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New Debts for Old

ISSUE:  Spring 1936

When the American national bonded debt rises from the present thirty billion dollars to eighty billion dollars, it will be equivalent, per capita, to the British national debt. When an American with a five-thousand-dollar income pays an income tax of twenty-two per cent instead of four per cent, he will be paying as much as a resident of London. We have a long way to go before we reach the highest levels of public debt and taxation that have been tested and found practicable in modern political economy. In the meantime, it would be well to try to understand the relation of debt, whether public or private, to national economy as a whole.

In the Republican campaign skit, “Liberty at the Crossroads,” there was a brief discussion of public finance. A young couple were frightened away from the marriage license bureau when they heard what their share of the national debt amounted to, and were told that the national debt stood as a first charge against their earnings. These two fallacies, as developed in the skit, are so widely believed that they call for analysis.

The first fallacy is a double one. It, is used by the National Economy League in its literature. It consists, first, in dividing the total national debt by the population and concluding that each individual is in debt by his ratable portion of the whole; and second, in ignoring the consequences of the fact that the debt is internal, owed by Americans to Americans.

If it were true that a national debt of thirty billions imposed on each citizen, on the average, a debt burden of twenty-five hundred dollars, it would be equally true that the books of the nation credit each citizen, on the same average, with a government bond in the value of twenty-five hundred dollars.

The American public debt is an internal debt; the debt of a farmer or business man is an external debt. The difference is substantial. When a grocer or farmer allows his budget to get out of balance and borrows beyond his income, he is giving someone else a claim to his assets, and ultimately he will lose his property. But when the American people allow the national budget to get out of balance and borrow to cover the amounts not met by tax yield, they are merely redistributing among themselves certain claims on future public revenues.

An internal public debt is not at all analogous to the external debt of a business man; it is more nearly analogous to* the “debt” that Mrs., Brown, who has been exceeding her household expense allowance for fifteen years, now owes to Mr. Brown. The couple is very wealthy; though they were in debt before the war, they now hold mortgages on property all over town. Mr. Brown grumbles because his wife exceeds the allowance that was set when they were married fifteen years ago; he tells her to be more economical. But in her relations with outsiders, she always pays cash; she has no charge accounts; her extravagance worries her husband, but does not give any outsider a claim on the family property..

This crude analogy does not imply that a national deficit and an increasing national debt are unimportant; it implies only that the exact significance of the deficit and debt cannot be discovered by using the even cruder analogies of the improvident farmer or business man.

If all private business in the country is looked upon as a unit, lumping borrowers and lenders together, then the situation that is analogous to the expansion of the public debt is simply the general expansion of private debt; in other words, a cycle of investment and the flotation of securities.

The second prevalent fallacy, included in the Republican skit, is the notion that the bonded debt has a priority claim on the wealth of the country. This fallacy is clearly revealed when the relief expenditures, present and prospective, are submitted to a realistic analysis.

The number of relief clients, whether on direct or work relief, has not changed materially in three years. It was 3,789,000 families in June, 1933; 3,770,000 families in June, 1934; 3,830,000 families in June, 1935; and will be something near that figure in June, 1936. The decision to give those who are at present on the relief rolls a guarantee that they can take temporary jobs and be assured of an easy return to their status as relief clients tends to change this statistical constant into a kind of civil list; it forces us to envisage the possibility that we may have upon our hands, not merely 8,800,000 families on relief, but the same families, year after year, as a permanent element of the population supported in the style to which they have become accustomed.

The prospect of a constant charge, recurring year after year, in the amount of some two to four billion dollars, is appalling to some minds. It seems to be something infinite and uncontrollable; but the very fact that it is becoming a relatively stable and fixed charge should tend to allay fears. The relief load is becoming predictable. If it is to stand at two to four billions a year, it is equivalent, at present interest rates, to a funded debt of forty to eighty billion dollars. A permanent relief load of a certain amount is equivalent, on the national balance sheet, to a present bonded debt in an amount calculated by capitalizing the fixed charges.

