Wednesday, February 8, 2012

Long-term versus short-term debt

In a previous post I have referred to the Fiscal-Military State, and Brewer's classic book on it. It is worth remembering, for those afraid about debt these days, that public debt in the UK during the Napoleonic Wars peaked at more than 250% of GDP.

One of the important ways in which the British were able to out-finance the other major European powers, fundamentally France, during the 18th century was the ability to borrow long at at low rates. The graph below shows the proportion of unfunded to funded debt (from Brewer's book). The UK rapidly moved from almost 100% of unfunded debt to less than 10%.

Funded debt, was debt for which specific taxes were set aside to service it, and it tended to be long-term, while unfunded debt was usually short-term debt. Debt service consumed a great amount of the budget, but that was simply the result of the incredibly large amount of debt, since interest rates remained relatively low. I guess the lesson is that long term debt in your own currency is okay.


  1. Especially when the world is paying you to borrow. Real yield on a US 10 year at -0.24 as of 2/10.

  2. That's a good point Jason. The question is why the British also paid relatively low rates of interest. Some authors suggest that it was that the debt was funded, including Brewer. Note that at that time the pound was convertible (to gold), so it was not a fiat currency like the US dollar now. Which would mean that actual default was possible.


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