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<font size="2"><font face="Verdana" color="#002864" size="5"><strong>Repudiating the National Debt</strong></font>
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<p class="MsoBodyText"><font face="Verdana" size="4">by Murray N. Rothbard</font>
<p class="MsoBodyText"><font face="Verdana">[Posted January 16, 2004]</font>
<p class="MsoBodyText"><font face="Verdana"><img alt src="http://www.mises.org/images3/nationaldebt.gif" align="right" border="0" width="282" height="164">In
the spring of 1981, conservative Republicans in the House of Representatives
cried. They cried because, in the first flush of the Reagan Revolution that
was supposed to bring drastic cuts in taxes and government spending, as well
as a balanced budget, they were being asked by the White House and their own
leadership to vote for an increase in the statutory limit on the federal
public debt, which was then scraping the legal ceiling of one trillion dollars.
They cried because all of their lives they had voted against an increase in
public debt, and now they were being asked, by their own party and their own
movement, to violate their lifelong principles. The White House and its
leadership assured them that this breach in principle would be their last:
that it was necessary for one last increase in the debt limit to give
President Reagan a chance to bring about a balanced budget and to begin to
reduce the debt. Many of these Republicans tearfully announced that they were
taking this fateful step because they deeply trusted their President, who
would not let them down.</font>
<p class="MsoBodyText"><font face="Verdana">Famous last words. In a sense, the
Reagan handlers were right: there were no more tears, no more complaints,
because the principles themselves were quickly forgotten, swept into the
dustbin of history. Deficits and the public debt have piled up mountainously
since then, and few people care, least of all conservative Republicans. Every
few years, the legal limit is raised automatically. By the end of the Reagan
reign the federal debt was $2.6 trillion; now it is $3.5 trillion and rising
rapidly [ed. Note: $6.9 trillion, Jan. 13, 2004]. And this is the rosy side of
the picture, because if you add in"off-budget" loan guarantees and
contingencies, the grand total federal debt is $20 trillion.</font>
<p class="MsoBodyText"><font face="Verdana">Before the Reagan era,
conservatives were clear about how they felt about deficits and the public
debt: a balanced budget was good, and deficits and the public debt were bad,
piled up by free-spending Keynesians and socialists, who absurdly proclaimed
that there was nothing wrong or onerous about the public debt. In the famous
words of the left-Keynesian apostle of"functional finance,"
Professor Abba Lernr, there is nothing wrong with the public debt because
"we owe it to ourselves." In those days, at least, conservatives
were astute enough to realize that it made an enormous amount of difference
whether—slicing through the obfuscatory collective nouns—one is a member
of the"we" (the burdened taxpayer) or of the"ourselves"
(those living off the proceeds of taxation).</font>
<p class="MsoBodyText"><font face="Verdana">Since Reagan, however,
intellectual-political life has gone topsy-turvy. Conservatives and allegedly
"free-market" economists have turned handsprings trying to find new
reasons why"deficits don't matter," why we should all relax and
enjoy the process. Perhaps the most absurd argument of Reaganomists was that
we should not worry about growing public debt because it is being matched on
the federal balance sheet by an expansion of public"assets." Here
was a new twist on free-market macroeconomics: things are going well because
the value of government assets is rising! In that case, why not have the
government nationalize all assets outright? Reaganomists, indeed, came up with
every conceivable argument for the public debt except the phrase of Abba
Lerner, and I am convinced that they did not recycle that phrase because it
would be difficult to sustain with a straight face at a time when foreign
ownership of the national debt is skyrocketing. Even apart from foreign
ownership, it is far more difficult to sustain the Lerner thesis than before;
in the late 1930's, when Lerner enunciated his thesis, total federal interest
payments on the public debt were one billion dollars; now they have zoomed to
$200 billion, the third largest item in the federal budget, after the military
and Social Security: the"we" are looking ever shabbier compared to
the"ourselves."</font>
<p class="MsoBodyText"><font face="Verdana">To think sensibly about the public
