Since its inception, sovereign debt has been a central pillar of running the economy especially in times of crises. The origins of public debt lay in the loans raised by kings and emirs to cover their expenses especially during times when tax revenues fell short of what was needed to finance the state such as war or economic crises. Simply put, public debt -much like private debt- is in its origin a mechanism to bypass a bottleneck in resources premised on future surplus being enough to cover the debt servicing. In these cases the sovereign, king, emir, or sultan was the party responsible for the debt as the sole sovereign and ruler of his domain. Kings would default on their debts fairly often as their unparalleled power left the creditors no option for retribution. This default could be as simple as failing to cover payments, which could often ruin the creditor, such as the English crown default on loans from the Medici’s London branch. The default led to the branch’s bankruptcy and triggered a chain reaction that collapsed Medici banking hegemony. In other cases the default would take the form of exercising sovereign power to imprison or banish the creditor so they are not able to collect on their loans.
Such tactics made lending to sovereigns an incredibly dangerous affair that bankers would sometimes be forced to loan the sovereign. On the other hand, the Italian city states’ debts were owed by the city state itself not its rulers themselves and the absence of an unchallenged executive meant that likelihood of default or exile was limited. This practice of public debt made bankers much more eager to lend to republics than kingdoms as the risks were limited. This meant that these states, despite their relatively small population, could raise enough funds to stand up to great european powers ten times their size.
The rise of central banks as the primary institution of managing’s states loans and their service in place of the king’s treasury marked the gradual shift from sovereign debt, as debt raised on behalf of the king and under his sole responsibility, to public debt that is raised on behalf of the population and guaranteed by state revenues. This meant a better guarantee for creditors and thus increased the amount of funds different governments could raise through credit. As public debt became a staple of financial markets, it also rose to prominence in the modern era as a means to fund investments, as if the rate of interest is less than expected the rate of profit, the incurrence of debt would be the right economic decision to make. In the modern era that meant that instead of debts being an exceptional tactic used in desperate times, it became a central part of funding the state and its activities. In a word, debt became normalized.
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