This book presents historical support for the proposition that the need to borrow domestically, i.e., through domestic bond sales, makes governments more democratic and accountable to their citizens, particularly the richer citizens such as businessmen and investors who buy the bonds. This thesis is not new: Americans associate it with Alexander Hamilton who said in the Federalist Papers words to the affect that, "government borrowing from citizens gives each a significant political stake in the other." A somewhat gruesome sub-plot of the book, is that political interdependency and therefore democracy grows with the need to garner extraordinary financing for war and emergencies. In fact, Macdonald uses the historical need for war financing to help structure his presentation.
            God knows why James Macdonald chose this time to write his book, but it resonates well right now. I am very uncomfortable with the currently widely held belief among Donors (institutions and staff) that billions of dollars of aid to improve governance and democracy in developing countries will result in faster growth in GDP. My view is that external aid and lending to governments (e.g., Argentina) allows them to ignore the need to cultivate growth in their own tax and borrowing bases. The fact that I believe this seems to make me a pariah in the aid community. It's nice to have James Macdonald and his glorification of the "Citizen Creditor", wittingly or not, as company.
            Before reproducing sentences from Macdonald's book that support my view I want to make a point about what constitutes sufficient "proof" of one or another position regarding the causality between governance and growth. Should history, or a series of World Bank correlation studies motivate development behavior that has such huge consequences? I address this issue in a paper entitled, "Improving Logical Reasoning in the World Bank" (see--http://users.erols.com/rmyers1/LOGIC4.pdf). I suggest that World Bank studies generally say what Bank managers want to hear, not what has a high probability of development success. Over the years Bank studies have "proved" the development "success" of foreign lending for investment projects, and then for structural adjustment, first for trade reform, then for privatization and now for governance. What the studies ignore is thirty years of history that says what the Bank doesn't want to hear: that World Bank lending is not hastening and, through debt overhangs may be hindering economic development.

(p. 76:Italy-1300s) From the point of view of the citizen creditor, the ability to sell his loans [in secondary markets] compensated for the...postponement of repayment by creating a new source of liquidity."

(p. 85:Italy-1300s) "[With the introduction of the Monte--public sector domestic debt] the compact with citizens had changed subtly."

(p. 160:Netherlands-late 1500s) "It was, as elsewhere in Europe, the power of the purse that provided the most potent weapon of the opponents of absolutism..."

(p. 205:France-1700s) "The extinction of...the financier class removed one of the few remaining restrictions on royal absolutism."

(p. 227:England-1700s) "...description of England as a country, like the Dutch Republic, 'where the finances are absolutely governed by those who furnish them.' "

(p. 231: Netherlands-mid 1700s) "In other ways the landed class came to appreciate the advantages of Dutch finance [involving the establishment of asset markets]. The corollary to the fall in interest rates was an increase in the price of land and a reduction in mortgage costs."

(p.326: France-1789) "One of the most curious aspects of the French Revolution...is the juxtaposition of an apparently sincere belief in the sanctity of the public debt with policies that led inevitability to default."

(pp. 362-3) "...[the] characteristic traits of all the great powers. First and foremost...was parliamentary control of the national budget. ... The second fundamental component...was an independent central bank.

(p. 364) "Investors were willing to lend large sums on such advantageous terms only it they were convinced that their interest and principal would be paid in sound currency."

(p. 370) "...it is useful to return to the original connection between democracy and public credit that has been set out in this book. Democracy...is a system in which the citizens control the state. As long as democratic states borrow from their own citizens, their good credit record is simply a reflection of the virtual identity of borrower and lenders."
        And "...it is fairly easy to see that the best borrowers were those countries who [whose citizens??] had accumulated substantial domestic capital over the centuries and were therefore able to finance themselves internally."

(p. 371) "Even for states that could afford to borrow internally , the situation was not entirely straightforward. Where legitimacy of the regime was questioned,  no amount of domestic wealth could engender a good credit rating."

(p. 471) "In a striking turnaround from earlier times, a substantial foreign investment in the national debt is now seen as a proof of international credit standing rather than as a sign of economic [and political??] immaturity or financial weakness. The corollary to these trends has been the progressive disappearance of the hero of our tale, the citizen creditor, from the political scene."