A Fortnightly Review of

The National Debt: A Short History
by Martin Slater

C Hurst & Co Publishers Ltd | 256 pages cloth | £20.00

By NICK O’HEAR.

MY ENGINEERING DEGREE included a course in Economics. This was in 1968. At that time, focus was on the balance of payments and little or none on the national debt. Martin Slater, in this excellent book, explains why: We owed a fortune to the Americans, who seemed to have bankrolled a large part of both the First and Second World Wars.

Our debt was in dollars and our negative balance of payments made maintaining the value of the pound difficult and ultimately impossible. This led to large devaluations — in 1949 from $4.03 to $2.80 and in 1967 to $2.40. Our debt, of course, was in dollars, so devaluing the pound nearly doubled a crippling debt. This didn’t deter Prime Minister Harold Wilson from saying, “It does not mean that the pound in your pocket, your purse or in the bank, has been devalued.”

War is also the main driver for the national debt. The government issued bonds of one sort or another to raise enough money to prosecute whatever war was in vogue at the time. There was always a hope that, by being victorious, the spoils of war would pay for the war itself or “reparation” payments could be imposed on the loser. This is what happened to Germany in 1918. The Allies owed the British and the British owed the Americans. It would all work out if the Germans could be made to pay for the cost of the war and reparation. In one calculation, the German debt was assessed as being £24,000 million and that Germany should pay annually £1,200 million every year for 20 years. Bearing in mind that the British GDP in 1914 was £2,400 million, Germany had no hope of paying such a large amount to anyone. As a result, the Allies couldn’t pay the British — and the Americans refused to waive the British debt.

Similarly, the Second World War further increased Britain’s debt to the Americans. Generally, though the national debt was money owed by the state to the people and institutions in the country. In trying to manage the debt, the government devised various schemes such a the ‘sinking fund’. This was first proposed in the eighteenth century. It worked similarly to an endowment policy for a mortgage, where interest payments were separated from capital repayments. In short, the idea could work if the Government could lend money at higher interest rates than those incurred by the national debt. It was presented as a miracle cure – a financial sleight of hand. Any scheme of this type involves banks and brokers and gives them opportunities to to profit from the debt.

The current debt is about 80 per cent of GDP. This, in itself, is not particularly exceptional. At the end of the Second World War, it reached almost 2½ times GDP. However, it is of some concern is that it is increasing without very good reason. After all we have had more than 70 years of peace.

The reader is introduced to unfamiliar concepts such as Consols and Tontines. Quantitative Easing is also discussed (without much enthusiasm) and how it contributes to increasing house prices. There is a lot to come to grips with but Prof Slater presents the material in a clear and understandable way.

The main current issue is not that the national debt is too large, but that it is growing in a time of peace and prosperity.

The main current issue is not that the national debt is too large, but that it is growing in a time of peace and prosperity. The argument revolves around the need for austerity and a more Keynesian view that we should invest for growth. Martin Slater points out that even Keynes believed in restraint. Government investment is targeted at infrastructure projects but this increases borrowing and may not be as helpful to the economy and growth as investment in industry. This leads us to Private Finance Initiatives. This enables the government to saddle the country with added debt without it appearing in the national debt. On its own, this might not be too bad. After all, everybody wants new hospitals and high speed rail links to get to them. The catch is that the government has to offer high returns as well as extremely attractive terms and guarantees. The cost of everything financed in this way cleverly combines the worst points of capitalism and socialism.

Judging by the reviews of this book, economists praise it. But  while Martin Slater does not avoid numbers he presents them in a very readable way. As a result, the book should interest a wide section of the general public. It is well worth reading.

♦

Nick O’Hear is chairman of Tension Technology International, Ltd., based in Schoonhoven, The Netherlands.

Note: This review was altered immediately after publication to correct an editing error.