Keynes on Foreign Debt and the External Constraint: Lessons for the Current Debate

Keynes’ views on domestic public debt changed substantially over his lifetime, moving from conventional concerns with sound finance toward a position close to functional finance. His views on foreign debt, however, were remarkably consistent. Drawing on his experience with wartime finance, German reparations, Lend-Lease, and the 1945 Anglo-American loan, Keynes understood external obligations as claims on future real resources whose sustainability depended on access to foreign exchange. The paper uses this distinction to intervene in current debates on public debt and monetary sovereignty. It argues that conventional analyses wrongly treat domestic currency debt as if it were foreign debt, while Modern Money Theory tends to make the opposite mistake by extending monetary sovereignty too far. A state may create its own currency, but it cannot thereby command foreign resources or create the international means of payment required to obtain them.