We are so habituated to the doctrine of the business world that the overhead of a bonded debt takes priority over the labor overhead, and that a going concern can get rid of its labor costs by closing down plant while it continues to pay bondholders out of reserves, that we tend to apply the same reasoning to the national government, where the conditions are reversed. We tend to think of the owners of government bonds as holders of a first mortgage, while the persons on relief rolls have only a second mortgage.

Actually the exact reverse is the case. The relief rolls are a first mortgage on the treasury, and the bondholders possess only a second mortgage. This is not an ethical judgment about what ought to be; it is not an appraisal of the relative places that ought to be accorded to human and property rights respectively. It is an outright realistic description of the actual situation. The Federal government, so long as it stands as set up by the Constitution, and unless a Fascist revolution completely changes its character, cannot pay the coupons on the bonds until the relief checks have been honored. The political consequences of repudiating the claims of the relief clients would be a disturbance that might make the bondholders wish they held Brazilian or Peruvian paper. But in practical American politics it could not come to that. Not even the Hoover administration, not even a Republican Congress, could stand against the demand that the fixed charge of caring for the relief rolls be met.

The bondholders possess a junior mortgage, the relief clients a first mortgage. But the difference is more than one of simple priority. The bonds are payable in dollars, subject to all the risks of inflation, but the relief obligations are payable in another currency. There is no gold clause written in them; they are written in a currency that was known before gold was mined. They call for payment in calories and degrees of temperature. About three thousand calories per man per day, payable in food; about seventy degrees of temperature, payable in coal and clothing—such is the letter of the obligation, If inflation doubles prices, eighty billions rise to a hundred and sixty billions. The biological minimum cannot be altered, nor can payment be postponed by any financial operation. No moratorium law will alter the fixed period of grace, the range of which was so succinctly stated by that prophet of misery, Carlyle, when he wrote that “nine meals are all that stand between civilization and barbarism.”


Those who cry out most loudly against the expansion of the national debt, and those who are most insistent on balancing the budget, are not, as is often charged, mere destructive critics who have no positive program. They have a positive program. In general, it is based on the anticipation that a balancing of the budget would lead to an expansion of investment, and hence to the employment of relief clients by private industry. The relation between extinction of unemployment and an increasing of the debt load is not substantially different from that which is present in the public relief program, except for two highly significant points.

If private investment is to carry the load, first the risk is shifted to the relief client, who may or may not be cared for, and second, the debt structure that will result will be a private debt, not a public debt.

That there is danger inherent in shifting risk to the relief client is clear; on the other hand, there is the chance that by shifting risk to the relief client, the re-employment would come to be financed by creating private rather than public debt. The point that then calls for analysis is simply this: what is the economic significance of an expanding private debt which makes it so much more desirable than an expanding public debt that the risk of shifting from one to the other should be assumed?

The answer to this question, of why a private debt should be preferred to a public debt, leads deep into the theories underlying our economic organization.

The first distinction that is usually made between the two classes of debt is stated in terms of productivity. It is usually said that private debt gives rise to more highly disciplined business operations. But the standard of productivity in the business world is not the standard of social welfare. A lumber business is regarded as productive if it pays its stockholders, though it ruins a mountain range and river valley beyond any possibility of repair. An enterprise engaged in manufacturing, advertising, and selling cosmetics is regarded as productive, even though the net results of its operations are a mulcting of its customers by over-pricing and a certain amount of damage to their health. An individual business may be deemed productive because it gets a high yield per man-hour on the assembly line, even though it organizes its seasonal operations in such a fashion that the yield per man-year is very low. These observations do not prove that public enterprise is more productive than private enterprise, when productivity is measured in terms of general welfare; they merely indicate that a corrective caution should be used in making comparisons.

