Question

Is there a potential problem if governments continually finance goods and services with borrowed money?

Answer 1

The correct answer, I believe is B

Answer 2

Is there a potential problem when governments continually borrow?

b) Yes, eventually their debts must be repaid with interest.

A classic example in history was the experience of the French government under the Bourbon dynasty, which ultimately gave way to the French Revolution.

The French monarchy was the envy of Europe, and the Palace of Versailles maintained the most glorious lifestyle you could imagine. The royals and aristocracy lived large – too large. The government had accumulated 4 billion livres worth of debt by 1789. 1 livre in their monetary terms then = approx. $4 in our monetary terms in the US today, so that’s a $16 billion national debt. 40% of the government’s budget was going to pay interest on debts. And it kept getting worse. In 1786, for example, government income was 357 million livres and expenses were 555 million. So that's about 200 million added to the national debt in just one year. The debts kept piling on, and it was reaching a point when lenders were starting to say no to any further loans. The government had reached a position where it could not go forward without levying even more oppressive tax burdens on the people, and the people weren’t willing to pay.

It should be mentioned that, along with the regular lavish costs of the royalty and upper class lifestyles (all paid by the lower classes), a big part of the government’s debt had come from wars. There was the 7 Years War fought in Europe (1756-63) – known as the French and Indian War over here in the colonies. Losing that conflict didn’t sit well with France. And so when the colonial Americans broke out in revolution against the British monarchy, France devoted enormous financial aid (as well as officer support) to the Americans. The cost to France for supporting America’s revolution added up to 1 billion livres (about 4 billion in today’s dollars). This is part of what put France’s debt problem over the edge. When bankers and lenders would no longer give further loans to the French government, the series of events that led to the French Revolution fell into place.