Will We Ever Pay Off?

June 8, 1964

In 1930, the national debt was $16 billion. In 1945, at the end of World War II, it was $260 billion. During the war, while the debt was piling up, the general assumption was that this borrowing was proper and even unavoidable in a time of crisis, but that once the war was over the debt would be gradually reduced or paid off. Instead, in the eighteen years since the end of the war, the national debt has been increased to $308 billion, or an average of $6,500 for every family in the United States.

Today interest on the debt alone amounts to $11 billion a year, or more than three times as much as the government spent annually for all purposes in the years 1926 to 1930.

There is curiously little concern about this. On the contrary, every once in a while some writer emerges to ridicule what little concern there is. J. David Stern did this in the January Atlantic. Even academic economists belittle the problem.

Stern’s argument was summed up in the statement that “the nation is growing faster than its debt.” One academic economist, trying to prove the same point, epitomized his argument in the following table:

	1945	1963
National debt	$260	$305
Gross national [product]	214	585

The triumphant conclusion the professor drew from this table was that “the national debt, when viewed as a burden to a year’s production, has been more than cut in two.”

DEBT VS. GNP

The figures are official, and the conclusion is technically correct. The complacency of the conclusion is 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 63 percent since 1933 and 43 percent 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 63 cents of every dollar it borrowed in 1933 and 43 cents of every dollar it borrowed in 1945.

To put it bluntly, the creditors, the holders of U.S. Government bonds, have been cheated.

Let’s make this even clearer by an illustration from another country. At the end of 1923, the purchasing power of the German paper mark fell to less than one-trillionth of its 1913 value. This meant that prices rose more than a trillion times. Therefore Germany’s “GNP,” measured in paper marks, rose more than a trillion times. As a result, its accumulated debt, represented by borrowings of marks of a much higher purchasing power, was reduced to practically no burden on the economy at all. Though Germany was the extreme case, the situation did not differ in principle from what happened in France (where the franc eventually fell to less than one one-hundredth of its 1913 value) and a score of other European countries.

‘A PRETENDED PAYMENT’

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 currency.

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 rising prices, will rise in relation to the debt, and so these writers will have increasing reasons for statistical satisfaction.

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 balanced the budget and made an honest start?