IEA-透视英国债务（英文）-2021.5正式版

IEACurrentControversiesNo.78UKDEBTINPERSPECTIVEForrestCapieandGeoffreyWoodMay2021InstituteofEconomicAꢀairsIEACurrentControversiespapersaredesignedtopromotediscussionofeconomicissuesandtheroleofmarketsinsolvingeconomicandsocialproblems.AswithallIEApublications,theviewsexpressedarethoseoftheauthorsandnotthoseoftheInstitute(whichhasnocorporateview),itsmanagingtrustees,AcademicAdvisoryCouncil,orseniorstaff.3ContentsAbouttheauthors46SummaryIntroduction7Thedebtsurges8Whyworry?9Whatisdebtsustainability?Previousefforts12141720SourcesofinflationandtheroleofhonestgovernmentReferences4Abouttheauthors5ForrestCapieisEmeritusProfessorofEconomicHistoryattheBusinessSchool,CityUniversity,London.HehastaughtattheLondonSchoolofEconomics,theUniversityofWarwickandtheUniversityofLeeds.HehasbeenaBritishAcademyOverseasFellowattheNationalBureau,NewYork,aVisitingProfessorattheLondonSchoolofEconomics,andaVisitingScholarattheIMF.Hehaswrittenwidelyonmoney,banking,andtradeandcommercialpolicy.HewasHeadofDepartmentofBankingandFinanceatCityfrom1989to1992,andEditoroftheEconomicHistoryReviewfrom1993to1999.HiscommissionedhistoryoftheBankofEnglandwaspublishedbyCambridgeUniversityPressin2010.GeoffreyWoodisEmeritusProfessorofEconomicsattheBusinessSchool,CityUniversity,LondonandEmeritusProfessorofMonetaryEconomicsattheUniversityofBuckingham.AgraduateofAberdeenandEssexUniversities,hehasworkedattheFederalBankofSt.LouisandtheBankofEngland.Overseashehasadvisedseveralcentralbanksandnationaltreasuries.Heisanadvisertoseveralfinancialinstitutionsandtwopensionfunds,andwasanadvisertotheTreasurySelectCommitteeoftheHouseofCommons,andtotheParliamentaryBankingCommission.Hehasauthored,co-authored,oreditedoverthirtybooks,andhaspublishedover100academicpapers.Hisfieldsofinterestaremonetaryeconomics,monetaryhistoryandfinancialregulation.6Summary●

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ationalꢀdebtꢀfiguresꢀneedꢀperspective.ꢀThisꢀcanꢀcomeꢀfromꢀviewingꢀthemasaratiotonationalincome.●

Thatratiohassurgedinthelast20years.Butdespitemanyassertions,thedebt-to-incomeratiosofthepastfewyearsarenotunprecedented.●

Whentheratioreachedsuchpeaksinthepast,muchconcernwasexpressed.Buttherewasnotapanicforimmediateaction.Problemsmayindeedfollow,buttheydonotinevitably

follow.●

Thedebtcanbecopedwithandthereneednotberesorttoanyemergencymeasures.Historicalinvestigationshowshowandwhy.Controlofspendingandmeasurestoallowand,ifpossible,promotesteadyꢀgrowthꢀareꢀsufficient.●

Inflationꢀisꢀaꢀdanger,ꢀbutꢀhonestꢀgovernmentꢀandꢀgoodꢀsenseꢀcanꢀwork.7IntroductionTheUKdebt/incomeratioiscurrentlyaround100percentandsettorisefurther.Butthishashappenedbefore.Toputthesecurrentfiguresinperspective,andtounderstandthelonghistoryofdiscussionofUKnationaldebt,welookattheexperiencenotjustoverthefifteenyearssincethelastcrisis,butoverthepast270years.Duringthoseyears,Britishgovernmentdebthasbeendiscussedbyeconomists,mathematiciansandphilosophers.TheindustrialrevolutioninBritainisusuallydatedfromaroundthemiddleoftheeighteenthcentury.ItisworthbearinginmindthoughthattherateofgrowthofGDPwasbarely1percentbeforethenineteenthcentury.Thedebt/incomeratioatthebeginningoftheindustrialrevolutionwas100percent.Intheperiodfromthemiddleoftheeighteenthcenturyuntilwellintothesecondhalfofthetwentiethcentury–theperiodoftenreferredtoas‘moderneconomicgrowth’andthetail-endofwhichfrom1950to1973isusuallyreferredtoas‘thegoldenera’–thedebt/incomeratiowasabove100percentover75percentofthetime.Ineachof165yearsofthe217yearsbetween1748and1965itwas100percentormore(onoccasionsreachingabove250percent).Thisisworthemphasising:mostofthetimebetweenthebeginningoftheindustrialrevolutionandthepresent,thedebt/incomeratiohasbeen100percentormore,andthatinaperiodwhenourlivingstandardshavebeentransformedforthebetter.8ThedebtsurgesInthatperiodtherehavebeenthreesimilar,butfarfromidentical,episodeswhenvastnewspendingneedsarose.Allwereduringandimmediatelyaftermajorwars.ThefirstoccasionwastheRevolutionary/NapoleonicWarsofthelateeighteenth/earlynineteenthcenturies,whenspendingresultedinadebt-to-incomeratioofmorethan200percent.TherewasasimilarexpansioninWorldWarIandagainduringWorldWarII,whenspendingrosedramaticallyoncemore.Debtfollowedandthedebt-to-incomeratioreachedabout250percentatitspeakin1947.Incontrasttohistoricalepisodeswhenothercountriesfacedlargedebtoverhangsasaresultofwarsandcollapsingtaxrevenue,inBritaintaxrevenuesincreasedduringthewars.Buttaxationalonedidnotproducesufficientsums.Borrowinghadtobereliedon.Britainhadcertainadvantageshere.Ithadbeenatwarmostofthetimebetweenthe1680sandthelateeighteenthcentury.Inthatperiod,itbuiltareputationforprobityinpeacetimeandtheservicingofdebtacquiredinwartime.Whenitcametothesethreemajorwars,ithadnodifficultyborrowingbothdomesticallyandabroad.Hencethehighdebt-to-incomeratios.9Whyworry?Throughoutmostoftheperiodthereweretwoconcerns.Onewasthatalargenationaldebtburdensthenationinthefuture;andthesecondthatalargenationaldebtisriskybecauseshouldanadverseshockhittheeconomyitwillbemoredifficulttoborrow,desirableasborrowingmightbeatthattime.Thediscussionisovertwocenturiesold.ThemoderndiscussionwasinitiatedbyJamesBuchanan(1958)andgaverisetoadebateintheJournalofPoliticalEconomy,inwhichtheleadingprotagonistsincludedE.J.Mishan(1963),aswellasBuchanan(1964).Theclassicalfunctionofbudgetpolicyistochangethepatternofresourceallocationthatthemarkethasproduced.Thatiswellexemplifiedbymovinganeconomyfromitspeacetimeoperationstothefightingofawar.Britain’swarsagainstFrance(inthe18thand19thcenturies)provideaclearexample.Howisthetransfertobepaidfor?Paymentcancomefromtaxationorfromborrowing.Themethodbywhichtheresourcesareraisedcanaffectfromwheretheresourcescome.Ifresourcescomepurelyfromprivatesaving,thenthereisnocostincurrentconsumption;theeffectonfutureconsumptiondependspurelyontherateofreturnonthegovernmentspendingascomparedwiththerateofreturnthatwouldhavebeenachievedbyprivatelyinvestedsavings.Whether,then,thefutureisburdeneddependsonthesourceoffundstheprivatesectordrawson,andhowgrowthisaffected.Whilethatmayseemobvious,itstillhastobeclarified.Doestheservicingofdebtleadtotaxationthatdamagesoutput,ortoinflation(thatalsodamagesoutput)?Thetaxationdebateisasoldastheburdendebate,10andfromtheverybeginningfeaturedmanyofthesameprotagonists.1Someearlycontributionsareworthexamining.TheoriginsoftheBritishnationaldebtliewiththe1688RevolutionandtheensuinghostilitieswiththeFranceofLouisXIV.Itwasnotpossibletoimposetaxestodefendthenewlyacquiredlibertiesagainsttheencroachmentsofaforeignpower.ToquoteMcCulloch(1845andsubsequenteditions),‘...thecontractionofdebtwasnotthenamatterofchoicebutnecessity;andtoitweareingreatmeasureindebtedforourliberties’.ButMcCullochgoeson,‘...thepracticeoffundingwasfoundtobesoveryconvenientameansofobtainingsuppliesthatithassincebeenresortedtoonalloccasionswhetheritwerereallyrequiredornot.Andhencetherapidgrowthandvastmagnitudeofthedebt’(ibid.:421).Thereasonsforconcernaboutthelevelofdebtandthecostsofservicingitwereeconomic,certainly,butalsosocialandpolitical.Thebest-knowncontributorstothisdiscussionareHume,SmithandRicardo–thatgreattrinity.DavidHume(1752:282-286)pointedtotheinjuriouseffectsofrisingtaxationongrowth.Further,heforesawasocietywhereeconomicpowerwasconcentratedinthehandsofbondholders,withnomiddleclass,andheadingforpoliticalinstability:‘Adieutoallideasofnobility,gentry,andfamily’.Hewasalsoconcernedthatdebtissueincreasedtheever-presentdangerofprofligategovernment.‘Itisverytemptingtoaministertoemploysuchanexpedient,asitenableshimtomakeagreatfigureduringhisadministration,withoutoverburdeningthepeoplewithtaxes,orexcitinganyimmediateclamoursagainsthimself’.AdamSmith’sconcerns(1776,BookV)overlapwiththese.Deficitfinancing,hefeared,woulddivertresourcesfromproductiveinvestment.Moreover,ifthegovernmentreliedontaxationratherthandebt,itsspendingpropensitymightbecurtailed,andwarswouldbelesseasilyembarkedonandmorespeedilyended.Smithalsoattackedthenotionthatpayingbytaxationtheinterestoninternallyhelddebtwasmerelyatransferfromonehandtotheother.Risingtaxationwould,hemaintained,leadtoadeclineininvestment,toemigration,andtocapitalflight.DavidRicardo’s(1817)criticismsweresimilar.Hefearedthedistortingeffectsonresourceallocationofhightaxation,andhowthediversionofresourcesthatsuchtaxesproducedwoulddamageeconomicperformance.1ꢀ

Theꢀinflationꢀdebateꢀcameꢀlater,ꢀandꢀisꢀconsideredꢀlaterꢀinꢀthisꢀpaper.11Thus,thefirmlyheldclassicalviewwasthatanationaldebtwasundesirable.Itwasaburden,ashasbeenarguedinmoderntimesandonthesamegroundsby,forexample,JamesBuchanan(1958;1964).Butthisdoesnotmeanthatdebtshouldneverbeincurred,andthat,ifincurred,itshouldberepaidassoonaspossible.Thedecisiondependsontheavailablealternativesandonwhethersharingaburdenwithfuturegenerationsseemsjustifiedbythosefuturegenerationsbenefiting.Intheclassicalview,debtcanbeincurredtofinancearesponsetoanemergency–theseclassicalauthorshadwarinmind–butoncetheemergencywasovergovernmentexpenditureshouldbecutbacktothepre-emergencylevel,andthedebtgraduallyreducedthroughtaxationonwhatwasexpectedtobeasteadilygrowingincome.Thisconclusionofcourseembracedtheinsuranceprinciple,asthatsimplyprovidedanadditionalreasonforwhatwasinanycaserecommended.Theseprinciplescanguidepolicyonlysolongasthedebtissustainable,solongasitdoesnotfeedonitselfandinevitablyoutgrowtheeconomysupportingit.Whendoesthatbenignoutcomeemerge?12Whatisdebtsustainability?Howmightadebt/incomeratiobesustainable?Forthattoholdthecosttogovernmentofdebtservicingisusuallysimplycomparedtotherateofgrowthoftheeconomy.Ifthecostexceedstheeconomy’sgrowthrate,debtserviceeatsupmoreandmoreofincome.Butwhatrateofinterestshouldbeused?Isitbestcapturedbytheyieldongovernmentdebt?Imagineaperiodofzeroinflationandthegovernmentissues£100millioninbondswithacouponof3percent.Thecostofservicingthat£100millionofdebtis£3millionperannum.Thatdoesnotvaryoverthecourseofthelifeofthebonds,say30years,irrespectiveofwhathappenstopricesoryields.So,attheendofyear1,governmentneedstoborrow£3milliontopaybondholders.(Andthat£3millionofcourseisaddedtothestockofdebt.)Ifinterestrateshaverisen,thenthecostofservicingthedebtthatyearrises.Overthecourseoftheloanaseriesontheappropriateinterestratesisrequired.Thecostofborrowingislikelytovary,possiblyquitesubstantially.Itisnotaneasycalculation.Ifatsomepointthecostisregardedastoohighthereisthepossibilityofloweringitbymeansofaconversiontoalowercoupon.Forexample,inWorldWarI,onestockissuedwasWarLoanat5percent,£2,500million,equalinsizetoapproximately25percentofthetotaldebt,andequalinvaluetoabouthalfofGDP.Inthe1920s,thecostofservicingwasheavyandaconversionoperationwascarriedoutreducingthecouponto3.5percentandextendingtheduration.Toachieveasuccessfulconversionrequiressomefavourablecircumstancesandpossiblysomeincentivesfortheholders(Capie,MillsandWood1986).TowardstheendoftheThatcherera,whentheglobaleconomywasstilladjustingtotherestrictivemonetarypolicymeasuresneededtotametheGreatInflationofthe1970s,itseemedreasonabletoassumethatinterestratesexceededtheeconomy’sgrowthrate.ButtheUK(andglobal)13economyisnolongerinsuchacounter-inflationaryenvironment,noraretherehighnominalandrealinterestrates.OlivierBlanchard(2019:1219)recentlyobservedinhisAmericanEconomicAssociation(AEA)PresidentialAddressthat‘notonlyaretoday’sinterestrateslow,theyarelowerthangrowthrates’.Blanchard(1991)hadpreviouslyacknowledgedthepossibilitythattheinterestrateonpublicdebtcouldfallbelowthegrowthrateoftheeconomy,inwhichcase‘thegovernmentcouldrunpermanentprimarydeficits…andthesewouldeventuallyleadtoapositivebutconstantdebtlevel’.Whileflirtingwiththispossibility,inthisearlierpaperBlanchardstillfellbackonthegeneralpresumptionthattheinterestrateongovernmentdebtexceedsthegrowthrate-thatsituation,hewrote,‘prevailsgenerally’(ibid.:15).However,itmightbethatthe1980sand1990s,whenthenominalinterestrateindeedexceededthegrowthrate,areanhistoricalaberration.Duringagoodpartofthepost-warperiodthenominalgrowthrateoftheUKeconomywasconsistentlyabovetheaverageinterestrateongovernmentdebt-thiswasthecaseuntilthe1980s.Itcanbearguedthatalowerpublicdebtstockshouldbesoughttoprovide‘insurance’incaseanothershockemerges.Butexperiencewithloweringorevenstabilisingpublicdebtstocksinrecentdecadesillustratesthepossibilityofproblemswithimplementingthis.Further,itshouldnotbeforgottenthatraisingtaxestopayinterestondebtcanactasadisincentivetoworkandtoprivatesectorinvestment.22Thiswasaconcernofsomeclassicalauthors,asitwasmorerecentlywithJamesBuchanan(op.cit.)amongothers.14PreviouseffortsNevertheless,theburdenofthedebtafterallofthesewarswasextremelyheavy.Howcoulditbereduced?Therewerereallyonlytwoviableways.Onewasfromeconomicgrowthandtheotherwasfrominflatingthedebtaway.Strictlyspeakingthereweretwoadditionaloptions.Onewassimplytodefault.Butthatwasanathematothegovernmentsofthetime,andinanycasewouldhavedamagedorevendestroyedfutureborrowingoptions.Afourthoptionwouldhavebeenstrictspendingrulesandthefurtherraisingoftaxes.Intheclimateofthetimesthesewereunacceptable.FollowingtheNapoleonicWars,thereweredemandsforsmallergovernment.ButafterWorldWarI,thepressurewasforspending,particularlyonhousingforreturningservicemen.AndafterWorldWarII,anewlyelectedLabourgovernmentcametoofficeonthepromiseofbigspendingthatincludedextensivenationalisation.Thus,thetwoseriousoptionsweregrowthorinflation.AftertheNapoleonicWars,therewerealsodemandsforgreaterprobityintheaffairsofthestateandareturntothegoldstandardthathadbeenabandonedintheearlyyearsofthewar.Asthatwasaimedforandachieved,inflationwasruledout,leavingonlygrowthalongsidemodestprimarysurpluses.Similarly,afterWorldWarIthegoldstandardthathadbeensuspendedontheoutbreakofwarin1914hadtoberestoredandin1925itwas,albeitinslightlydifferentform.Again,therewasnoinflation.FollowingWorldWarII,therewerethelargespendingplansofthenewLabourgovernment.Therewasalsoamuchlooserassociationwithametallicbaseforthecurrencyandthepossibilityforinflationcertainlyexisted,andsomeinflationappeared.Interestingly,inallthreecasestherateofeconomicgrowthfollowingthepeakpointinthedebt-to-incomeratiowasstrongandtheratioslowlydeclined.Onlyinthelastofthethreedidinflationplaysomepart,asdid15anincreasinglyheavytaxburdentopayforanincreasingroleofthestate,ataxburdenthatcontinuedformanyyears.Itisclearthatapproachestoreducingthedebt-to-incomeratiohavedifferedfromepisodetoepisode.However,managingthedebtoverhanghastypicallybeenconstrainedbytheoverallpolicyframework–inparticular,themoneysupplyregimeandthenatureofthestate.Theimportanceofthemoneysupplyregimehasalreadybeenimplied.Withafractionalreservebankingsystem,themoneysupplycanchangeaccordingtothereserve-holdingbehaviourofbanks.Buttheonlysourceofsustained

moneysupplychangeisasustainedchangeintheliquidreservesofbanks–themonetarybase,asitisknowninmanycountries.ThemajorstudyofthiswasPhillipCagan’s(1965)fortheUSA,butsimilarresultsappearforothercountries.Hence,solongasthegrowthoftheso-calledmonetarybasewasconstrained,thegrowthofbroadermeasuresofthemoneysupplywasinthelongertermconstrained,andsotoowasinflation.Ifthemonetarybasecomprisedgold(thegoldstandard)orsomeothermetal(silverforexample,orevenabimetallicstandard)thenthebasecouldgrowonlytotheextentthatthesupplyofthemetalormetalsdid.Ofcourse,thequestionofwhatkeptcountriesonthatgoldstandardmustarise,butitisusefulalsotoconsider-fortheunderlyingquestionsarethesame-whatkeepscountriestoanylowinflationcommitment.BritaincouldhaveleftthegoldstandardaftertheNapoleonicWars,butinsteadofperpetuatingthewartimesuspensionthestandardwasrestored(in1821).Again,BritaincouldhaveperpetuatedthesuspensionofWorldWarI,butinsteadresumedgold(in1925),andatthepre-warparity,untilfinallyforcedoffintheturmoiloftheGreatDepressionintheUSA.WhydidBritainstayongold?Partlytherewassimplyafeelingthatbeingonthegoldstandardwasnatural,thattherewasnothingelsethatcouldbedone.Butitwasalsowellestablishedthatstablepricesweremorallydesirableandalsogoodforprosperityandgrowth.Then,too,itwaswellestablishedthatifacountryineffectrepudiateditsdebtsbydebasingthecurrencyitwouldbeunabletoborrow,orattheleastexperiencegreatdifficultyinborrowing,atfuturetimesofstress.AndMontaguNormanmadethisamongotherargumentswhenheurgedBritainnotonlytoreturntogoldafterWorldWarI,buttodosoattheoldparity.16Thus,governmentswerereluctanttouserapidinflationtoreducethedebt-to-incomeratio.Itmakesfutureborrowingmoredifficult.Today’smonetaryframework-includingaclearinflationtarget-providessomepolicyfreedomnotpreviouslyavailable.Butitdoesnotallowanexcessiverelianceoninflation.Suchacrediblemonetaryframeworkcanhelpcontainfutureborrowingcosts.Therearemanyotherfactorsasidefromthelevelofdebtthatcanleadtoorallowinflation.Importantamongthemis,quitesimply,theabilitytomakemistakes.Therecanalsobeone-offshockstothepricelevelthatareallowedtoturnintoinflationthroughareluctancetemporarilytosqueezetheeconomy–thatmightbeamistake,oraconsciousandperhapswell-informeddecisionabouttrade-offs.Inotherwords,manythingscanleadtogovernmentsallowinginflation.Butchoosingtoinflatedeliberately,asawaytoreducethedebt-to-incomeratio,involvesaneglectofthefuture.ThisiswhatPigou(1920)referredtoasa‘defectivetelescopicfaculty’.Thatapplieswhetherkeepingtoametallicstandardoradheringtoaruleortoaninflationtarget.Allareself-imposedconstraints.Accordingly,then,withoutexceptionsuchdeliberateinflationisavoidedbystatesthataresecure,witharuleoflawandtheexpectationofabasiclevelofpoliticalstability.Incontrast,kleptocracies,unlesstheyarestupidaswellascorrupt,mustalwayshaveaneyeontheexitandarenottooworriedaboutthecountry’sfuture.Systematicdebasementtoreducetheburdenofdebtdoesnothappeninwell-orderedsocieties.WhentheGovernoroftheBankofEngland,AndrewBailey,wasaskedaboutthepossibilitythatinflationwouldsurgeinBritainasaresponsetothesharpincreaseinthedebt,herespondedthatBritainwasnotVenezuela.3Thatisasneatasummaryoftheaboveargumentasonecanimagine.3ꢀ

ꢀ‘Baileyꢀrejectsꢀmonetaryꢀfinancingꢀasꢀtoolꢀinꢀvirusꢀcrisis’,ꢀFinancialTimes,6April(/content/e7fa6ac4-c2a0-4c6c-b1e1-17ab91316915).17SourcesofinflationandtheroleofhonestgovernmentThereis,nonetheless,thewidespreadfearthatgrowingdeficitsinBritainandothercountriesaffectedbyCovid-19runthedangerofbeingmonetised,producingrapidmonetaryexpansionandinevitableinflation.Itistruethatalltheveryrapidinflationsandhyperinflationsofthelastfewhundredyearshavefollowedballooningdeficits.Therearemanyexamplesinthetwentiethcentury,whentechnologymadeiteasytoprintmoney.Buttherearealsoexamplesfromearliertimes.TheAmericanWarofIndependenceinthe1780swasone,andtheFrenchRevolutionofthe1790swasanother.Theextremecasesofhyperinflationcameinthetwentiethcentury(withimprovednote-printingtechnology)andcanbefoundinHungary,Russia,Poland,AustriaandGermanyinthefewyearsafterWorldWarI.Thegeneralstorythatistoldisofgovernmentsseekingfinancefirstraisingtaxes.Butwhenalimitisreachedonraisingrevenuefromtaxestheyturntoborrowing.