Historically, when governments amass too much debt, they default on it. That's just the way it is.
But there have been two exceptions to this rule: One was the United States after World War II; the other was Britain after the Napoleonic Wars (1797-1815).
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How did they do it? What was their strategy?
Some estimates show that the British government's debt after Waterloo was over 250% of GDP. However, that is a ridiculously high figure, and modern GDP statistics date back only to 1950 or so. Let's just say that it was a whopping big debt.
We can begin by listing what Britain's government did not do: It did not indulge in exorbitant government spending to "stimulate the economy." It did not devalue the currency. And it did not raise taxes.
Rather, Britain's approach was right in line with what I call the magic formula: low taxes, stable money.
To help pay for the war Britain introduced an income tax. It was the first modern income tax in the world, dating from 1799.
With the war's end in 1816 Britain eliminated the income tax. Given the enormous debt, this was considered rather daring at the time.
The second thing Britain did was to return to the gold standard. The pound was delinked from gold at the onset of hostilities, and its value floated downward. This naturally led to an increase in interest rates, to the 5% to 6% range from the 3.5% common with a gold standard. The gold standard was reinstated in 1821, and bond yields fell back to the 3.5% range, where they stayed until 1914. This allowed the government to finance its large debt cheaply.
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