As an empirical study, this book illustrates perfectly the decline of discourse brought on by the fetishism of formulae and the neglect of rigor where it matters, in the pursuit of evidence to support, refute, or refine what is otherwise little more than a conjecture. And yet, Economic Origins of Dictatorship and Democracy will be heavily cited, lavishly praised, and assigned to advanced seminars in the better graduate schools. Too bad. For it isn’t about democracy. It’s about a cardboard caricature, the existence or absence of certain rituals, which by no means assure that the citizens rule the state. In sketching their caricature, Acemoglu and Robinson strip the democratic ideal of substantial and also of ethical content. By treating the democratic impulse as a pure exercise in money-grubbing, they feed the contempt for democracy already characteristic of elite circles–the rational member of Acemoglu and Robinson’s "elite" is, in other words, a fascist. Indeed, if Acemoglu and Robinson’s democracy is the only type on offer, there is little reason to support it–unless one belongs to a transfer-receiving group.

Is there an alternative? If so, what would it look like? It would feature quantitative precision, married to knowledge of history, command of evidence, narrative skill, and to a fresh and important idea. Beyond this, it would give new insight into the success of democratic systems and also into the reasons they sometimes decay. As a bonus, it might help those of us predisposed to favor democracy on ethical grounds to understand that our sentiments might have a material foundation, and therefore the reasons for the loyalty we instinctively feel. It would, in other words, have many of the properties found in James MacDonald’s A Free Nation Deep in Debt.

This book begins with Moses, ends with World War II, and covers just about every important development in public finance in between. Yet, for all of its historical sweep, MacDonald offers a simple, stunning thesis: Democracy arises from public debt.

For MacDonald, a British former investment banker, there is no distinction between "citizens" and "elites." The citizens are the elite. To be a citizen in society is to be a free member of it; those who are not citizens are slaves or little better than slaves. Moreover, the progress of democracy is the expansion of the franchise, a word with two meanings: its present one of the right to vote and an ancient one meaning freedom from direct taxation. In turn, public debt is the hammer that knocks down the walls restricting citizenship, expanding democracy by degrees. Thus the institutions of finance, missing from Acemoglu and Robinson’s economics, suddenly take on the pivotal role. As MacDonald puts it:

Democracy (even in its most partial and imperfect form) is a system in which the citizens control the state. As long as democratic states borrow from their own citizens, their good credit is simply a reflection of the virtual identity of borrower and lender.

It’s a simple but compelling argument. States exist to make war; those who win survive. Public credit is a powerful weapon; states that can borrow win wars. And so even narrow democracies, rooted in parliaments going back to the Middle Ages, have an evolutionary advantage over absolute monarchies, for the king’s credit is always poor.

MacDonald pursues this story from Athens, where citizens would sacrifice their fortunes to the armies and navies when required, through the republics of Venice, Florence, and Genoa, whose citizen-creditors developed the first full-fledged public financial systems, and onward to England, France, and Spain in the age of conquest. He contrasts the strength of Anglo-Dutch finance with the repeated bankruptcies of Habsburgs and Bourbons–state finance by calculated confiscation, compounded with a privatized revenue system that deprived the crown of revenue while creating a hated class of tax farmers. It is no coincidence that Britain slowly became democratic, while revolution followed the French default of 1788.

Across the Atlantic, MacDonald traces the maturation of American public credit in the Revolutionary and Civil Wars, as well as the struggles between soft and hard money in the years following. A resolute member of the banker class, he argues powerfully in favor of Ulysses S. Grant’s financial policy, for federal interest costs fell in 1869, when the United States promised to redeem its debts in coin, and again with the Resumption Act of 1875.

Democratic finance differs from totalitarian not because it is easy, but because it is open. Holding the liabilities of the state directly, citizen-creditors understand that they form an essential part of private financial wealth. They take a direct interest in their government and its financial affairs (even though, as MacDonald shrewdly notes, the exact extent of public debt may be concealed from outside eyes). In totalitarian systems, banks and other buffer institutions handle state finance–or foreigners do. Accordingly, democratic systems understand the value of maintaining their credit; despotisms do not.

Mass democracy emerged following World War I precisely because this was the first war to be financed almost fully by the direct sale of government bonds to the public. All the Great War combatants sold bonds with zeal, and at war’s end all (except bankrupt and revolutionary Russia) found themselves in debt to nearly every household in their lands. Universal suffrage had to follow; you cannot ignore your bankers, even when there are millions of them. World War II repeated and deepened the experience, and in the aftermath popular democracy reached its zenith throughout the West.

A beauty of MacDonald’s idea is that it can be tested against situations he doesn’t discuss. Thus the democratic decolonization of India fits: It occurred after India had become a large war-time creditor of Britain. And the struggle for democracy in Latin America is complicated by foreign debt, easily analyzed as an external electorate of enormous power–one in obvious economic conflict with the voters who, at best, only hold the internal debt. The communists of China and Cuba maintain their insular systems because they are financially autarkic. Meanwhile, in democratic Venezuela, the rise and survival of Hugo Chávez owes everything to the singular financial autonomy conveyed by oil.

Finally, MacDonald’s financial perspective helps explain the relationship between democracy and economic development. The most democratic states are not only powerful; they are rich. They are richer than the monarchies they succeeded and also than the communist states with whom for much of the twentieth century they competed. Why? Surely the simplest answer lies in their ability and willingness to mobilize public debt for development as well as for war. Democracies yield higher incomes not because of vulgar redistribution, which cannot distinguish them from communism, but because they alone can master the great Keynesian financial tools required for the achievement of full employment and national construction on the grand scale.

Given the simplicity and power of this argument, one reads the epilogue of this great book with surprise and sorrow. In MacDonald’s view, it’s all over. In the nuclear age, deficits and bond drives on the world-war scale are history, and the American citizenry has lost its pride of place as creditor of the American state. Today, financial intermediaries hold about 37 percent of U.S. public debt; Japan and China, along with other countries, now hold about 30 percent. The proportion of U.S. debt owned directly by Americans has fallen to below 10 percent; in 1945 (when the debt was more than twice as large in relation to GDP as now) citizen-creditors just about held it all. He concludes that the link is broken and "for all practical purposes, the venerable marriage between public credit and democratic government, so vital a factor in the history of the world, has been dissolved."

But there is another possible way to interpret this fact. If MacDonald’s thesis is right, the disappearance of the citizen-creditor forces a question. Can democracy survive when its financial roots have been cut? The scale of public debt is not the issue, but its ownership is. Can a country–whether the United States or any other–be truly democratic if it is in hock to banks and foreigners? And this is only the obverse of questions raised by our pathetic voter turnout, by the vote suppression that regularly poisons our elections, by the judicial coup d’état of December 2000, and by our regression toward a tax system from which the state’s main creditors are exempt, leaving the burden to fall heavily on all who do not or cannot vote–exactly those who comprise our passive and disregarded lower classes.

To put it bluntly, are we still a democracy? And, if not, what would it take to bring democracy back?