With the rise of stable banks and fiat money.

For most of history, state debt was seen in the same light as the stock market is today. Governments did take loans but they generally did not approach anywhere near modern ratios to GDP, due to the lack of pooled capital and the risk of default. These two problems were intertwined, as frequent state defaults ensured that most banks had a lifespan of a few decades at most.

This all changed with the 1694 creation of the Bank of England. English gentry, tired of losing money on loans to the King, created the Bank as a regulating and supervisory authority on crown debt. This was not analogous to earlier central banks, in fact the concept of a central bank was only secondary in the importance of the Bank of England - most importantly, the institution served to turn the government into a reliable debtor.

Initially, most English and later British debt under Bank of England management was earmarked for eventual repayment through taxes specially raised to eliminate loans. Under the ministership of Pitt the Younger, the government instituted a general sinking fund to pay down the debt. In spite of this, the British government was comfortable borrowing large sums - by the end of the Napoleonic Wars, debt by some estimates exceeded 200% of GDP.

The next revolution in debt financing came with the end of the Gold Standard and the introduction of fiat currency. Under bullion currency or currencies by pegged to bullion, the expansion of the currency supply depended upon the expansion of the supply of precious metals. Further, while the cost of currency creation varied depending on the specific policy (Gold, Silver Standard, bimetallism, monometallism, and so on), the commonality between all of them is that it costed money to create money.

The Great Depression led largely to the end of the Gold Standard in most industrialized economies that had previously used it. This in turn allowed countries to control their money supply at considerably lower cost, and impose what is sometimes called an “inflation tax” upon savers and wage earners. When looking at bond rates, one must factor in inflation in deciding the eventual cost of those bonds to the government. Not coincidentally, some of the most indebted governments in the world - chief among them Japan - actually have negative de facto bond interest rates.

Why do banks tolerate effectively taking a loss on government debt? First, because it’s better than 0% interest, second because it’s reliable, and third because they don’t actually lose from a profits and loss perspective. Some interest, even not greater than inflation, is better than none. All money that comes into a bank must be “pushed out” to earn some interest. Next, not all bank debt is dispatched to the government - only enough to ensure that the bank will not collapse from lack of investment. Third and most importantly, savers’ accounts are dwindling from inflation at the same time, so the bank is not losing overall.

This situation is tolerated by savers for reasons one and two, and because saving is still better than not saving.

This “inflating away” of debt sometimes leads to de facto negative interest rates, but generally only barely so. The French debt, which is approaching the size of the economy, by some estimates is “only” inflating away at 10-16 billion dollars a year - a small sum when one considers its total value is more than 2.7 trillion.

Indebtedness in the age of fiat currency generally correlated with capital richness. This is because they tend to have the lowest marginal product of capital (MPK), defined as the increase in output from a single unit of capital. Relatively capital poor countries experience much higher de facto bond rates and for this reason tend not to borrow as much. Paradoxically, these countries tend to have much lower debt to GDP but higher interest rates. In capital rich countries, the problem is very often the lack of other good investment opportunities.

States have been taking debts since ancient times, as there are records of formalized banks having formed in Ancient Greece. However, there was no record of immense and continued deficits of the size of the British debt during the Napoleonic Wars, or the many cases of post-WW2 sustained deficit spending, as the conditions in the banking system and currency supply would not allow it. Generally when a state became badly indebted prior to the creation of stable and managed public debt policies and the reliable banking system they spawned, default was in order, as the state failed to secure further loans.

Sources:

North and Weingast. Constitutions and Commitment.

Kobayashi, Keiichiro. Public Debt Overhang and Economic Growth.

Heer and Suessmuth. The Savings-Inflation Puzzle.

Sims, Christopher. Domestic Currency Denominated Debt as Equity in the Primary Surplus.

Wright, JF. British government borrowing in wartime: 1750-1815.

Eichengreen, El-Ganainy, et al. Public Debt Through the Ages.