At first blush, it would seem that a monograph on private indebtedness during the early years of the American republic could have little in common with a tome on the history of public finance from ancient times to the present. In curious ways, however, these two interesting and informative books are interrelated and contribute more taken together than either does separately.

To appreciate the interconnectedness, it is useful to begin with the work on private debts in America. During most of the seventeenth century in the English colonies, and indeed in most of Europe for a much longer time, owing money was generally regarded as immoral if not downright sinful. But as the colonies and the world became progressively more commercial through the 18th century, the moral stigma attached to being in debt tended to disappear, for complex patterns of trade could not be conducted on a cash basis. Debt was still regarded as dangerous, but it was necessary and was particularly necessary, as well as particularly dangerous, in the mercantile community.

The American Revolution arrested this wholesome and commonsensical development and insured that, for a considerable period, American attitudes about debt, both public and private, would be ambiguous. To declare and win independence from George III was, willynilly, to commit the United States to republicanism, and though most Americans had little understanding of what republicanism implied, they were aware that, as Montesquieu had taught, the actuating principle of a republic was virtue in the citizenry. Virtue meant manhood and independence and a disinterested devotion to the welfare of the public—”virtue,” like “public,” deriving from the Latin roots for manliness. To go into debt was to forfeit one’s independence by becoming beholden to one’s creditors; and republican theorists from Plato to Montesquieu had taught that commerce was inimical to republican virtue, precisely for that reason and also because it bred a love of luxury, the very antithesis of manliness.

Strong as the commitment to republicanism was, the Revolution and its aftermath produced material developments that jeopardized and threatened to undermine it. In the first place, paying for the war entailed the creation of an enormous public debt, to which we shall return in a moment. In the second place, the appetite for imported foreign manufactures, whetted shortly before Independence then stifled for eight years during the war, exploded at war’s end. The result was an enormous wave of importation on credit, then a severe contraction and economic recession in the mid-1780s.

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Now let us turn to the area of public finance. Throughout the ages and until comparatively recently, the main reason governments or states needed funds was to bear the costs of waging war. In ancient times the method was simple: the winner defrayed the costs by looting and/or enslaving the vanquished. For the loser, the cost was not a consideration, for as a practical matter that side ceased to exist. Later, upon the emergence of absolute or nearly absolute monarchies, the economics of statecraft changed somewhat. Kings rarely had credit, for they were apt to renege on their obligations, and the moneyed classes went into hiding or hid their assets whenever agents of the crown came around. Normally, therefore, kings saved their revenues between wars, until they amassed enough to launch hostilities anew. When the funds, unless replenished by looting, ran out, they had to stop fighting. They repeated the cycle again and again.

The solution was the invention of public debt, which was possible only in states that were relatively free, for the essence of a public debt is that it is owed by the citizens of a state to one another. The central thesis of A Free Nation Deep in Debt is encapsulated in its subtitle, The Financial Roots of Democracy, and if allowance is made for the fact that James Macdonald really means free government and not “democracy,” the argument is convincing and insightful.

Between the 13th and the 16th centuries, the city-states of Italy created a genuine system of public debt. Next came Holland, which was able to win its long war of independence from Spain even though the “parent” country was far richer and more populous—because Holland had an endless source of revenue in the form of public debt owned by its citizens.

A danger inherent in public debt was its tendency to generate speculative bubbles, wherein hard money chased after paper in the hope of making profits simply by virtue of everyone’s expectation (mistaken, of course) that the value of the paper would increase indefinitely. In France, John Law’s Mississippi Bubble led to a speculative mania and a spectacular collapse that bankrupted thousands and drove the monarchy, once and for all, away from efforts to establish public credit. In Britain, the contemporaneous South Sea Bubble bred an even greater speculative mania (including the famous prospectus for a “Company for carrying on an Undertaking of great Advantage, but Nobody to know what it is”—which Macdonald thinks probably never actually existed), and an equally spectacular collapse. Fortunately for Britain, however, Sir Robert Walpole and the Bank of England managed to restore order and to place English public finance on a permanently solid footing.

The result was momentous. During the century of almost perpetual war for domination between France and England, England’s coffers were always full and France’s were always on the brink of exhaustion, and accordingly England triumphed. Even Napoleon, who financed his wars mainly on the ancient principle of conquer and loot, was outspent and bested by Britain. As an aside, it should be noted that Britain’s per capita public debt ran as high as 300 percent of the estimated gross national product, a figure that dwarfs the American public debt as of 2003.

