Home Books, Arts, StageHistory The public debt (part 2)

The public debt (part 2)

by Jacques Trauman

The President of the Republic, concerned about his French grandchildren, enjoined us, like a severe schoolmaster, to read during confinement. Obedient, I of course complied, and I took the opportunity to put my student knowledge to the test this time (I had then crossed the course of Elementary school mentioned in my previous article which dealt with public debt).

At a time when economists ignore the ruin of French small investors, the chain bankruptcy of European institutional investors (banks, insurance companies, etc.) not to mention the chaos created in the financial markets and where these economists recommend us to repudiate our national debt, I get my hands on a great classic of financial crises, “Manias, Panics and Crashes, a history of financial crises“, by Charles P. Kindelberger (John Wiley 1 Sons 1978).

The list of financial crises from 1618 to 1990 which appears in appendix B of the book, is worth its weight in peanuts. Then I focus on another great classic, “This time is different, eight centuries of financial folly”, by Carmen M. Reinhart and Kenneth S. Rogoff (Princeton University Press 2009). This serious and comprehensive study was written by two professors of economics, one at the University of Maryland and the other at Harvard. I was going to be able to put my knowledge of fractions into practice.

What do we learn? First, that from 1800 to 2008, there were no less than 250 sovereign defaults (that’s when a government decides not to pay or restructure its debt); thus, Austria defaulted 7 times, France 8 times, Germany 8 times, Greece 5 times (it was in default or in debt restructuring half the time since its independence in 1821), Hungary 7 times, Italy 1 time, Spain 13 times, Argentina 7 times, Brazil and Chile 9 times, Mexico 8 times, Venezuela 10 times, while the United States, Canada and Australia have not been once. In short, sovereign default is a well-established habit, so, frankly, once more or once less …

France had already taken the plunge, defaulting 8 times from 1500 to 1800, to the point that Abbé Terray, general controller of finance for Louis XV from 1768 to 1774, had made a theory of it, believing that a country had to voluntarily and systematically put itself in default once a century in order to restore the balance of finances (one should exhume the works of this inspired minister to draw the lessons from it).

These successive faults in France were linked to the fine habit which had been adopted since 1303 and which consisted in reducing the quantity of precious metal in the gold and silver coins in circulation in the kingdom, a practice still in progress. nowadays with the massive use of the printing press. Henry II defaulted in 1558, after having sworn to his great gods that he would never do so (“necessity rules”). Then France was still lacking after the War of Spanish Succession (1701-1714), and twice more in 1770 and 1788. Even if the inflation which followed the French Revolution took care of eliminating a good part of the debt , she did not fail to recover.

But in the 20th century, Western Europe put its house in order. Certainly Austria is missing twice (1938, 1940), Germany twice (1932, 1939), Russia three times (1918, 1991, 1998). However, it is above all the emerging countries which, in a magnificent series of faults, take over (Argentina 4 times, Brazil 7 times, Chile 7 times, Venezuela, Mexico, Panama, not to be outdone). China, for its part, is missing twice (1921, 1939), Japan once (1942), India three times (1947, 1958, 1969), Indonesia, the Philippines, Sri Lanka, etc. … Follow the movement. In summary, in the 20th century, Western Europe is not lacking, it is Latin America and Asia.

So, is it not time to make up for lost time, to show what we are capable of, and to fail in turn?

Reinhart and Rogoff’s book is full of exciting statistics on financial crises. They also criticize Kindelberger for not basing his reasoning on statistical series; this is repaired.

In chapter 14 of the book, they study the effects of a financial crisis. Admittedly, the results are somewhat schematic, because the crises studied, occurring over a period of 8 centuries, are fundamentally different from each other, but there are nevertheless some common points. We can therefore draw almost universal conclusions.

During a crisis and after a financial crisis,

– real estate assets fall by an average of 35% and it takes an average of 6 years to recover the prices before

– financial assets fall by 56% on average and take 3 and a half years to return to their previous level

– unemployment rises on average by 7%, and does not return to its level until after 4 years,

– GDP drops on average by 9%, but recovers in 2 ½ years,

– public debt increases by 80%, mainly due to the sharp fall in income generated by taxes.


Basically, it takes 5 to 6 years on average to recover from a financial crisis. The one we are living in is particularly severe, it may take 10 years to recover, but hopefully, the worst is never certain.

To conclude, I would like to thank the President of the Republic for a host of reasons. First for having decided a lockdown for all of us, then for having enjoined us to read, and finally for having drawn our attention to the fact that when we default on our extravagant debt, we will only revive an old tradition of history .

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