Who Profits from Public Debt?
This historical record is fundamental for a number of reasons. First, it enables us to understand why nineteenth-century socialists, beginning with Marx, were so wary of public debt, which they saw—not without a certain perspicacity—as a tool of private capital.
This concern was all the greater because in those days investors in public debt were paid handsomely, not only in Britain but also in many other countries, including France. There was no repeat of the revolutionary bankruptcy of 1797, and the rentiers in Balzac’s novels do not seem to have worried any more about their government bonds than those in Jane Austen’s works. Indeed, inflation was as low in France as in Britain in the period 1815–1914, and interest on government bonds was always paid in a timely manner. French sovereign debt was a good investment throughout the nineteenth century, and private investors prospered on the proceeds, just as in Britain. Although the total outstanding public debt in France was quite limited in 1815, the amount grew over the next several decades, particularly during the Restoration and July Monarchy (1815–1848), during which the right to vote was based on a property qualification.
The French government incurred large debts in 1815–1816 to pay for an indemnity to the occupying forces and then again in 1825 to finance the notorious “émigrés’ billion,” a sum paid to aristocrats who fled France during the Revolution (to compensate them for the rather limited redistribution of land that took place in their absence). Under the Second Empire, financial interests were well served. In the fierce articles that Marx penned in 1849–1850, published in The Class Struggle in France, he took offense at the way Louis-Napoleon Bonaparte’s new minister of finance, Achille Fould, representing bankers and financiers, peremptorily decided to increase the tax on drinks in order to pay rentiers their due. Later, after the Franco-Prussian War of 1870–1871, the French government once again had to borrow from its population to pay for a transfer of funds to Germany equivalent to approximately 30 percent of national income.13 In the end, during the period 1880–1914, the French public debt was even higher than the British: 70 to 80 percent of national income compared with less than 50 percent. In French novels of the Belle Époque, interest on government bonds figured significantly. The government paid roughly 2–3 percent of national income in interest every year (more than the budget for national education), and a very substantial group of people lived on that interest.14
In the twentieth century, a totally different view of public debt emerged, based on the conviction that debt could serve as an instrument of policy aimed at raising public spending and redistributing wealth for the benefit of the least well-off members of society. The difference between these two views is fairly simple: in the nineteenth century, lenders were handsomely reimbursed, thereby increasing private wealth; in the twentieth century, debt was drowned by inflation and repaid with money of decreasing value. In practice, this allowed deficits to be financed by those who had lent money to the state, and taxes did not have to be raised by an equivalent amount. This “progressive” view of public debt retains its hold on many minds today, even though inflation has long since declined to a rate not much above the nineteenth century’s, and the distributional effects are relatively obscure.
It is interesting to recall that redistribution via inflation was much more significant in France than in Britain. As noted in Chapter 2, French inflation in the period 1913–1950 averaged more than 13 percent a year, which multiplied prices by a factor of 100. When Proust published Swann’s Way in 1913, government bonds seemed as indestructible as the Grand Hotel in Cabourg, where the novelist spent his summers. By 1950, the purchasing power of those bonds was a hundredth of what it had been, so that the rentiers of 1913 and their progeny had virtually nothing left.
What did this mean to the government? Despite a large initial public debt (nearly 80 percent of national income in 1913), and very high deficits in the period 1913–1950, especially during the war years, by 1950 French public debt once again stood at a relatively low level (about 30 percent of national income), just as in 1815. In particular, the enormous deficits of the Liberation were almost immediately canceled out by inflation above 50 percent per year in the four years 1945–1948, in a highly charged political climate. In a sense, this was the equivalent of the “two-thirds bankruptcy” of 1797: past loans were wiped off the books in order to rebuild the country with a low level of public debt (see Figure 3.4).
