THERE is a fascinating chapter in the IMF's World Economic
Outlook, looking at past episodes of high government debt-to-GDP
ratios. It finds 26 occurrences since 1875 where developed
country governments had gross debt ratios of more than 100%, and
focuses on six particular examples; the UK after World War 1,
the US after World War 2, Belgium in the 1980s, Italy and Canada
in the 1990s and Japan over the last 20 years. These countries
had varying degrees of success in getting their ratios down.
The worst example, and one highlighted by Martin Wolf in the FT
today, was that of the UK between the wars. Fiscal contraction
(in part inspired by a newspaper campaign for a "war on waste")
was accompanied by very tight monetary policy as the UK
attempted to restore sterling to its pre-war parity with the
dollar (and gold). The idea was that the country needed to
return to an Edwardian golden era, in which sound money and
small government prevailed (admiration of the pre-1914 ethos is
a lingering cultural trait; see D