Whenthecostofborrowingbecomestoohigh,theyturntotheprintingpress.Giventhatveryrapidinflationhasalwaysappearedinaperiodofmonetaryexpansionfollowingorcontemporaneouswithgrowingbudgetdeficits,thequestionariseswhatcircumstancesproducedthelatter?Gravesocialunrestoractualdisorderprovokeslarge-scalespendingbytheestablishedauthorityinanattempteithertosuppressorplacatetherebelliouselement.Atthesametimethedivisioninsocietyresultsinasharpfallinrevenue.AsKeynes(1923:41)putit,inflation‘istheformoftaxationwhichthepublicfindhardesttoevadeandeventheweakestgovernmentcanenforcewhenitcanenforcenothingelse’.Butdoesinflationinevitably

flowfromaburstofgrowingdeficitsandtheaccompanyingriseinthestockofdebtoutstanding?Theanswertothat18questionis‘mostcertainlynot’.Whydoesinflationsometimesfollowandsometimesnot?Somehistoricalexperiencegivesguidance.Britain,duringtheRevolutionaryWarsandNapoleonicWarswithFranceinthelateeighteenthandearlynineteenthcenturies,abandonedthegoldstandardforover20years.Deficitsgrewandthestockofdebtroseuntilitstoodataround250percentofGDP.Thenoteissuerose,monetaryexpansiondidtakeplaceandtherewasalittleinflation–around3percentperannum.ButBritainhadacquiredareputationforservicingitsdebtsinthemanywarsacrosstheeighteenthcentury.Evenso,thedebt/incomeratioattheoutbreakofthewarsinthe1790swasaround150percent.Butleavinggoldin1797wasseenasbeingtemporary.Thecommitmenttoreturntothestandardassoonaspracticablewascredibleandnoworryinginflationfollowed.ThatcanbecontrastedwithFrance,wheretheissueofpapermoneyinthe1790swasonacolossalscaleandtherewasnobeliefthatitwouldbereversed.Inflationinthethousandsofpercentperannumfollowed,andtheFrenchreputation,destroyedduringJohnLaw’smonetaryexperimentsacenturyearlier,wasagaindestroyedandFrancesufferedforalongtimeafterwards.Britainexperiencedfurtherstrengthening

inthecredibilityofgovernment.Themostgeneralexplanationforthechangeshasitsoriginsinthegreatreactionagainstthe‘OldCorruption’oftheeighteenth-centurymercantiliststate.(SeetheworkofhistoriansHarling,Rubinstein,andHowe).Theall-pervasivefeatureofBritishgovernmentfromtheearlyeighteenthcenturyuntiltheageofreforminthenineteenthcenturywasthewidespreaduseofsinecures,andgratuitouspaymentstopeoplethegovernmentwishedtobribeorbuyorotherwisereward.Theconsequencesofstateexpansion,whichiswhatmercantilismconstituted,werecorruption,rentseeking,taxevasion(notablysmugglinginEngland)andotherillegalactivities.Thereweredangersthenforthefiscalbase.Thebeginningsofthedismantlingofmercantilismmeantthatmuchoftheoldhadgonebytheendoftheeighteenthcenturybutmuchpersistedintothenineteenth.Largegovernmenthadtogo.Therewasby1850smallgovernment,soundmoneyandapermanentcivilservicechosenbycompetitiveexamination.Andtheaimintheperiodwastoremoveallvestedinterestfromthelegislativeprocess.AsDonaldWinch(2002:8)expressedit,‘Whatbeganasoppositiontomercantilism...leftpoliticaleconomywithacontinuinginterestinexposingthosespecialinterestsseekinglegislativeprivilegesattheexpenseofaconceptofthepublicinterest...’.19Trustinthesystemandwithinthesystemhadanimportantroletoplay.Modernmoney,asopposedtocommoditymoney,restsontrust.Fromwheredoesthattru