In Britain, things were done differently: more slowly and with less passion. Between 1913 and 1950, the average rate of inflation was a little more than 3 percent a year, which meant that prices increased by a factor of 3 (less than one-thirtieth as much as in France). For British rentiers, this was nevertheless a spoliation of a sort that would have been unimaginable in the nineteenth century, indeed right up to World War I. Still, it was hardly sufficient to prevent an enormous accumulation of public deficits during two world wars: Britain was fully mobilized to pay for the war effort without undue dependence on the printing press, with the result that by 1950 the country found itself saddled with a colossal debt, more than 200 percent of GDP, even higher than in 1815. Only with the inflation of the 1950s (more than 4 percent a year) and above all of the 1970s (nearly 15 percent a year) did Britain’s debt fall to around 50 percent of GDP (see Figure 3.3).
The mechanism of redistribution via inflation is extremely powerful, and it played a crucial historical role in both Britain and France in the twentieth century. It nevertheless raises two major problems. First, it is relatively crude in its choice of targets: among people with some measure of wealth, those who own government bonds (whether directly or indirectly via bank deposits) are not always the wealthiest: far from it. Second, the inflation mechanism cannot work indefinitely. Once inflation becomes permanent, lenders will demand a higher nominal interest rate, and the higher price will not have the desired effects. Furthermore, high inflation tends to accelerate constantly, and once the process is under way, its consequences can be difficult to master: some social groups saw their incomes rise considerably, while others did not. It was in the late 1970s—a decade marked by a mix of inflation, rising unemployment, and relative economic stagnation (“stagflation”)—that a new consensus formed around the idea of low inflation. I will return to this issue later.
The Ups and Downs of Ricardian Equivalence
This long and tumultuous history of public debt, from the tranquil rentiers of the eighteenth and nineteenth centuries to the expropriation by inflation of the twentieth century, has indelibly marked collective memories and representations. The same historical experiences have also left their mark on economists. For example, when David Ricardo formulated in 1817 the hypothesis known today as “Ricardian equivalence,” according to which, under certain conditions, public debt has no effect on the accumulation of national capital, he was obviously strongly influenced by what he witnessed around him. At the moment he wrote, British public debt was close to 200 percent of GDP, yet it seemed not to have dried up the flow of private investment or the accumulation of capital. The much feared “crowding out” phenomenon had not occurred, and the increase in public debt seemed to have been financed by an increase in private saving. To be sure, it does not follow from this that Ricardian equivalence is a universal law, valid in all times and places. Everything of course depended on the prosperity of the social group involved (in Ricardo’s day, a minority of Britons with enough wealth to generate the additional savings required), on the rate of interest that was offered, and of course on confidence in the government. But it is a fact worth noting that Ricardo, who had no access to historical time series or measurements of the type indicated in Figure 3.3 but who had intimate knowledge of the British capitalism of his time, clearly recognized that Britain’s gigantic public debt had no apparent impact on national wealth and simply constituted a claim of one portion of the population on another.15
Similarly, when John Maynard Keynes wrote in 1936 about “the euthanasia of the rentie
r,” he was also deeply impressed by what he observed around him: the pre–World War I world of the rentier was collapsing, and there was in fact no other politically acceptable way out of the economic and budgetary crisis of the day. In particular, Keynes clearly felt that inflation, which the British were still reluctant to accept because of strong conservative attachment to the pre-1914 gold standard, would be the simplest though not necessarily the most just way to reduce the burden of public debt and the influence of accumulated wealth.