debt, we first have to go back to first principles and consider debt in
general. Put simply, a credit transaction occurs when C, the creditor,
transfers a sum of money (say $1,000) to D, the debtor, in exchange for a
promise that D will repay C in a year's time the principal plus interest. If
the agreed interest rate on the transaction is 10 percent, then the debtor
obligates himself to pay in a year's time $1,100 to the creditor. This
repayment completes the transaction, which in contrast to a regular sale,
takes place over time.</font>
<p class="MsoBodyText"><font face="Verdana">So far, it is clear that there is
nothing"wrong" with private debt. As with any private trade or
exchange on the market, both parties to the exchange benefit, and no one
loses. But suppose that the debtor is foolish, gets himself in over his head,
and then finds that he can't repay the sum he had agreed on? This, of course
is a risk incurred by debt, and the debtor had better keep his debts down to
what he can surely repay. But this is not a problem of debt alone. Any
consumer may spend foolishly; a man may blow his entire paycheck on an
expensive trinket and then find that he can't feed his family. So consumer
foolishness is hardly a problem confined to debt alone. But there is one
crucial difference: if a man gets in over his head and he can't pay, the
creditor suffers too, because the debtor has failed to return the creditor's
property. In a profound sense, the debtor who fails to repay the $1,100 owed
to the creditor has stolen property that belongs to the creditor; we have here
not simply a civil debt, but a tort, an aggression against another's property.</font>
<p class="MsoBodyText"><font face="Verdana">In earlier centuries, the
insolvent debtor's offense was considered grave, and unless the creditor was
willing to"forgive" the debt out of charity, the debtor continued
to owe the money plus accumulating interest, plus penalty for continuing
nonpayment. Often, debtors were clapped into jail until they could pay—a bit
Draconian perhaps, but at least in the proper spirit of enforcing property
rights and defending the sanctity of contracts. The major practical problem
was the difficulty for debtors in prison to earn the money to repay the loan;
perhaps it would have been better to allow the debtor to be free, provided
that his continuing income went to paying the creditor his just due.</font>
<p class="MsoBodyText"><font face="Verdana">As early as the 17th century,
however, governments began sobbing about the plight of the unfortunate debtors,
ignoring the fact that the insolvent debtors had gotten themselves into their
own fix, and they began to subvert their own proclaimed function of enforcing
contracts. Bankruptcy laws were passed which, increasingly, let the debtors
off the hook and prevented the creditors from obtaining their own property.
Theft was increasingly condoned, improvidence was subsidized, and thrift was
hobbled. In fact, with the modern device of Chapter 11, instituted by the
Bankruptcy Reform Act of 1978, inefficient and improvident managers and
stockholders are not only let off the hook, but they often remain in positions
of power, debt-free and still running their firms, and plaguing consumers and
creditors with their inefficiencies. Modern utilitarian neoclassical
economists see nothing wrong with any of this; the market, after all,"adjusts"
to these changes in the law. It is true that the market can adjust to almost
anything, but so what? Hobbling creditors means that interest rates rise
permanently, to the sober and honest as well as the improvident; but why
should the former be taxed to subsidize the latter? But there are deeper
problems with this utilitarian attitude. It is the same amoral claim, from the
same economists, that there is nothing wrong with rising crime against
residents or storekeepers of the inner cities. The market, they assert, will
adjust and discount for such high crime rates, and therefore rents and housing
values will be lower in the inner-city areas. So everything will be taken care
of. But what sort of consolation is that? And what sort of justification for
aggression and crime?</font>
<p class="MsoBodyText"><font face="Verdana">In a just society, then, only
voluntary forgiveness by creditors would let debtors off the hook; otherwise,
bankruptcy laws are an unjust invasion of the property rights of creditors.</font>
<p class="MsoBodyText"><font face="Verdana">One myth about"debtors'"
relief is that debtors are habitually poor and creditors rich, so that
intervening to save debtors is merely a requirement of egalitarian"fairness."
