At the end of the Second World War, Britain had accumulated a public debt stock of around 250 percent of GDP. How did the country survive with such an historically unprecedented debt burden? Actually, the country didn't survive, at least not in the form it took in the late 1940s.
When the debt reaches this crushing level, the only truly meaningful economic question is the interest rate. All other issues are secondary. For example, if interest rates were 10 percent, then the debt servicing burden would be 25 percent of GDP. Imagine that for a moment; a quarter of a nation's output is devoted to paying off the interest on the national debt.
Britain's post-war governments-of both parties-fully understood the terrifying consequences of high interest rates. They did everything they could to keep payments as low as possible. They set up a complex network of controls with the sole objective of keeping interest rates on public debt as low as possible.
This system was managed by the Treasury. Capital controls were at the centre of this repressive regime. It was forbidden to take large sums of money out of the country without the permission of the authorities.
Banks operated as a cartel, with rates determined by a diktat from Whitehall. Credit was strictly rationed. There were no teaser rates in the 1950s. Getting a mortgage wasn't a matter of popping down to the high Street and filling out a form. It meant saving up a huge deposit and going on a lengthy waiting list at the local building society.
This massive financial repression was extremely detrimental to growth. This is of course the point that Reinhart and Rogoff were making in their recent study. They claimed that when debt levels went above 90 percent of GDP then growth would fall by about one percentage point. This number seems quite reasonable in the case of the UK. Our growth rate was persistently lower than the rates recorded in Western Europe.
However, the UK didn't just suffer from three decades of sluggish growth. Balance of payments crises were a regular feature of economic life. In fact, to my uncertain knowledge there were crises in 1947, 1957, 1963, 1967, 1974, and 1977. Each time, the government was forced into humiliating policy reversals often requiring a life-threatening hike in interest rates.
There were also extended periods of persistent inflation. In the early 1950s, around the time of the Korean War, inflation spiked. It also rose sharply after the 1967 sterling devaluation. By the mid-1970s inflation hit 30 percent.
Inflation had an upside, at least for the government. Rising prices eroded the real value of the debt stock. But what was good news for the government was extremely bad news for bondholders. Those patriotic individuals who bought war bonds saw their investments devalued and ultimately destroyed by inflationary policies of successive government. It was a fitting repudiation of the wartime generation's sacrifice and patriotism.
During these years, the government dare not run the fiscal deficit. All governments, both Labour and Conservative, rigourously balanced the books. I can't remember precisely when her Majesty's government started running deficits on a systematic basis, but it was sometime around the early 1970s.
Throughout this period of heavy indebtedness, United Kingdom declined in influence and power. In 1945, it was one of the three global powers bestriding the world. It was a superpower. By the early, the country was a pale shadow of what it once was.
No, it was worse than that. It was unrecognizable. The country that alone in 1940 defended Christian civilization against the pagan horde, had evaporated in a cloud of debt. An impostor had taken its place. In 1973, Britain's governing class finally threw in the towel and meekly decided to subsume the UK into a European Federation. What a once been the largest empire the world had known, became within a generation, a province.
Debt destroyed the Empire. It depressed growth, encouraged inflation, and inspired class conflict. It inflicted repeated currency crises and utterly demoralized our leaders. One would have thought that our post-war trauma with debt would have taught us a bitter lesson. It would seem not. We are again accumulating unsustainable levels of debt. We've again taken the road to perdition.
This time debt will finish us off. It will destroy the last independent sovereign remnants of this once great and proud nation.