Why did public debt originate in Europe?

Today we take it as a given that, in order to function effectively, a government needs to have the ability to borrow, and to borrow over long time horizons. Yet, in the long history of fiscal states, public borrowing is a relative recent innovation. This is a puzzle demanding explanation. Perhaps even more puzzling is the fact that a generalized form of longterm public borrowing first emerged in medieval Europe, an economic backwater in many respects. In this short chapter I suggest why public debt first originated in Europe, and what this tells us more generally about the political conditions necessary for a state to gain access to long-term credit. The initial development of public credit in Europe depended heavily on a particular political institution: a representative assembly that monitors and intervenes in the area of state finance. The emergence of representative political institutions itself depended on a deeper causal factor, however: the long-standing trend in Europe for certain cities to be able to govern themselves autonomously. In an era of high travel and transport costs it was initially possible to sustain the institutions necessary for public credit only in a small polity, such as an autonomous city. It was only over time that rulers in Europe’s larger territorial states would learn to establish access to credit precisely by working through their cities. In what follows I develop my argument in the following sequence of steps. Beginning with an abstract consideration of the factors that condition the development of public credit, I then chart the evolution of public borrowing in Europe over a period of five and a half centuries between 1250 and the French Revolution. This is then followed by an exploration of why city states were the pioneers with regard to credit, why they eventually died out, and, finally, how territorial rulers eventually learned to harness the power of their cities.