Since the 1970s, analyses of the public debt have suffered from the fact that economists have probably relied too much on so-called representative agent models, that is, models in which each agent is assumed to earn the same income and to be endowed with the same amount of wealth (and thus to own the same quantity of government bonds). Such a simplification of reality can be useful at times in order to isolate logical relations that are difficult to analyze in more complex models. Yet by totally avoiding the issue of inequality in the distribution of wealth and income, these models often lead to extreme and unrealistic conclusions and are therefore a source of confusion rather than clarity. In the case of public debt, representative agent models can lead to the conclusion that government debt is completely neutral, in regard not only to the total amount of national capital but also to the distribution of the fiscal burden. This radical reinterpretation of Ricardian equivalence, which was first proposed by the American economist Robert Barro,16 fails to take account of the fact that the bulk of the public debt is in practice owned by a minority of the population (as in nineteenth-century Britain but not only there), so that the debt is the vehicle of important internal redistributions when it is repaid as well as when it is not. In view of the high degree of concentration that has always been characteristic of the wealth distribution, to study these questions without asking about inequalities between social groups is in fact to say nothing about significant aspects of the subject and what is really at stake.
France: A Capitalism without Capitalists in the Postwar Period
I return now to the history of public wealth and to the question of assets held by the government. Compared with the history of government debt, the history of public assets is seemingly less tumultuous.
To simplify, one can say that the total value of public assets increased over the long run in both France and Britain, rising from barely 50 percent of national income in the eighteenth and nineteenth centuries to roughly 100 percent at the end of the twentieth century (see Figures 3.3 and 3.4).
To a first approximation, this increase reflects the steady expansion of the economic role of the state over the course of history, including in particular the development of ever more extensive public services in the areas of health and education (necessitating major investments in buildings and equipment) together with public or semipublic infrastructural investments in transportation and communication. These public services and infrastructures are more extensive in France than in Britain: the total value of public assets in France in 2010 is close to 150 percent of national income, compared with barely 100 percent across the Channel.
Nevertheless, this simplified, tranquil view of the accumulation of public assets over the long run omits an important aspect of the history of the last century: the accumulation of significant public assets in the industrial and financial sectors in the period 1950–1980, followed by major waves of privatization of the same assets after 1980. Both phenomena can be observed to varying degrees in most developed countries, especially in Europe, as well as in many emerging economies.
The case of France is emblematic. To understand it, we can look back in time. Not only in France but in countries around the world, faith in private capitalism was greatly shaken by the economic crisis of the 1930s and the cataclysms that followed. The Great Depression, triggered by the Wall Street crash of October 1929, struck the wealthy countries with a violence that has never been repeated to this day: a quarter of the working population in the United States, Germany, Britain, and France found themselves out of work. The traditional doctrine of “laissez faire,” or nonintervention by the state in the economy, to which all countries adhered in the nineteenth century and to a large extent until the early 1930s, was durably discredited. Many countries opted for a greater degree of interventionism. Naturally enough, governments and the general public questioned the wisdom of financial and economic elites who had enriched themselves while leading the world to disaster. People began to think about different types of “mixed” economy, involving varying degrees of public ownership of firms alongside traditional forms of private property, or else, at the very least, a strong dose of public regulation and supervision of the financial system and of private capitalism more generally.
Furthermore, the fact that the Soviet Union joined the victorious Allies in World War II enhanced the prestige of the statist economic system the Bolsheviks had put in place. Had not that system allowed the Soviets to lead a notoriously backward country, which in 1917 had only just emerged from serfdom, on a forced march to industrialization? In 1942, Joseph Schumpeter believed that socialism would inevitably triumph over capitalism. In 1970, when Paul Samuelson published the eighth edition of his famous textbook, he was still predicting that the GDP of the Soviet Union might outstrip that of the United States sometime between 1990 and 2000.17
In France, this general climate of distrust toward private capitalism was deepened after 1945 by the fact that many members of the economic elite were suspected of having collaborated with the German occupiers and indecently enriched themselves during the war. It was in this highly charged post-Liberation climate that major sectors of the economy were nationalized, including in particular the banking sector, the coal mines, and the automobile industry. The Renault factories were punitively seized after their owner, Louis Renault, was arrested as a collaborator in September 1944. The provisional government nationalized the firm in January 1945.18
In 1950, according to available estimates, the total value of French public assets exceeded one year’s national income. Since the value of public debt had been sharply reduced by inflation, net public wealth was close to one year’s national income, at a time when total private wealth was worth barely two years of national income (see Figure 3.6). As usual, one should not be misled by the apparent precision of these estimates: it is difficult to measure the value of capital in this period, when asset prices had attained historic lows, and it is possible that public assets are slightly undervalued compared with private assets. But the orders of magnitude may be taken as significant: in 1950, the government of France owned 25–30 percent of the nation’s wealth, and perhaps even a little more.
