HM Treasury series 8: The National Debt

The Bank of England and financing the National Debt in the eighteenth century

Wednesday 17 April 2019

Dr Anne Murphy, University of Hertfordshire

The ‘contractor state’ is defined as one that was forced to turn to external suppliers for the delivery of key goods and services, including borrowing.  This concept has been most readily applied to the eighteenth-century British state in order to explain how and why it operated in partnerships to deliver the manpower and materials that secured victory in (most) of the conflicts of the long eighteenth century.  Although not before spoken of in these terms, in this paper I want to argue that the Bank of England was, in fact, the most successful and long-lived of all the contractors employed by the British state.  Indeed, it survived as a private firm, owned by its shareholders and controlled by a directorate elected from among those shareholders, from its establishment in 1694 to nationalisation in 1946.  It was a contractor because it received fees to manage the state’s debts.  It was a contractor because the collective mind of its directors understood and could negotiate with markets for money to which the state did not have easy direct access.  It was a contractor because it connected public and state in that profitable relationship which delivered funds to the British war machine while rewarding the public creditors with regular dividends.  And it was a contractor because it delivered the efficiency that state machinery can seldom achieve.  Thus thinking of the Bank in this way allows us to reconsider the nature of its contribution to the geopolitical success of the British state during the long eighteenth century.


The National Debt in the nineteenth century

Tuesday 7 May 2019

Martin Slater, University of Oxford

By 1815 the UK’s national debt had risen to about £800 million, approximately 200 per cent of GDP.  Pitt’s high-profile Sinking Fund scheme, which had promised to ensure that the Napoleonic war-time borrowing was responsible and repayable, was now seen as little better than a fraud; public financial management was shambolic and on the verge of crisis.  However by mid-century the UK’s national debt was seen as perfectly stable; indeed a key positive component in the structure of Victorian financial rectitude, and a model to be emulated by less fortunate countries.  By 1914 the debt had reduced to only about 25 per cent of GDP.   But little of this was due to actual repayment:  in 1914 the nominal debt was still about £650 million.  The improvement was a classic case (perhaps the first classic case) of growing out of a debt crisis through economic growth.  However while the Victorians made few repayments, the balanced budget conventions of the time, together with the absence of major wars, were at least largely successful in preventing increases of the nominal debt.

Governments in the first half of the 19th century prioritised tax reform over debt reduction.  Later politicians such as Gladstone and (more successfully) Northcote did begin to make some headway on debt reduction, employing a variety of repayment strategies.  Despite increasing military and welfare expenditure demands, debt reduction was gathering speed quite significantly in the years leading up to WWI. 


The World Wars and the National Debt

Tuesday 9 July 2019

William Allen, National Institute of Economic and Social Research

The unexpected outbreak of war in 1914 caused havoc in the world financial system, of which London was the centre.  There was an immediate financial crisis and the government had to intervene urgently to prevent the collapse of the banks and the Stock Exchange. Government borrowing to finance the war proved very expensive, with long gilts costing 5 per cent per annum.  Dealing with the overhang of expensive wartime debt was a major problem for the Treasury in the 1920s and early 1930s, but in 1932 much of the government’s debt was successfully converted from a 5 per cent yield to 3½ per cent.

The second world war, by contrast, had been long foreseen and contingency plans had been made in the late 1930s, including extensive controls on private borrowing and investment.  After some dithering, it was decided in 1940 not to allow long gilt yields to rise above 3%, and this policy was maintained throughout the war.

After the end of the war, the Labour government tried to reduce long-term interest rates further, to 2½%, but the attempt failed as inflationary expectations were aroused.  In the lecture I hope to:


1.       Explain the connection between the financial crisis of 1914 and the high cost of government borrowing.

2.       Describe the conversion to 3½ per cent and explain why it was possible.

3.       Discuss the role of minimum gilt prices and forward guidance in both world wars.

4.       Describe the failure of the post-1945 ultra-cheap money policy.

5.       Describe the effects of the financing of WW2 on the structure of the gilt-edged market.

6.       Compare the financing of the two world wars and their long-term effects.


The National Debt after World War Two

Thursday 18 July 2019

Paul Temperton, Tier Company (formerly Bank of England)

After World War 2 the UK national debt stood at 250 per cent of GDP.  Winston Churchill could not sleep at night.  He fretted about whether the UK could ever repay the colossal sum of US$4bn (£1bn) it had borrowed from the US and Canada to pay for the war.  The loan, at a 2 per cent interest rate was repayable over 50 years.  Churchill need not have worried so much.  It was finally paid off in 2006.

However, the reduction in debt as a share of the economy after the war had little to do with debt repayment. Rather, it was, as in the mid-nineteenth century, a story about growing out of debt.  Between 1945 and 1990 UK public sector debt rose six-fold (from £25bn to £151bn) but nominal GDP grew more than sixty-fold (from £10bn to £657bn).  As a share of GDP, debt fell from 250 per cent to 23 per cent.

Yet there are constant pressures for higher government spending (which has a tendency to grow faster than incomes – an observation first made by German economist, Adolph Wagner, in the nineteenth century); governments want to keep tax rates competitive; but at the same time there is an emphasis on debt restraint. In that trilemma something has to give. Looking ahead, it is most likely to be debt restraint.


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