Debt and Credit: The Other Side of the Coin

DEBT made the British Empire

In the 1700s, the British did not invent the idea of credit, but rather stole it off the Dutch, who already had an economic empire with the Dutch East India Company. Using the effective idea of "buy now, pay later", the British were able to build ships and arm their world-renowned fleets very quickly.
The French, at the same time did not take to the idea of credit. France, once a great power, top of the heap in Imperial Europe, is the best contrast for Britain's use of credit. As the French king, and then republic, did things the old way, they were forced to first raise the gold and francs to buy a ship or a gunboat, and then build it. In this way, sometimes only one ship was being built at a time.
The British, however, used credit: with the promise, backed by the Parliament and by the Crown, that worker's wages and material costs would be payed eventually, or "at a later date", shipyards across Britain's coastline were able to work on and complete several ships at once.
While the French would grunt out one, maybe two ships at a time, with long pauses in production in between (as they raised more funds), the British were able to churn out antire fleets in the same time. History has proven to us that this British modus operandi was the smarter course to take.

Why?

At the time of the discovery and colonisation of the New World, Britain was a heavyweight in Europe (after Elizabeth II), and it needed ships to guard its new enterprises. Protecting farms and plantations in Africa and America, the home ports within visual range of the coast of France - all Britain's biggest problems were best solved by naval superiority. The general parity between French and British industry at the time meant that if they both followed the same production principles, they would both end up building the same amount of ships, in the same amount fo time, and sned them out to smash each other to bits. The relative sizes of their navies would never really change, and it could easily turn into a never-ending naval arms race.

The advent of Credit, however, gave Britain the production advantage it needed. Production soared, ships were pumped out, and numerical superiority was achieved.

"Buy now, Pay later".

British physical naval superiority was established, but at great cost. The delayed payment (ie credit) on a fleet of warships is a steep payment, and the British government had pledged to pay its debts. With just the resources available on the British Isles, Britain could never have hoped to repay its debts to the (neutral) foreign and domestic creditors. In fact, Britain's claims on being good for the money were rather baseless in this regard. However, rich people and neutral governments still willingly gave over large amounts of money. They did it because the British Crown, and the British Government, made realistic and believeable pledges for their use of the money - to colonise the New World, and to defend the interests of the creditors. In this way, the creditors of Britain were in fact making a significant investment in the future of the Empire. Of course, at the start of it all, no-one could have really known how powerful the British Empire would become. Hindsight shows us that it was a good investment, but we humans never have the benefit of hindsight before the fact. We can really only rely on foresight, and that is a rare attribute to find in a person.

At the time, Britain did seem to have some real foresight. Initial losses in North America such as Roanoke occurred before credit really took root, but the resources and sheer potential of future American colonies was too great to resist.
We know how it turned out. Britain colonised the eastern side of North America, and the British people in those colonies eventually grew so profitable in their own right that they sought independence from Britain and to create their own state (the modern USA).

But in the meantime, when all the ships were being built, and the resources of America were yet to be exploited, Britain racked up an enormous National Debt. In fact, ballpark figures put Britain's National Debt in the range of millions of pounds! This number would be barely fathomable in the 18th century, but there it was!

Bottomless Debt?

If Britain racked up a debt into the millions, how could it still keep creditors interested?
The answer is simple: repayments. Debt repayments, as a key constituent of Debt, are always paid in installments. Obviously, to pay the entire sum owed all at once would negate the very need for taking the debt out in the first place. The debt on a loan is traditionally paid in installments, and each instalment brings with it a level of interest, based on the amount first loaned, and the time planned to be taken in paying it all back. "Interest" is the currency amount that adds on to the original loaned amount, and it means that the Creditor, by the end of all the repayments, actually makes a profit on the amount he originally loaned out.

Britain's exploits in the New World, funded by credit, were rich and profitable. Debts were payed back, with interest, in a timely manner. In this way, the Creditors of the British Empire found that lending money was a very profitable undertaking. All of this in spite of the phenomenal figure that was the National Debt.

The ability to pay back debts in a timely manner (usually the timeframe is agreed upon in advance), and meet interest add-ons, is called a "credit-rating". Britain's rich exploits, which were funded by initial loans, allowed the Empire to maintain a good credit-rating, which encouraged further investment in more of the Empire's exploits. As you can see, rather than creating a one-way-in, one-way-out debt situation, and growing exceedingly nervous about its ablity to pay, Britain instead created a cyclical, self-nourishing economy, based on large amounts of credit and good credit-ratings. The Empire itself began to loan out to its colonies once they had reached strong self-sufficiency, and within itself Britain created an ongoing, free-moving, and growing economy. No wonder they took over the world.

There are intrinsic cultural aspects to Britain's actions, exploits, and attitude regarding debt, but this should have its own essay.

Britain's example may seem, from afar, to be one of bottomless, endless debt. But by no means was the British Empire in any trouble. Old debts were repaid, andnew ones were invested. Creditors were always happy to come back for more, and ultimately everybody won.

That is the historical example of the birth of Credit, and why it can be a good thing.