But the more insistent distinction that is made between private and public debt is not related to the respective productivities which result from their creation, but to the devices and processes by which they are liquidated. The liquidation of a public debt is effected either by tax collections or repudiation. Repudiation may be accomplished by inflation of the general price level, reduction of interest rate, or by other means. Private debt is liquidated by revenue from business operations or by bankruptcy.

If the debt burden is to be liquidated by tax revenue or the revenue from business operations, the reason for preferring the latter is clear; for those who are paying the money feel a greater sense of compulsion when they are paying taxes, and a greater sense of freedom when they enter the business market as purchasers. The sense of compulsion is especially obvious in the case of direct taxes. Indirect taxes, when they have worked their way into a price structure, are not distinguished by the consumer from price elements that result from charges on private business debt. And in respect of certain consumer situations, notably the public utilities, the consumer is not effectively free to abstain from purchasing the services and paying the price. As long as tax-free securities are available, certain elements of income can be withdrawn by certain classes from the reach of the income tax itself. The distinction between payments to the government in the form of taxes and payments to private business for goods and service is not exclusively a distinction between payment under compulsion and payment without compulsion.

Political resistance to direct taxation develops so rapidly and effectively under the American political system that it is probable that most of the public debt, if paid off, will be paid from indirect taxes. This means, in effect, that it will be paid by people who do not and cannot make any important distinction between the amounts they are paying to help liquidate public debt and the amounts they are paying to help liquidate private debt. When a motorist drives up to a Sunoco service station, he pays with the same dollar bill twenty cents that is applied to the liquidation of some state road bonds, and an uncertain amount that is applied to the maintenance of the capital structure (i. e., debt) of Sun Oil Co. Still, regardless of this illustration, public and private debts exhibit important differences in the methods by which money is collected for paying them off. The differences, however, are small compared with the difference between the two alternative methods of extinguishing the debt without payment—repudiation in the case of public debt, and bankruptcy in the case of private debt. The analysis of the difference between repudiation and bankruptcy calls for an examination of certain fundamentals of our business system which have been too little explored.


Capitalism has often been described as a system in which profits and the use of the profit motive are the distinguishing marks. Nevertheless, the desire for gain is not peculiar to this system. For, however much this motive may in certain cultures have been subjected to restraints and controls, it has certainly been an element in economic systems which could not, by any stretch of terminology, be called capitalistic. The special characteristics of modern business institutions come much more clearly to light if we look at the other side of the balance sheet and inquire, not how does the system operate with respect to profits, but how does it operate with respect to losses.

In the history of modern business, losses are a factor no less constant than profits. Few indeed are the business firms that endure more than one or two generations. Of the hundreds of establishments launched in the past forty years in the field of automobile manufacturing, how many are alive today? The world’s population and the world’s accumulation of capital have increased steadily in the past hundred and fifty years, but just as the city of the dead is more populous than the city of the living, so the roster of defunct enterprises is longer than the roster of going enterprises. Bankruptcy is the statistically probable fate, ultimately, in any business venture. Profit is obtained by those who are in the game while they are winning, but out of it before the dice turn against them.

The entrepreneur always prefers to play with loaded dice if he can get them. He prefers certainties to risks. Were not the Calvinists, who did so much to create the institutions of modern business, believers in predestination, and did they not condemn gambling? The Protestant theory of interest that gave justification to usury was not based on a doctrine of risk, but on a doctrine of abstinence. The usurer was being rewarded, according to this doctrine, not for taking a chance on losing his loan, but for the virtue of saving his substance instead of consuming it in worldly pleasures. But the actual growth of business in an expanding economic world was in fact attended by tremendous risks and losses. Business operations in this environment were given remarkable freedom by certain neatly contrived juridical devices for the rapid writing off of losses and the piecemeal cancellation of debts. These were the special inventions of modern capitalism. The most important of these devices were bankruptcy laws and limited liability company laws.

