Why Our Debt Grows

July 11, 1960

We ended the fiscal year 1960 with a national debt of $286 billion. In addition to this direct and avowed debt, our government has contingent obligations of some $316 billion, not including unfunded social-security liabilities of $350 billion or perhaps $650 billion, depending on the assumptions on which they are calculated. Our national debt, including contingent liabilities, is not only the highest in the world in absolute amount but the highest in relation to annual government revenues.

What would we think of the prudence of a man with a yearly income of $7,900 who owed $29,000 and had endorsed, in addition, IOU’s of relatives totaling $31,600 or even $76,000 more? Multiply these figures by 10 million and you get the position of our government.

It has long been fashionable to say that the maxims of fiscal conduct that apply to an individual do not apply to a nation. One facile argument, brought forward in the early days of the New Deal, is that the size of the national debt does not matter because “we owe it to ourselves.” Though this argument was put forward as a new discovery, it was really very ancient. In 1740, a generation even before the publication of Adam Smith’s Wealth of Nations, Smith’s countryman, the philosopher David Hume, in a remarkable essay, “Of Public Credit,” dealt with it specifically:

“We have indeed been told that the public is no weaker upon account of its debts, since they are mostly due among ourselves and bring as much property to one as they take from another. It is like transferring money from the right hand to the left; which leaves the person neither richer nor poorer than before. Such loose reasoning and specious comparisons will always pass where we judge not upon principles.”

DESTRUCTIVE TAXES

Hume went on to point out that the people who pay the taxes are not necessarily the same as those who receive the interest, and certainly never in the same proportion. Taxes always fall upon the most productive people in the community. “If all our present taxes be mortgaged, must we not invent new ones? And may not this matter be carried to a length that is ruinous and destructive?”

This was not the only “modern” fallacy that Hume answered. It was only last August that Britain’s official Radcliffe report announced that a big public debt “gives strength” to a nation. Yet more than two centuries ago Hume was writing: “What, then, shall we say to the new paradox, that public incumbrances are of themselves advantageous, independent of the necessity of contracting them; and that any state, even though it were not pressed by a foreign enemy, could not possibly have embraced a wiser expedient for promoting commerce and riches, than to create funds and debts and taxes without limitation? Reasonings such as these might naturally have passed for trials of wit among rhetoricians, like the panegyrics on folly and a fever, on Busiris and Nero, had we not seen such absurd maxims patronized by great ministers, and by a whole party among us.”

A CAUSE OF INFLATION

Hume proceeded to point out not only that interest payments on the debt must raise taxes, but that “public securities are with us become a kind of money . . . a kind of paper credit,” with “all the disadvantages attending that species of money.” In brief, he saw that debt led to inflation.

And Hume also recognized clearly that the persistent political pressures were all on the side of incurring debt rather than repaying it. “It is very tempting to a minister to employ such an expedient as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamors against himself. The practice, therefore, of contracting debt, will almost infallibly be abused in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker’s shop in London, than to empower a statesman to draw bills, in this manner, upon posterity.”

Hume was not too hopeful regarding the future. “I must confess that there is a strange supineness, from long custom, creeped into all ranks of men, with regard to public debts.”