Now back to post-revolutionary America, where ambiguity over private indebtedness was compounded by ambiguity over the public debt. A handful of American political leaders had studied the British fiscal system and perceived that to manage the public funds of the United States in a similar way would enormously strengthen the Union. Most, however, had learned to distrust and fear the British system. A host of commentators, from Trenchard and Gordon (in Cato’s Letters) to Viscount Bolingbroke and his circle had denounced Walpole and the financial revolution in terms that bordered on the hysterical. Investors in Britain’s public debt, “money-men,” were castigated as blood-suckers who lived by dealing in paper at the expense of the yeomanry and gentry, undermining the traditional agrarian order and destroying the balance of the English constitution. Unless a “patriot king” came along to cast the money-changers out of the temple, English liberty would be lost forever. Most Americans had concluded by 1776 that liberty in the mother country was a thing of the past, and that any attempts to install a Walpolean fiscal order in America would result in the loss of liberty here.

Installing a Walpole-style fiscal order was precisely what Treasury Secretary Alexander Hamilton had in mind, and when his scheme for funding the national debt, assuming the state debts, and instituting the Bank of the United States was in place, public credit was almost instantly restored—or, more properly, established for the first time. To those, such as President Washington, who had experienced first-hand the idiocy of financing a war without credit, the achievement seemed miraculous.

Others, however, led by Secretary of State Thomas Jefferson, slowly perceived the implications of Hamilton’s program and sought to destroy it. They attempted, following Bolingbroke’s advice, to appeal to a patriot king, Washington, to overthrow the system, and when that failed they used Bolingbroke’s back-up plan, to organize a “country party” of the whole people to gain control of the national government and bring about the same end. And, in 1800, the Jeffersonian Republicans won the ascendancy.

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Things did not work out the way they planned. Indeed, after they killed the Bank on the eve of the War of 1812 and brought disgrace to the nation, Jefferson’s former followers re-enacted most of Hamilton’s program. Hostility and fear regarding public finance survived in the form of Jacksonian Democracy, and the destructive measures of the Jacksonians wreaked havoc upon the country’s economy. Not until World War I was a stable system of public finance finally established in the United States.

In the meantime, private indebtedness came close to undermining the Hamiltonian order in quite the way that John Law’s plan was wrecked, namely, through speculative bubbles. The first bubble, in 1792, took place due to the machinations of William Duer, a perfidious sometime friend of Hamilton’s who temporarily worked as a Treasury Department agent until he had to be eased out for improprieties. Duer and his associates gambled in public paper as well as stock in the Bank of the United States and private banks. His plans were so complex that not even his closest associates knew what he was about, if indeed he knew himself; in any event, prices temporarily collapsed and Duer and hundreds of associates went broke and were sent to debtors’ prisons. The second bubble came five years later. At the center of it was Robert Morris, erstwhile financier of the Revolution. It involved land operations more than public paper, and when it collapsed it brought down thousands of investors, most of whom likewise were confined to debtors’ prisons. (Bruce Mann follows his narratives of these bubbles with several chapters on conditions in the prisons—surprisingly civilized—and one on the ill-fated Bankruptcy Act of 1800. This makes for fascinating, if disjointed reading.)

The two books are valuable contributions, and though most historians’ eyes glaze over at the mention of financial matters, all could profit from reading them. I would close, however, with a pair of demurrers, for each book is marked by a large oversight. In Macdonald’s case, he never tells us that the British public debt, in addition to working wonders for the nation commercially as well as financing wars, provided the basis for England’s currency. The country’s money supply consisted largely of notes of the Bank of England, issued against public debt certificates held in the Bank’s vaults. Thus deficit financing not only kept England solvent; every issue of new government paper increased the circulating medium. The oversight in Mann’s book is that he fails to understand that the biggest speculators operated in public lands, for which they contracted to pay in public securities at their face value, even though—prior to the establishment of Hamilton’s system—the securities could be bought for ten to fifteen cents on the dollar. The Hamiltonian program sent public paper soaring to and even beyond its par value, with the result that speculators, in order to meet their obligations, had to pay several times as much as they had bargained for. It was small wonder that so many of them went broke, and a large wonder that the Hamiltonian system survived anyway.