The Bankruptcy Court in England was open only to the merchant until 1861. For others, the debtors’ prison yawned. And the limited liability company laws came into European legislation at about the same time that the bankruptcy law was extended to the general public. The older corporation law, which lacked the principle of limited liability, made each stockholder responsible, to the extent of his entire estate, for all the debts of a bankrupt corporation. The owner of a single share of stock stood to lose, not merely the money he had invested, but everything he owned, if the company failed. No one could enter the great gambling house at all unless he took all his property with him. And if he lost a single throw, he went to prison. The limited liability principle made it possible for a man to bet his fortune one chip at a time, and the open bankruptcy law left him a free man even though he lost his property. These two legal devices invited all property holders to enter the business man’s world and share his risks, his profits, and his losses.

Property entered this world from a position of much greater relative security. The propertied class of the Old Regime, the landed aristocracy, had its property protected by entail, primogeniture, or Church endowment. A widespread system of entailed property had certain rigidities about it that were not unlike the rigidity that a modern economic system receives in the presence of a great public debt. A great proportion of the income of the country was pledged in advance to a certain fixed destination. To shake down that rigid structure, refinance the Church, and re-assign the national income, came the great French Revolution.

Nor was this Europe’s only experience with a large-scale liquidation. Charles Martel confiscated the Church lands in the eighth century; the lands of the Templars were seized by King Philip in the fourteenth century; Church lands were swept into new hands by the Protestant revolution of the sixteenth century. The Chinese emperors fought the absorption of land by Buddhist monasteries, just as the Westem kings with their statutes of mortmain fought the fixation of land in the hands of the Christian Church. But rigidity developed despite resistance, and the periodicity in the rise and fall of Chinese dynasties reflected a rhythm in land tenure, the fall of a dynasty coming at the point where the land system had become too rigid and cumbersome. Even the clay tablets from the ruined cities of Mesopotamia tell the story of a Babylonian cycle in the course of which a creditor class would gain control of the land by devices similar to large-scale mortgage and foreclosure, and then see itself swept away.

The elasticity of capitalist economy is measured by the speed with which individual losses can be written off, and the ground cleared for new enterprises. The most significant distinction between public and private debt is that the private debt can be canceled or repudiated piecemeal, but not the public debt. It is true the Nazi government has been able to make distinctions in the treatment of foreign and domestic creditors. It is true, also, that inflation sweeps out simultaneously the public and the private debt. But the special difference still stands, that the repudiation of public debt is a large-scale, sweeping, revolutionary measure; while the cancellation of private debt, under a going business system, takes place in a multitude of separate bankruptcies, foreclosures, and liquidations.

But if the time conies that business refuses to take losses, or to write off its debts piecemeal, then private debt comes increasingly to resemble public debt in respect to the devices by which it is written off. There are a number of evidences of this tendency. The R. F. C. labored to shore up crumbling monuments of debt; the relation of the railway debt structure to the insurance company investment is such that a general writing off of railway debt would be a mass operation directly affecting so many people that it would in this respect more nearly resemble a repudiation of public than of private debt. The N. R. A. was a measure in which a capitalist economy tried to prevent losses, and hence sacrificed its unique heritage of elasticity. A capitalist economy that will neither work without profits, nor accept losses, has already destroyed its own vitality. It has compromised one of the most significant distinctions between private and public debt, and hence between private and public investment, or private and public control of investment. It is accepting the rigidities of the agrarian system it displaced, and accepting with those rigidities the prospect that change and movement must have the character of revolution.

Consistency would require that those who oppose the expansion of public debt, while praying for the expansion of private debt, should equally oppose the shoring up of private debt in a way that makes it resemble public debt. It would demand that those who ask that industry unbalance its budgets (and that is the meaning of the flotation of new securities), should insist that the stern rule of bankruptcy, corporate and individual, be carried out in all its rigor, regardless of the clamor and distress. Instead of seeking to protect yesterday’s investors in private industry, they should seek further to despoil them, and the battle cry of their campaign should be: “Off with the old debt, and on with the new.”


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