This is a significant proportion, especially in view of the fact that public ownership left small and medium firms untouched, along with agriculture, and never claimed more than a minority share (less than 20 percent) of residential real estate. In the industrial and financial sectors most directly affected by the postwar nationalizations, the state’s share of national wealth exceeded 50 percent from 1950 to 1980.
Although this historical episode was relatively brief, it is important for understanding the complex attitude of the French people toward private capitalism even today. Throughout the Trente Glorieuses, during which the country was rebuilt and economic growth was strong (stronger that at any other time in the nation’s history), France had a mixed economy, in a sense a capitalism without capitalists, or at any rate a state capitalism in which private owners no longer controlled the largest firms.
To be sure, waves of nationalization also occurred in this same period in many other countries, including Britain, where the value of public assets also exceeded a year’s national income in 1950—a level equal to that of France. The difference is that British public debt at the time exceeded two years of national income, so that net public wealth was significantly negative in the 1950s, and private wealth was that much greater. Net public wealth did not turn positive in Britain until the 1960s–1970s, and even then it rema
ined less than 20 percent of national income (which is already quite large).19
What is distinctive about the French trajectory is that public ownership, having thrived from 1950 to 1980, dropped to very low levels after 1980, even as private wealth—both financial and real estate—rose to levels even higher than Britain’s: nearly six years of national income in 2010, or 20 times the value of public wealth. Following a period of state capitalism after 1950, France became the promised land of the new private-ownership capitalism of the twenty-first century.
What makes the change all the more striking is that it was never clearly acknowledged for what it was. The privatization of the economy, including both liberalization of the market for goods and services and deregulation of financial markets and capital flows, which affected countries around the world in the 1980s, had multiple and complex origins. The memory of the Great Depression and subsequent disasters had faded. The “stagflation” of the 1970s demonstrated the limits of the postwar Keynesian consensus. With the end of postwar reconstruction and the high growth rates of the Trente Glorieuses, it was only natural to question the wisdom of indefinitely expanding the role of the state and its increasing claims on national output. The deregulation movement began with the “conservative revolutions” of 1979–1980 in the United States and Britain, as both countries increasingly chafed at being overtaken by others (even though the catch-up was a largely inevitable process, as noted in Chapter 2). Meanwhile, the increasingly obvious failure of statist Soviet and Chinese models in the 1970s led both communist giants to begin a gradual liberalization of their economic systems in the 1980s by introducing new forms of private property in firms.
Despite these converging international currents, French voters in 1981 displayed a certain desire to sail against the wind. Every country has its own history, of course, and its own political timetable. In France, a coalition of Socialists and Communists won a majority on a platform that promised to continue the nationalization of the industrial and banking sectors begun in 1945. This proved to be a brief intermezzo, however, since in 1986 a liberal majority initiated a very important wave of privatization in all sectors. This initiative was then continued and amplified by a new socialist majority in the period 1988–1993. The Renault Company became a joint-stock corporation in 1990, as did the public telecommunications administration, which was transformed into France Telecom and opened to private investment in 1997–1998. In a context of slower growth, high unemployment, and large government deficits, the progressive sale of publicly held shares after 1990 brought additional funds into public coffers, although it did not prevent a steady increase in the public debt. Net public wealth fell to very low levels. Meanwhile, private wealth slowly returned to levels not seen since the shocks of the twentieth century. In this way, France totally transformed its national capital structure at two different points in time without really understanding why.
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