The costs of wars have been the main driver of public debt in the Western
World during the modern era. The late twentieth century stands out as a period
that saw a pronounced increase of government debt to GDP ratios in peacetime.
This paper assesses the role that financial crises have played in shaping the
public debt trajectory in the twentieth century. Focusing on the experiences
of 14 industrial economies, I show that financial crises have long and lasting
effects on public finances. I provide evidence that the costs of financial
crises have increased strongly in the second half of the twentieth century and
that the costs of financial crises grow with the size of the financial sector.
In many countries, the rising costs incurred from stabilizing the economy
after financial crises were an important cause of the peacetime surge of
public debt ratios in the late twentieth century. In today's highly
financialized economies, financial crises have become a key risk for public
finances
