Key Takeaways

  • Alexander Hamilton stated in his 1790 report on public credit that reliable national debt is “the price of our liberty,” linking sovereign borrowing directly to military survival.
  • Britain secured its century of dominance over France because its deep bond market provided cheap borrowing before the Napoleonic Wars began.
  • When global debt capacity is small, geography rules. When debt markets expand, investor expectations alone can trigger a global power shift without a single shot fired.
  • Treasuries after 2020 have traded more like volatile equities, raising borrowing costs and compressing America's traditional financial buffer.

The Price of Liberty Is a Low Yield

Most historians credit weapons, factories, or geography for the rise and fall of empires. Carolin Pflueger points to something far drier: the yield curve.

In joint research with Pierre Yared, Pflueger tracks how sovereign debt capacity shapes geopolitical dominance. Hamilton saw the connection early. In 1790, he argued that any young nation expecting to survive war needed a functional public credit market. As Pflueger notes, Hamilton explicitly recognized that US credit “is the price of our liberty.”

Consider the Napoleonic Wars. France had a larger population and fertile land. Yet the United Kingdom possessed something Napoleon lacked: a deep, liquid bond market where the government could borrow at low interest rates. Pflueger points out that “The UK had a functioning, deep bond market with low borrowing rates prior to the Napoleonic Wars, and that helped it a lot. And that, in turn, winning these wars made it the undisputed military and financial power for several decades to come.”

Cheap capital financed the ships, paid foreign coalitions, and sustained armies long after France ran out of coin. Geopolitical hegemony followed the cheapest cost of capital.

When Markets Pick the Next Empire

The mechanics of power change as financial systems grow. Pflueger outlines two distinct regimes:

When global financial capacity is small, physical geography decides the winner. “Whoever has an exogenous advantage, if it's a natural moat or mountain top or whatever it is, that country is going to be the safest, it's going to be able to borrow at the lowest rate, and end of story,” Pflueger explains.

When financial capacity expands, capital markets overpower geography. A country with an initial financial edge can borrow cheaply, fund defense, and expand its tax base. That success reinforces investor confidence, driving borrowing costs down even further.

This loop has a dark corollary. If global investors decide that another sovereign offers better long-term safety, capital can flow away overnight. As Pflueger puts it: “It's not necessarily what has happened, but it's kind of an interesting thing to think about that there could be a hegemonic transition that doesn't even involve war, it's just financial markets deciding and pricing in their expectations.”

In an era where US Treasuries face higher term premia and behave like risk assets, that tipping point is no longer theoretical.

What to Do With This

Stress-test your runway and debt structures against long-term rates that stay above 4.5% rather than reverting to zero. Review your vendor contracts and banking relationships this week, and replace short-term variable credit lines with fixed maturities before treasury volatility spills into private lending terms.