The Debt Trap

Debt is one of those things everyone hates and no one can live without, like Microsoft updates or the bloke in HR who insists on “circling back”. It has been with us for as long as people have wanted something now and only had the means to pay for it later. Which is to say: since the first goat changed hands on the promise of “I’ll bring the grain after harvest, honest”.

At heart, debt is just time travel. You drag future wealth into the present and hope future you is still speaking to past you when the bill arrives. The whole of civilisation is built on that trick. You cannot build a road, a ship, a cathedral or a rail network by passing a hat round payday by payday. At some point someone has to front the money and trust that tomorrow will exist, the taxman will still be extracting, and the king will not have died in battle leaving a 12 year old in charge.

In the early days, the arrangement was admirably simple. The king needed money for a war, some pointless dynastic quarrel, or new bling for the palace. He went to whoever had cash - Jews, Lombards, rich merchants, early bankers - and borrowed it. If things went well, he paid them back with interest. If things went badly, he blamed them, defaulted, and occasionally expelled or executed them for good measure. From the king’s point of view this was an excellent risk management strategy. Heads I win, tails I confiscate your house.

This is the first phase of debt: rulers as apex predators. If you lent to them you were not just taking credit risk, you were taking “might wake up in the dungeon” risk. The balance of power was entirely with the sovereign. He had the army, the gallows and, if he really wanted to hurt you, the power to ban you from court banquets.

Over time, however, states developed an awkward habit: they became expensive. Gunpowder, standing armies, navies with real ships rather than leaky tubs, colonial expeditions, Versailles and its imitators - all of it costs money, and not just once. You can rob a minority community or a single bank only so often before you run out of victims or credit. If you want to fight wars every decade and keep a huge bureaucracy in wigs, you need people to keep lending to you despite your appalling personality.

Enter phase two: the rise of the great banking families. The Fuggers, the Medici, the Genoese financiers and their friends. These people were not just lenders. They controlled mines, traded spices and metals, handled international payments, and generally knew how to make the early modern world go round. If you were the emperor of somewhere grandly named but perpetually broke, you held your cap in your hand when you visited their counting house.

Here the power balance begins to shift, but only a little. If you defaulted on the Fuggers, they might not have an army, but they had something just as useful: connections, information, and the ability to quietly tell every other major investor that you were a walking bad debt. They could also gently “suggest” policies in return for their help. Appoint this bishop. Grant that monopoly. Hand over those mining rights. In the small print of early loan contracts you can almost see the birth of lobbying.

Even so, it was still a world of big personalities. The emperor might owe the Fuggers a fortune, but he still sat on a throne and had an annoying habit of believing in divine right. The balance of terror ran both ways. He needed their money; they needed his legal system and soldiers to protect their businesses. It was not yet the tyranny of the spreadsheet.

The real revolution in debt came when states stopped relying mainly on single families and started borrowing from everyone and their aunt. Italian city states had made a start with public debt held by their own citizens, but the Dutch and then the English really industrialised the idea. You create tradable government bonds, you sell them widely, and you pay the interest on time so people trust you enough to buy more. Simple, dull, and utterly transformative.

Now, instead of owing money to one powerful banker who might end up dangling from a hook, the state owed money to a broad class of investors: merchants, landowners, professionals, foreign financiers. The debt itself became a kind of political constituency. If you threatened default, it was not just “old Jakob the banker” who got upset, it was half the people in the coffee house and a good portion of Parliament.

This is where power really starts to tilt. Once you have a big pool of tradable public debt, you have something new: the bond market. A permanent, twitchy Greek chorus of investors deciding whether they believe your promises. If they do, you can borrow cheaply, build your navy, fight your wars, and congratulate yourself on your “sound money”. If they do not, your borrowing costs spike, you face a funding crisis and suddenly you are giving long speeches about “difficult but necessary decisions”.

Kings still defaulted occasionally, of course, but the cost of doing it rose sharply. A serial defaulter finds that lenders demand much higher interest rates, or they simply stay away. You can chop off one banker’s head and call it a day; you cannot decapitate the entire investor class without rather spoiling the tax base.

By the 19th and 20th centuries, the relationship had turned almost inside out. Debt had become not just a way for states to get money, but a way for investors and creditor countries to discipline states. Gunboats turned up in harbours to “encourage” repayment. Later, international institutions took over the job - issuing loans in return for “structural adjustments” that somehow always seemed to involve cutting public services, privatising assets and making life more agreeable for foreign capital.

Domestically, you can see the effect every time a government solemnly announces that “the markets would not wear” this or that policy. You will notice nobody voted for “the markets”. They are not on the ballot paper. Yet they sit in every minister’s head, like an invisible whip. The fear of a bond strike does more to shape fiscal policy than most manifestos.

This is the modern paradox of debt. The original justification still holds: you need it to build things, to smooth shocks, to stop every war, pandemic or recession turning into complete collapse. Without debt we would have fewer hospitals, fewer schools, fewer railways and far more fires. Paying as you go is all very well until you want a bridge that will still be there in 50 years.

But in giving ourselves that flexibility, we have also given creditors enormous leverage. In the old days it was at least clear who held the whip. Now it is a diffuse mix of pension funds, insurance companies, hedge funds, overseas central banks and institutions with names like a minor character in a Le Carre novel. No single lender can imprison the king. Instead, the whole lot can quietly mark your bonds down a notch and watch your chancellor sweat.

And yet, states have not entirely surrendered. They still have nuclear options: inflation, capital controls, selective default, and plain political defiance. Argentina has made a career out of irritating bondholders and is still there. Russia has defaulted more than once and continues to have flags, borders and rather too many missiles. Even within Europe, there has been a tug of war between creditor orthodoxy and democratic impatience.

You could say we have moved from “absolute monarchy with hostages” to “constitutional monarchy with a sullen, heavily armed landlord”. The state can still act, but only within a corridor of what its creditors deem tolerable. If politicians try to sprint outside that corridor they discover, usually within days, that gilt yields have become very interested in their plans.

The irony is that most ordinary people are on both sides of this. Through pensions and savings they are, in a small way, the creditors. Through taxes and public services they are also the debtors. When governments cut spending to “reassure the markets”, what they are really doing is sacrificing their present selves as citizens in order to soothe their future selves as bondholders. It is a very British compromise: everyone loses, but in a nicely balanced way.

So yes, debt began as a brutal personal relationship between king and lender, backed by swords and dungeons. It evolved into a structural dependency between states and markets, backed by spreadsheets and credit ratings. The balance of power shifted from the throne to the ledger, but not in a clean, once-and-for-all way. It is a continuing argument over who gets to control time: politicians, electors, or those who can move billions at the click of a mouse.

In the meantime, the basic lesson remains what it was when some Mesopotamian farmer scratched an IOU on a clay tablet. Credit lets you live a bit ahead of yourself. Just do not be surprised when the future, eventually, wants a word.