But this assumption was never true: in business, the wealthier the businessman
the more likely he is to be a large debtor. It is the Donald Trumps and Robert
Maxwells of this world whose debts spectacularly exceed their assets.
Intervention on behalf of debtors has generally been lobbied for by large
businesses with large debts. In modern corporations, the effect of
ever-tightening bankruptcy laws has been to hobble the creditor-bondholders
for the benefit of the stockholders and the existing managers, who are usually
installed by, and allied with, a few dominant large stockholders. The very
fact that a corporation is insolvent demonstrates that its managers have been
inefficient, and they should be removed promptly from the scene. Bankruptcy
laws that keep prolonging the rule of existing managers, then, not only invade
the property rights of the creditors; they also injure the consumers and the
entire economic system by preventing the market from purging the inefficient
and improvident managers and stockholders and from shifting the ownership of
industrial assets to the more efficient creditors. Not only that; in a recent
law review article, Bradley and Rosenzweig have shown that the stockholders,
too, as well as the creditors, have lost a significant amount of assets due to
the installation of Chapter 11 in 1978. As they write,"if bondholders
and stockholders are both losers under Chapter 11, then who are the winners?"
The winners, remarkably but unsurprisingly, turn out to be the existing,
inefficient corporate managers, as well as the assorted lawyers, accountants,
and financial advisers who earn huge fees from bankruptcy reorganizations.</font>
<p class="MsoBodyText"><font face="Verdana">In a free-market economy that
respects property rights, the volume of private debt is self-policed by the
necessity to repay the creditor, since no Papa Government is letting you off
the hook. In addition, the interest rate a debtor must pay depends not only on
the general rate of time preference but on the degree of risk he as a debtor
poses to the creditor. A good credit risk will be a"prime borrower,"
who will pay relatively low interest; on the other hand, an improvident person
or a transient who has been bankrupt before, will have to pay a much higher
interest rate, commensurate with the degree of risk on the loan.</font>
<p class="MsoBodyText"><font face="Verdana">Most people, unfortunately, apply
the same analysis to public debt as they do to private. If sanctity of
contracts should rule in the world of private debt, shouldn't they be equally
as sacrosanct in public debt? Shouldn't public debt be governed by the same
principles as private? The answer is no, even though such an answer may shock
the sensibilities of most people. The reason is that the two forms of
debt-transaction are totally different. If I borrow money from a mortgage bank,
I have made a contract to transfer my money to a creditor at a future date; in
a deep sense, he is the true owner of the money at that point, and if I don't
pay I am robbing him of his just property. But when government borrows money,
it does not pledge its own money; its own resources are not liable. Government
commits not its own life, fortune, and sacred honor to repay the debt, but
ours. This is a horse, and a transaction, of a very different color.</font>
<p class="MsoBodyText"><font face="Verdana">For unlike the rest of us,
government sells no productive good or service and therefore earns nothing. It
can only get money by looting our resources through taxes, or through the
hidden tax of legalized counterfeiting known as"inflation." There
are some exceptions, of course, such as when the government sells stamps to
collectors or carries our mail with gross inefficiency, but the overwhelming
bulk of government revenues is acquired through taxation or its monetary
equivalent. Actually, in the days of monarchy, and especially in the medieval
period before the rise of the modern state, kings got the bulk of their income
from their private estates—such as forests and agricultural lands. Their
debt, in other words, was more private than public, and as a result, their
debt amounted to next to nothing compared to the public debt that began with a
flourish in the late 17th century.</font>
<p class="MsoBodyText"><font face="Verdana">The public debt transaction, then,
is very different from private debt. Instead of a low-time preference creditor
exchanging money for an IOU from a high-time preference debtor, the government
now receives money from creditors, both parties realizing that the money will
be paid back not out of the pockets or the hides of the politicians and
bureaucrats, but out of the looted wallets and purses of the hapless taxpayers,
the subjects of the state. The government gets the money by tax-coercion; and
the public creditors, far from being innocents, know full well that their
proceeds will come out of that selfsame coercion. In short, public creditors
are willing to hand over money to the government now in order to receive a
share of tax loot in the future. This is the opposite of a free market, or a
genuinely voluntary transaction. Both parties are immorally contracting to
participate in the violation of the property rights of citizens in the future.
