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A Brief History Of Debt

Publication Date: 
June 06, 2012
Knowledge @ Wharton Today

Professor Michael W. McConnell was mentioned in the following article discussing a recent talk he gave comparing the current US debt to historical instances of national debt around the world. Knowledge Today at the Wharton School of UPenn has the story:

Governments have borrowed money for much of history, but a more modern system began to evolve in the Middle Ages, according to Michael McConnell, a professor at Stanford Law School who spoke at a recent Wharton conference titled, “Is U.S. Government Debt Different?” Early European kings had revenues from vast landholdings and typically needed no one’s permission to spend those funds as they wanted. But they often were forced to borrow for wars and other purposes, and this early sovereign debt, unlike today’s “safe” U.S. Treasuries, was considered highly risky.

“Kings were notoriously terrible credit risks, because they didn’t like to pay it back,” McConnell said. In the seventeenth century, England’s Charles II was forced to pay Dutch lenders 15% to 20% interest at a time when private borrowers paid only about 3%, McConnell noted. In England, control over taxation was one of the first powers won by parliament as the sovereign’s absolute authority started to erode. In 1688, Parliament took control of the authority to borrow, which had the effect of making the national debt the country’s obligation rather than the king’s. This firmer backing allowed the government to borrow at lower rates.

In the U.S., Congress’s authority over taxation and the public debt were established in the Constitution, which addresses public finances to a much greater extent than most people realize, McConnell said.