UK National debt and battle of waterloo

Mervyn King has given a speech after a long long time ( The last speech was on 18 June 2008.

In this speech King says why the recapitalisation of UK Banks was important. In sum, move was not to save the banks but to save the economy from the banks.

What was however amusing was his discussion of the govt. deficit. Recapitalisation would lead to higher government deficit. He says:

The cost of supporting the banking system will inevitably raise the level of national debt. Managed properly, however, such a rise in national debt need not prove inflationary. Indeed, within a reasonable period it should be possible for the Government to reduce its stake in the banking system, for example by selling units in a Bank Reconstruction Fund, and repay the additional debt that had been issued. That is one difference between past increases in national debt in times of war and the increase now to pay for recapitalisation of the banking system which involves the acquisition of an asset.

To help understand the difference between war-times and current times, King tells you a story:

Let me take you back again to 1958. In the very first television interview given by a Governor of the Bank of England, Cameron Cobbold explained national debt to RobinDay on “Tell the People”, the highlight of ITN’s Sunday evening schedule fifty years ago. Here is the exchange:

Cobbold: The National Debt represents the sums of money which the Government have over the years borrowed from the public, mainly in this country and, to some extent, abroad. That is really the amount of expenditure which they have failed over the period to cover by revenue.

Day: Have we paid for World War II?

Cobbold: No.

Day: Have we paid for World War I?

Cobbold: No.

Day: Have we paid for the Battle of Waterloo?

Cobbold: I don’t think you can exactly say that.

🙂