Before the late 17th century, it was customary for the state to fund its war debts by levying new taxes. But by 1694 the Nine Years' War had left the English Government's finances in tatters. We were forced to borrow £1.2 million at a rate of 8% from the newly formed Bank of England and national deficit financing was born.
National debt in the modern sense emerged in the the early 18th century, as banking and financial markets enabled the creation of debt through the issue of bills and bonds. Subsequently, the national debt rose from £12m in 1700 to £850m by the end of the Napoleonic Wars in 1815.
The First World War saw another major increase, from £650m in 1914 to £7.4bn in 1919. We borrowed heavily to beat the Nazis in World War Two and by 1946 the debt had grown to £24.7bn, or 250% of GDP. The debt then declined rapidly in GDP terms, but the period of high inflation in the 1970s and 80s ensured net debt continued to rise, from £33.1bn in 1970 to £197.4bn in 1988.
Historically, Britain has borrowed on a large scale to finance wars. Our creditworthiness as a nation has long been to our advantage. This graph shows the history of public debt as a percentage of GDP using the traditional National Loans Fund measure. This statistic was discontinued by the Treasury in 2004 as it no longer accurately reflected the true liabilities of the modern state.
Now, after decades of relative peace and prosperity, our national debt is sky-rocketing once more. In 1997 Public Sector Net Debt stood at £352 billion. From there it took only 12 years to double, and the Government forecasts it will double again by 2014. Let's hope we don't need to finance a major defensive war any time soon.
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