Both parties, therefore, are making agreements about other people's property,
and both deserve the back of our hand. The public credit transaction is not a
genuine contract that need be considered sacrosanct, any more than robbers
parceling out their shares of loot in advance should be treated as some sort
of sanctified contract.</font>
<p class="MsoBodyText"><font face="Verdana">Any melding of public debt into a
private transaction must rest on the common but absurd notion that taxation is
really"voluntary," and that whenever the government does anything,
"we" are willingly doing it. This convenient myth was wittily and
trenchantly disposed of by the great economist Joseph Schumpeter:"The
theory which construes taxes on the analogy of club dues or of the purchases
of, say, a doctor only proves how far removed this part of the social sciences
is from scientific habits of mind." Morality and economic utility
generally go hand in hand. Contrary to Alexander Hamilton, who spoke for a
small but powerful clique of New York and Philadelphia public creditors, the
national debt is not a"national blessing." The annual government
deficit, plus the annual interest payment that keeps rising as the total debt
accumulates, increasingly channels scarce and precious private savings into
wasteful government boondoggles, which"crowd out" productive
investments. Establishment economists, including Reaganomists, cleverly fudge
the issue by arbitrarily labeling virtually all government spending as"investments,"
making it sound as if everything is fine and dandy because savings are being
productively"invested." In reality, however, government spending
only qualifies as"investment" in an Orwellian sense; government
actually spends on behalf of the"consumer goods" and desires of
bureaucrats, politicians, and their dependent client groups. Government
spending, therefore, rather than being"investment," is consumer
spending of a peculiarly wasteful and unproductive sort, since it is indulged
not by producers but by a parasitic class that is living off, and increasingly
weakening, the productive private sector. Thus, we see that statistics are not
in the least"scientific" or"valuefree"; how data are
classified—whether, for example, government spending is"consumption"
or"investment"—depends upon the political philosophy and insights
of the classifier.</font>
<p class="MsoBodyText"><font face="Verdana">Deficits and a mounting debt,
therefore, are a growing and intolerable burden on the society and economy,
both because they raise the tax burden and increasingly drain resources from
the productive to the parasitic, counterproductive,"public" sector.
Moreover, whenever deficits are financed by expanding bank credit—in other
words, by creating new money—matters become still worse, since credit
inflation creates permanent and rising price inflation as well as waves of
boombust"business cycles."</font>
<p class="MsoBodyText"><font face="Verdana">It is for all these reasons that
the Jeffersonians and Jacksonians (who, contrary to the myths of historians,
were extraordinarily knowledgeable in economic and monetary theory) hated and
reviled the public debt. Indeed, the national debt was paid off twice in
American history, the first time by Thomas Jefferson and the second, and
undoubtedly the last time, by Andrew Jackson.</font>
<p class="MsoBodyText"><font face="Verdana">Unfortunately, paying off a
national debt that will soon reach $4 trillion would quickly bankrupt the
entire country. Think about the consequences of imposing new taxes of $4
trillion in the United States next year! Another way, and almost as
devastating, a way to pay off the public debt would be to print $4 trillion of
new money—either in paper dollars or by creating new bank credit. This
method would be extraordinarily inflationary, and prices would quickly
skyrocket, ruining all groups whose earnings did not increase to the same
extent, and destroying the value of the dollar. But in essence this is what
happens in countries that hyper-inflate, as Germany did in 1923, and in
countless countries since, particularly the Third World. If a country inflates
the currency to pay off its debt, prices will rise so that the dollars or
marks or pesos the creditor receives are worth a lot less than the dollars or
pesos they originally lent out. When an American purchased a 10,000 mark
German bond in 1914, it was worth several thousand dollars; those 10,000 marks
by late 1923 would not have been worth more than a stick of bubble gum.
