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    Brief History of Debt

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    Alberto Nichols
    Governments have borrowed money for centuries, but a modern system began in the Middle Ages. Early European kings borrowed money for wars and projects, but were seen as risky creditors since they did not always repay debts. In the 17th century, England's King Charles II paid extremely high interest rates of 15-20% due to this risk, while private borrowers paid around 3%. In 1688, the English Parliament gained control over borrowing and taxation, making government debt a national rather than royal obligation and allowing it to borrow at lower rates. In the U.S., the Constitution established Congress's authority over taxation and public debt. Alexander Hamilton established the foundations of the Treasury system and argued that reasonable national debt could benefit the economy

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    Brief History of Debt

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    Alberto Nichols
    54 views3 pages
    Governments have borrowed money for centuries, but a modern system began in the Middle Ages. Early European kings borrowed money for wars and projects, but were seen as risky creditors since they did not always repay debts. In the 17th century, England's King Charles II paid extremely high interest rates of 15-20% due to this risk, while private borrowers paid around 3%. In 1688, the English Parliament gained control over borrowing and taxation, making government debt a national rather than royal obligation and allowing it to borrow at lower rates. In the U.S., the Constitution established Congress's authority over taxation and public debt. Alexander Hamilton established the foundations of the Treasury system and argued that reasonable national debt could benefit the economy

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    Brief history of debt

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    Brief history of debt

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    Governments have borrowed money for centuries, but a modern system began in the Middle Ages. Early European kings borrowed money for wars and projects, but were seen as risky creditors since they did not always repay debts. In the 17th century, England's King Charles II paid extremely high interest rates of 15-20% due to this risk, while private borrowers paid around 3%. In 1688, the English Parliament gained control over borrowing and taxation, making government debt a national rather than royal obligation and allowing it to borrow at lower rates. In the U.S., the Constitution established Congress's authority over taxation and public debt. Alexander Hamilton established the foundations of the Treasury system and argued that reasonable national debt could benefit the economy

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    54 views3 pages

    Brief History of Debt

    Uploaded by

    Alberto Nichols
    Governments have borrowed money for centuries, but a modern system began in the Middle Ages. Early European kings borrowed money for wars and projects, but were seen as risky creditors since they did not always repay debts. In the 17th century, England's King Charles II paid extremely high interest rates of 15-20% due to this risk, while private borrowers paid around 3%. In 1688, the English Parliament gained control over borrowing and taxation, making government debt a national rather than royal obligation and allowing it to borrow at lower rates. In the U.S., the Constitution established Congress's authority over taxation and public debt. Alexander Hamilton established the foundations of the Treasury system and argued that reasonable national debt could benefit the economy

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    © All Rights Reserved
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    Download as docx, pdf, or txt
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    A Brief History of Debt

    Source: https://knowledge.wharton.upenn.edu/article/a-brief-history-of-debt/

    Governments have borrowed money for much of history, but a more modern system began to
    evolve in the Middle Ages, according to Michael McConnell, a professor at Stanford Law School
    who spoke at a recent Wharton conference titled, “Is U.S. Government Debt
    Different?” Early European kings had revenues from vast landholdings and typically needed
    no one’s permission to spend those funds as they wanted. But they often were forced to
    borrow for wars and other purposes, and this early sovereign debt, unlike today’s “safe” U.S.
    Treasuries, was considered highly risky.
    “Kings were notoriously terrible credit risks, because they didn’t like to pay it back,” McConnell
    said. In the seventeenth century, England’s Charles II was forced to pay Dutch lenders 15% to
    20% interest at a time when private borrowers paid only about 3%, McConnell noted. In
    England, control over taxation was one of the first powers won by parliament as the
    sovereign’s absolute authority started to erode. In 1688, Parliament took control of the
    authority to borrow, which had the effect of making the national debt the country’s obligation
    rather than the king’s. This firmer backing allowed the government to borrow at lower rates.

    In the U.S., Congress’s authority over taxation and the public debt were established in the
    Constitution, which addresses public finances to a much greater extent than most people
    realize, McConnell said.

    The U.S. government incurred debts from the very beginning, said Richard Sylla, a professor at
    New York University’s Stern School of Business who also participated in the conference. The
    roots of the modern Treasury system were established by Alexander Hamilton, who explained
    his philosophy in a 1781 letter: “A national debt if it is not excessive will be to us a national
    blessing; it will be a powerful cement of our union. It will also create a necessity for keeping up
    taxation to a degree which without being oppressive, will be a spur to industry.”

    In 1790, Hamilton restructured the country’s early debt by establishing three kinds of
    Treasury bonds: a 6% bond, a 3% bond and a 6% deferred bond that paid no interest for the
    first 10 years. These bonds quickly began to trade on securities exchanges in
    theU.S.andEurope. “So we had a Treasury bond market from the beginning of the country,”
    Sylla said. “These markets were actually pretty efficient.”

    In one of the first major debt-funded expenditures, $11.25 million in bonds were sold for the
    Louisiana Purchasein 1803. In 1868, the 14th Amendment to the Constitution asserted that “the
    validity of the public debt …. shall not be questioned,” underscoring the government’s
    obligation to pay what it owes.
    Three pillars of the modern Treasury system were established between 1914 and 1939, Sylla
    said. Those include the Treasury Tax and Loan system started during World War I to create a
    network of financial institutions to receive tax and loan payments, to ease the effects that large
    payments into the Treasury could have on banks and money markets.

    The second pillar, begun during the 1920s, established a system of predictable government
    bond transactions. At first, this was to assure an orderly pace of redemptions, early retirements
    and other transactions as the government used surpluses to pay down debt. In the 1930s, it
    helped the government borrow in an orderly way. In 1939, the system established a debt
    ceiling, or overall borrowing limit controlled by Congress.

    The third pillar, involving Treasury auctions, evolved from the World War I period to the
    1970s. Prior to that war, bonds were sold at auction, and only to support specific projects, such
    as the Spanish-American War and thePanama Canal. This was replaced by sales at fixed prices
    to attract buyers who were afraid of auctions, and the funds were used for general needs
    rather than individual projects.

    The fourth pillar was the establishment in 1968 of a book-entry system for keeping track of bond
    owners, replacing the issuance of physical bond certificates.

    The Historical Origins of the Debt-Equity Distinction


    https://commons.allard.ubc.ca

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