Research in the History of Economic Thought and Methodology: Including a Symposium on Public Finance in the History of Economic Thought: Volume 38A

By the beginning of the nineteenth century, British public debt, accumulated over the eighteenth century and during the Revolutionary and Napoleonic Wars (1793–1815), had attained extremely high levels, at times even reaching 200% of the gross national product (GNP). This increase in debt paradoxically coexisted with the early progression of the industrial revolution.

In this chapter, we explain this concomitance by the effective policies of sovereign debt management put in place by the State and the Bank of England (BoE). First, the State put in place measures to lower its risk of default by funding its debt with tax revenue that would allow it to honour due payments. Second, following the suspension in 1797 of cash payments for pounds sterling, the BoE, in addition to its role in financing the State, followed an active policy of sovereign debt management, promoting both bank liquidity and market liquidity.

After the end of the Napoleonic War, few issues of public policy dominated discussions in England as fervently as the issue of currency and the national debt. A time of civil unrest and social radicalisation, the circulation of ideas and pamphlets was prolific. The difficulties of post-war reconstruction sparked a long debate on issues of monetary reform and repayment of the national debt. The growth of national debt increased the size of the financial market and had important consequences for a changing class dynamic in domestic political affairs. The distributional aspects of the conflict were present, as was the satirical mockery of mishandling of public affairs. In much of the subsequent scholarship the organisation of taxation and expenditure, and the financial system and the issue of currency have been analysed as separate. This chapter brings them together. In particular, it focuses on Ricardo’s monetary thought and his views on public finance and contextualises them in light of his contemporaries.

The year 1848 is considered by historians as a political and economic turning point in France: a major political crisis took place in the form of the February Revolution, accompanied by extensive financial troubles for the French government. The economists of that time actively debated the economic causes and consequences of the crisis. This chapter is devoted to the analysis of these financial controversies in French economic thought around 1848. If the political and philosophical debates of 1848 between the liberals and the socialists are quite well known by historians of economic thought, their financial side has been relatively neglected. According to the authors of this chapter, it is nevertheless of great interest to examine the liberal and socialist ideas of that time. This chapter aims to investigate this little-studied question by raising three main issues: the first one consists of presenting the different diagnoses of the 1848 financial crisis from socialist and liberal viewpoints. Second, it proposes an analysis of the content of theoretical controversies about ways to overcome the financial troubles, particularly regarding the trade-off between taxation and debt. Lastly, it emphasizes the role of this period for the subsequent constitution of a financial orthodoxy in France.

Since the early modern age, the debt of the State was a constant source for concern to the Spanish governments. Episodes of defaults caused by enormous expenditure to keep the Empire slowly faded out until a certain reorganization of public finance was attained in the central decades of the nineteenth century. The core idea that finance ministers and economists, in general, had at that time was to balance the public budget controlling expenses, in order to handle the problem of public debt. However, alternative views on government finance existed. Focusing on a crucial period for the consolidation of Spanish liberal regime and its public finance, this chapter shows that, among a predominant concern for reducing public expenditure as the best way to stabilize the economy and promote economic growth, the character of Luis María Pastor emerges to support government expansionary policies financed with credit. Far from fearing deficit, Pastor, one of the leaders of the Spanish liberal school of economic thought, believed that investment in infrastructures financed through debt was the key to economic growth. Through a multiplicative effect, a program of public investment would enhance economic growth, eventually solving the long-term insufficiency of Spanish finance. This gives evidence that ideas on public finance of classical liberal economists were far from uniform, contributing to a more precise view on the body of doctrines of this school.

This chapter discusses the evolution of German views on public debt 1850–1920, referring to three strands of secondary literature: (1) German retrospectives on public finance, (2) the historical literature with a public choice perspective, and (3) contributions to public/constitutional law, mainly referring to Lorenz von Stein. The skeptic view of public debt endorsed by authors of the second half of the period is shown to be related to politico-economic issues of state agency combined with new state functions, rather than to the rejection of Dietzel’s Proto-Keynesian macroeconomic reasoning.

This chapter discusses the “seigniorage argument” in favor of public money issuance, according to which public finances could be improved if the state more fully exercised the privilege of money creation, which is, today, largely shared with private banks. This point was made in the 1930s by several proponents of the “100% money” reform scheme, such as Henry Simons of the University of Chicago, Lauchlin Currie of Harvard and Irving Fisher of Yale, who called for a full-reserve requirement in lawful money behind checking deposits. One of their claims was that, by returning all seigniorage profit to the state, such reform would allow a significant reduction of the national debt. In academic debates, however, following a criticism first made by Albert G. Hart of the University of Chicago in 1935, this argument has generally been discarded as wholly illusory. Hart argued that, because the state, under a 100% system, would be likely to pay the banks a subsidy for managing checking accounts, no substantial debt reduction could possibly be expected to follow. The 100% money proponents never answered Hart’s criticism, whose conclusion has often been considered as definitive in the literature. However, a detailed study of the subject reveals that Hart’s analysis itself appears to be questionable on at least two grounds: the first pertains to the sources of the seigniorage benefit, the other to its distribution. This chapter concludes that the “seigniorage argument” of the 100% money authors may not have been entirely unfounded.

From 1782 to 1834, the English social legislation shifted from a safety net devised to deal with emergencies to a social security system implemented to cope with the threat of unemployment and poverty. In the attempt to explain this shift, this chapter concentrates on the changed attitudes toward poverty and power relationships in eighteenth-century British society. Especially, it looks at the role played by eighteenth-century British economic thinkers in elaborating arguments in favor of reducing the most evident asymmetries of power characterizing the period of transition from Mercantilism to the Classical era. To what extent did economic thinkers contribute to creating an environment within which a social legislation aimed at improving the living conditions of the poor as the one established in 1795 could be not only envisaged but also implemented? In doing so, this chapter deals with an aspect often undervalued and/or overlooked by historians of economic thought: namely, the relationship between economic theory and social legislation. If the latter is the institutional framework by which both individual and collective well-being can be achieved the former cannot but assume a fundamental role as a useful abstraction which sheds light on the multifaceted reality in which social policies are proposed, forged, and eventually implemented.

In this chapter the author subjects some aspects of Roosevelt’s “New Deal” to critical analysis, demonstrating the limits to reform given the power of “vested interests” as articulated by Thorstein Veblen. While progressive economists and others are generally favorably disposed toward the New Deal, a critical perspective casts doubt on the progressive nature of the various programs instituted during the Roosevelt administrations. The New Deal was shaped by the institutional forces then dominant in the U.S., including the segregationist system of the South. In the end, “vested interests” dictated what transpired, but what did transpire required a modification of the understanding of the standard ideological perspective of capitalism, “liberalism.”