Inflation, then, is an underhanded and terribly destructive way of indirectly
repudiating the"public debt"; destructive because it ruins the
currency unit, which individuals and businesses depend upon for calculating
all their economic decisions.</font>
<p class="MsoBodyText"><font face="Verdana">I propose, then, a seemingly
drastic but actually far less destructive way of paying off the public debt at
a single blow: out-right debt repudiation. Consider this question: why should
the poor, battered citizens of Russia or Poland or the other ex-Communist
countries be bound by the debts contracted by their former Communist masters?
In the Communist situation, the injustice is clear: that citizens struggling
for freedom and for a free-market economy should be taxed to pay for debts
contracted by the monstrous former ruling class. But this injustice only
differs by degree from"normal" public debt. For, conversely, why
should the Communist government of the Soviet Union have been bound by debts
contracted by the Czarist government they hated and overthrew? And why should
we, struggling American citizens of today, be bound by debts created by a past
ruling elite who contracted these debts at our expense? One of the cogent
arguments against paying blacks"reparations" for past slavery is
that we, the living, were not slaveholders. Similarly, we the living did not
contract for either the past or the present debts incurred by the politicians
and bureaucrats in Washington.</font>
<p class="MsoBodyText"><font face="Verdana">Although largely forgotten by
historians and by the public, repudiation of public debt is a solid part of
the American tradition. The first wave of repudiation of state debt came
during the 1840's, after the panics of 1837 and 1839. Those panics were the
consequence of a massive inflationary boom fueled by the Whig-run Second Bank
of the United States. Riding the wave of inflationary credit, numerous state
governments, largely those run by the Whigs, floated an enormous amount of
debt, most of which went into wasteful public works (euphemistically called
"internal improvements"), and into the creation of inflationary
banks. Outstanding public debt by state governments rose from $26 million to
$170 million during the decade of the 1830's. Most of these securities were
financed by British and Dutch investors.</font>
<p class="MsoBodyText"><font face="Verdana">During the deflationary 1840's
succeeding the panics, state governments faced repayment of their debt in
dollars that were now more valuable than the ones they had borrowed. Many
states, now largely in Democratic hands, met the crisis by repudiating these
debts, either totally or partially by scaling down the amount in"readjustments."
Specifically, of the 28 American states in the 1840's, nine were in the
glorious position of having no public debt, and one (Missouri's) was
negligible; of the 18 remaining, nine paid the interest on their public debt
without interruption, while another nine (Maryland, Pennsylvania, Indiana,
Illinois, Michigan, Arkansas, Louisiana, Mississippi, and Florida) repudiated
part or all of their liabilities. Of these states, four defaulted for several
years in their interest payments, whereas the other five (Michigan,
Mississippi, Arkansas, Louisiana, and Florida) totally and permanently
repudiated their entire outstanding public debt. As in every debt repudiation,
the result was to lift a great burden from the backs of the taxpayers in the
defaulting and repudiating states.</font>
<p class="MsoBodyText"><font face="Verdana">Apart from the moral, or
sanctity-of-contract argument against repudiation that we have already
discussed, the standard economic argument is that such repudiation is
disastrous, because who, in his right mind, would lend again to a repudiating
government? But the effective counterargument has rarely been considered: why
should more private capital be poured down government rat holes? It is
precisely the drying up of future public credit that constitutes one of the
main arguments for repudiation, for it means beneficially drying up a major
channel for the wasteful destruction of the savings of the public. What we
want is abundant savings and investment in private enterprises, and a lean,
austere, low-budget, minimal government. The people and the economy can only
wax fat and prosperous when their government is starved and puny.</font>
<p class="MsoBodyText"><font face="Verdana">The next great wave of state debt
repudiation came in the South after the blight of Northern occupation and
Reconstruction had been lifted from them. Eight Southern states (Alabama,
