Figure 1 provides a broad historical perspective of debt developments in advanced, emerging, and low-income economies. Debt levels in advanced economies (now the G20) averaged 55% of GDP over 1880–2009, with a number of peaks and troughs that correspond with key historical events along the way.
– During the first era of financial globalisation (1880–1913), debt ratios trended down as public finances were, for the most part, under control, and growth was supported by an unprecedented level of gold standard-enabled financial and trade flows. Debt ratios reached their lowest level – 23% of GDP in advanced economies – in 1914, when the First World War began.
– But war and the fiscal crises that followed, the Great Depression (early 1930s), and World War II (1941–45) drove debts upward (to almost 150% of GDP in 1946).
– By 1960, however, debt ratios had declined to 50% of GDP on the back of strong postwar reconstruction and in some cases moderate, high, or even hyper inflation.
– Debt ratios began to rise again starting in the mid-1970s, with the end of the Bretton Woods system of exchange rates and the two oil price shocks. Expanding welfare states, moderating growth, and higher interest rates all contributed to this seminal peacetime increase, which the present crisis has exacerbated.
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