in 1720, gave rise to a host of pamphlets and caricatures, with the devil creating the money that promises relief. In many of the popular versions, the devil shits money: the delusion created by unbacked money is the devil’s excrement. Goethe put that message very powerfully in Part II of Faust.

The dream of magical relief from debt has never vanished. Today’s activists, too, demand a biblical cancellation of debt or jubilee. Jubilees are also characterized as carnivalesque assertions of unruliness, or a return to a benign state of nature. Would it really be that benign?

Debt creates the obligations that for millennia have tied the global economy together. Scholars – from archaeologists to historians – agree that debt is considerably older than money or coins.  Clay cuneiform tablets record Sumerian debt contracts measured in units of grain or animals in Mesopotamia over five thousand years ago.

The evolution of debt was also central to theories of ethics. Plato’s four virtues – temperance, prudence, courage, and justice – could be either developed internally or shaped by external influences. More often they arose from the combination of inborn proclivities with teaching and practice, and develop in individuals over the course of entire lifetimes.  Courage, which was later often redescribed as the virtue of fortitude, involved meeting obligations, not running away from them.

Debts help to socialize us. They are one aspect that constitutes the key to human personhood, in that debts provide a recognition that we are bound by our past actions, and thus have a continuous identity as a person. On that basis, promises occur between persons: you know who I am and can rely on me, even if circumstances change. Without that trust, there is endless suspicion.

In the 2010s, when everyone was bashing Germany for its reluctance to forgive Greek debt, many Anglo-American commentators liked to point out that German was the only language in which debt and guilt are the same word – Schuld. The argument betrayed a deep ignorance of both language and history. Go to Latin countries, and you find the same linguistic phenomenon: debitum in Latin, dette in French, debito in Italian or deuda in Spanish all share the same moral lineage. The moral weight attached to owing is deeply rooted in the history of European languages – and of ethics itself.

Debts can also be highly oppressive, forging chains of obligation, and, in many premodern societies, bondage and debt peonage. It thus deprived people of their humanity. That is because circumstances obviously do change; there are accidents, climatic and health catastrophes, and it becomes impossible to repay. The more volatility, the more uncertainty, the more vulnerability increases, and people can’t borrow or plan for the future.

Debt as the Cement of Social Cohesion

An easy way to reconcile debt’s dual nature – on the one hand fostering responsibility, civility, and order, and on the other generating personal distress and disorder – was to shift it onto governments. That was the view of classical antiquity, and it holds a parallel to the modern view which sees a fundamental task of governments as creating a particular secure or stable asset.

In Greek city states, the public treasury, secured in grand temples, held what were notionally loans of citizens that could be used for emergencies, and which were not usually paying any interest. If the citizens lost, they had simply made a sacrifice for a greater good. The loans in this way represented one idea of civic community. The link of state debt and religion was clearly expressed in the form of the building that much later (especially in the eighteenth and early nineteenth century) provided a model for neoclassical bank buildings.

Monarchs and absolute rulers, by contrast, would attempt to raise the same kind of credit – the distinction between that and taxation was not always clear. But the prospect of being repaid was minimal, and the lenders became smarter about concealing their wealth from royal agents (in effect tax collectors). So monarchs would borrow, paying interest, from merchants in other territories; and frequently engage in partial or complete defaults. Getting better terms for debt was a central spur to the process of creating political accountability, and even democracy.

The establishment of the Bank of England in 1694 formed the centerpiece of the “English financial revolution,” which dramatically reduced the cost of English borrowing and as a consequence increased its capacity to pay for military and especially naval infrastructure and services. The innovation was that creditors controlled a parliament that voted on taxes, and so could ensure repayment.

The first US Treasury Secretary, Alexander Hamilton, was deeply influenced by the British example, and studied the case of the Bank of England in detail. When he proposed in 1790 the assumption of the debts of individual states from the War of Independence, he saw the compromise needed as a result of merging different debt burdens as creating a new polity. Debt would become, he wrote, “the strong cement of our union.”

The fascination of Hamilton remains. He became a central figure in European debates after the emergence of the European or Eurozone debt crisis in 2010, when calls for debt mutualization gained momentum

State debt rested on a complex network of promises and engagements. It gave the state the resources to perform its central functions – defense, the administration of law and justice – and correspondingly created loyalty from the beneficiaries of state-provided security. That is why the choice of being Hamiltonian is so difficult: it may build new ties, but it also presupposes some initial common sentiment. In the past, people believed that they were committed to die for the fatherland, but it is too much of a mental and emotional stretch to die for debt mutualization.

Debt Explodes

The Covid experience accelerated a democratic trend already observable in the later twentieth century: Spending more and taxing less proved politically popular – or populist. As interest rates fell, governments believed they had discovered a free lunch. The case against adjustment (now labelled as austerity) became ever more compelling. Building up debt seemed like a way of managing political expectations (see Figure).

The behavior of modern democracies, with their inbuilt tendency to exploit financial innovation to run deficits, is quite different to that of earlier states. Britain exemplified the old model: build large surpluses, or pay off debts, in peacetime, so that the country could be prepared to run the deficits needed in case of a large-scale war. After the Second World War, however, first the Cold War atomic peace generated by the balance of terror, and then after 1990 the sense that the new world was going to be peaceful forever, obviated any need for precautionary austerity. Only Russia’s attack on Ukraine in 2022 revived the old uncertainties of security and conflict. Deterrence had failed to guarantee a world permanently free of great power conflict and the need for big defense spending.

One further development appeared to make the free lunch argument for permanent deficit democracies even more compelling. As industrialization spread and emerging economies emerged with stunning rapidity, they saved more. The resulting savings glut was used, notably by Fed chair Ben Bernanke, to explain the large global imbalances (the imbalances that allowed the US to run twin budget and current account deficits). But this development too would prove to be a transitory moment of comfort. As societies aged – most spectacularly in China – demographic decline loomed, savings were destined to dwindle, and older populations would begin to draw down their reserves. It was clear that the source of saving would be temporary, and that funds would be scarcer as older populations wanted to spend down their savings.

There was, in truth, only a temporary window, produced by the momentary coincidence of sophisticated financial markets, an international order that guaranteed peace, and a fast growing and saving middle class in emerging markets, that led the industrial world to think that they could resolve the growing demands of their democratic audiences. The illusion was to believe that it could be a permanent state of the world.

As this illusion shatters, calls for new monetary magic grow louder – perhaps in the form of stablecoins that will create more demand. One option is to be permanently frightened by an inflation that will wipe away the value of debt, but also the basis of every contract. The other is to hope that someone else will take over or assume the debt, that there will be some rescue by a benevolent outsider – by magic from the outside.

Yet every such hope repeats the same temptation: the belief that debt can be conjured away without consequence. In the end, The utopia of a way out of debt destroys the cement that binds society together.