Arkansas, Florida, Louisiana, North Carolina, South Carolina, Tennessee, and
Virginia) proceeded, during the late 1870's and early 1880's under Democratic
regimes, to repudiate the debt foisted upon their taxpayers by the corrupt and
wasteful carpetbag Radical Republican governments under Reconstruction.</font>
<p class="MsoBodyText"><font face="Verdana">So what can be done now? The
current federal debt is $3.5 trillion. Approximately $1.4 trillion, or 40
percent, is owned by one or another agency of the federal government. It is
ridiculous for a citizen to be taxed by one arm of the federal government (the
IRS), to pay interest and principal on debt owned by another agency of the
federal government. It would save the taxpayer a great deal of money, and
spare savings from further waste, to simply cancel that debt outright. The
alleged debt is simply an accounting fiction that provides a mask over reality
and furnishes a convenient means for mulcting the taxpayer. Thus, most people
think that the Social Security Administration takes their premiums and
accumulates it, perhaps by sound investment, and then"pays back"
the"insured" citizen when he turns 65. Nothing could be further
from the truth. There is no insurance and there is no"fund," as
there indeed must be in any system of private insurance. The federal
government simply takes the Social Security"premiums" (taxes) of
the young person, spends them in the general expenditures of the Treasury, and
then, when the person turns 65, taxes someone else to pay the"insurance
benefit." Social Security, perhaps the most revered institution in the
American polity, is also the greatest single racket. It's simply a giant Ponzi
scheme controlled by the federal government. But this reality is masked by the
Social Security Administration's purchase of government bonds, the Treasury
then spending these funds on whatever it wishes. But the fact that the SSA has
government bonds in its portfolio, and collects interest and payment from the
American taxpayer, allows it to masquerade as a legitimate insurance business.</font>
<p class="MsoBodyText"><font face="Verdana">Canceling federal agency-held
bonds, then, reduces the federal debt by 40 percent. I would advocate going on
to repudiate the entire debt outright, and let the chips fall where they may.
The glorious result would be an immediate drop of $200 billion in federal
expenditures, with at least the fighting chance of an equivalent cut in taxes.</font>
<p class="MsoBodyText"><font face="Verdana">But if this scheme is considered
too Draconian, why not treat the federal government as any private bankrupt is
treated (forgetting about Chapter 11)? The government is an organization, so
why not liquidate the assets of that organization and pay the creditors (the
government bondholders) a pro-rata share of those assets? This solution would
cost the taxpayer nothing, and, once again, relieve him of $200 billion in
annual interest payments. The United States government should be forced to
disgorge its assets, sell them at auction, and then pay off the creditors
accordingly. What government assets? There are a great deal of assets, from
TVA to the national lands to various structures such as the Post Office. The
massive CIA headquarters at Langley, Virginia, should raise a pretty penny for
enough condominium housing for the entire work force inside the Beltway.
Perhaps we could eject the United Nations from the United States, reclaim the
land and buildings, and sell them for luxury housing for the East Side
gliterati. Another serendipity out of this process would be a massive
privatization of the socialized land of the Western United States and of the
rest of America as well. This combination of repudiation and privatization
would go a long way to reducing the tax burden, establishing fiscal soundness,
and desocializing the United States.</font>
<p class="MsoBodyText"><font face="Verdana">In order to go this route, however,
we first have to rid ourselves of the fallacious mindset that conflates public
and private, and that treats government debt as if it were a productive
contract between two legitimate property owners.</font>
<p class="MsoBodyText"><span class="517285313-16012004"><font face="Verdana">______________________________</font></span>
<p class="MsoBodyText"><font face="Verdana">Murray
N. Rothbard</font><font face="Verdana"> (1926-1995) was professor of
economics at the University of Nevada, Las Vegas, and vice-president for
academic affairs at the Ludwig von Mises Institute. This article ran in the
June 1992 issue of Chronicles (pp. 49-52).
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