AT THE OUTBREAK OF WORLD WAR I, THE NATIONAL debt amounted to only $1.2 billion. At the end of 1919 it had swelled because of that war to $25.5 billion. But there was a national sense of responsibility about it. Prudent policies were followed. Successive Republican administrations reduced it at a rate of nearly $1 billion a year, so that at the end of 1930 it was down to $16.2 billion.
But then, well before we got into World War II, welfare spending started to soar. There was no effort to balance the budget; the cult of deficits prevailed. At the end of fiscal year 1941, five months before Pearl Harbor, the public debt was at the then record level of $55.5 billion. We ended the war with a public debt of $260 billion, but this time there was no important reduction, except almost by accident in 1948 and 1951. Chronic deficits have now brought it up to $363 billion.
It is amusing to recall the rationalizations that accompanied each succeeding deficit. At first each presidential message would solemnly estimate a surplus for the next fiscal year, which always turned out to be a deficit before the year was over. Next, the budget was always to be balanced sometime in the next couple of years—but, of course, not now.
Then a new doctrine began to be put forward. It set up a straw-man: the conservative who allegedly insisted that the budget must be balanced every year, come hell or high water. Ah no, this new doctrine replied; the budget need be balanced only over a period. But the high priests of the new doctrine never got around to specifying just how long the period should be, or just when it would be safe to begin to show a surplus again. They showed no ardor for sticking to the arithmetic even of their own proposals. If, as in the eight years 1961 through 1968, there was an uninterrupted average administrative deficit of $8 billion a year, shouldn’t there be an average surplus of $8 billion a year for the next eight years?
The argument for a budget balanced “over a period” has, in fact, been quietly dropped. In its place is the argument that the budget should never be balanced when there is less than full employment, or even when there threatens to be less than full employment. And this again has become in fact an argument for a perpetual deficit. For though President Johnson’s economic advisers called for and got a tax increase (but never called for a spending cut), no one dreamed of suggesting a surplus, or even a balanced budget. In presenting his budget for the fiscal year 1968, for example, President Johnson planned a deficit of $4.3 billion in the cash budget and of $8.1 billion in the orthodox administrative budget. (The actual administrative deficit turned out to be $25.4 billion.) “To seek a lower deficit or a surplus” for 1968, he warned, “would be unwarranted and self-defeating” because it would “depress economic activity.”
The implication of this whole philosophy is that it is dangerous even to balance the budget, and that so far from trying to pay off or even reduce the national debt, we should permit a perpetual increase.
Let us look at what this has already meant for annual interest payments alone. They have doubled in the last ten years—from $8.3 billion in 1960 to $16 billion in 1970. Thus interest payments alone are every year greater than the entire amount it took to run the government in 1941, and more than five times as much as was required to run the government in 1929.
In 1932 Candidate Franklin Roosevelt was alarmed because the national debt had increased by $3 billion in the preceding two years. But for a generation the size and growth of the national debt have been lightly dismissed with the argument that “we owe it to ourselves.” This was presented in the Nineteen Thirties as a brilliant discovery of the “new” economics; but the argument is so old that it was familiar to the great British philosopher David Hume, who answered it in a brilliant essay in 1740: “The practice of contracting debt will almost infallibly be abused in every government . . . We have indeed been told that the public is no weaker upon account of its debts, since they are mostly due among ourselves.” But Hume then went on to point out that the creditors who received the interest on the debt were by no means the same people as the taxpayers who had to pay it, and that practically no one paid and received exactly the same amount. The tax burden fell mainly upon the active workers and producers, and hampered production. “If all our present taxes be mortgaged,” he asked, “must we not invent new ones? And may not this matter be carried to a length that is ruinous and destructive?”
“I must confess,” he also wrote in the course of his essay, “that there is a strange supineness, from long custom, creeped into all ranks of men, with regard to public debts,” so that hardly anyone dared to hope that substantial progress would ever be made in paying them off. We find plenty of evidence of this complacency today. Academic economists even vie with each other in trying to prove that the situation is after all very good.
A favorite argument of the last few years is that “the nation is growing faster than its debt.” This is “proved” statistically. In the table below, for example, I merely bring up to mid-1969 some comparisons presented (in billions of dollars) by one academician in 1964:
Gross National Product
Debt as burden on GNP
So we might advance triumphantly to the conclusion that the national debt, when viewed as a burden on a year’s production, has been cut by two-thirds since 1945!
The conclusion would be technically correct, but complacency would be unjustified. The reason the national debt is less of a burden is that, through inflation, the purchasing power of the dollar has been steadily reduced. It has been reduced 65 per cent since 1933 and more than 50 per cent since 1945. Let us state this another way. By failing to balance its budget, by borrowing, by monetizing the debt, by printing more dollars, by steadily diluting the dollar’s purchasing power, the government has in effect repudiated 65 cents of every dollar it borrowed in 1933 and 50 cents of every dollar it borrowed in 1945.
To put it bluntly, the government’s creditors have been swindled.
Adam Smith, writing in 1776, was perfectly familiar with this method of disguised repudiation. “When national debts have once been accumulated to a certain degree,” he wrote, “there is scarce, I believe, a single instance of their having been fairly and completely paid.” But governments usually covered “the disgrace of a real bankruptcy” by the “juggling trick” of “a pretended payment” in depreciated money.
So the relationship that seems to give some present-day writers so much satisfaction—that the national debt, in dollar terms, has been falling in relation to the gross national product in dollar terms—is simply the outcome of the steady depreciation of the dollar. The more inflation we have, and the more the purchasing power of the dollar is depreciated, the more the national debt will “fall” in relation to the GNP, because the GNP, measured in soaring prices, will rise in relation to the dollar debt.
Do we have any serious intention of ever paying off our national debt in dollars of at least present purchasing power? If so, isn’t it about time we begin to balance the budget and make an honest start?