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<font face="Verdana" size="1" color="#002864">http://www.mises.org/fullstory.asp?control=1419</font>
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<font size="2"><font face="Verdana" color="#002864" size="5"><strong>Perpetual Debt: From the British Empire to the American Hegemon</strong></font>
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<p class="MsoBodyText"><font face="Verdana" size="4">By H.A. Scott Trask</font>
<p class="MsoBodyText"><font face="Verdana">[Posted January 27, 2004]</font>
<p class="MsoBodyText"><font face="Verdana"><img alt src="http://www.mises.org/images3/debt.gif" align="right" border="0" width="226" height="271">Bush
officials have suggested that their"war on terror" will last many
decades. Less than a month after 9-11, Defense Secretary Rumsfeld
compared it to the"50-years, plus or minus" of Cold War with the <ST1:PLACE>
Soviet Union</ST1:PLACE>
. In March 2002, Secretary of State Powell warned that the war"may
never be finished, not in our lifetime." A month later, <ST1:PLACE>
<ST1:PLACENAME>
Homeland Security Director</ST1:PLACENAME>
<ST1:PLACENAME>
Tom</ST1:PLACENAME>
<ST1:PLACENAME>
Ridge</ST1:PLACENAME>
</ST1:PLACE>
warned that the threat of terrorism"is a permanent condition to which
this country must permanently adapt." </font>
<p class="MsoBodyText"><font face="Verdana">Thus, if the ruling elite has its
way, and it shall, as the American people have no opinion on the matter, or
can even be bothered to think about it, we are faced with at least half a
century of intermittent war and a further augmentation of the national
security state that has been draining our wealth like a voracious vampire
since 1950. There is no secret as to how they will finance it—by
borrowing and inflating. If the Democrats are the party of"tax and
spend," the Republicans are the party of"borrow and spend." </font>
<p class="MsoBodyText"><font face="Verdana">Since Prime Minister Sir Robert
Walpole's introduction of the funding system in <ST1:COUNTRY-REGION>
<ST1:PLACE>
England</ST1:PLACE>
</ST1:COUNTRY-REGION>
during the 1720s, the secret was out that government debt need never be repaid.
Just create a regular and dependable source of revenue and use
it to pay the annual interest and the principal of maturing bonds. Then
for every retired bond, sell a new one. In this way, a national debt
could be made perpetual. Walpole's system proved its worth in financing
British overseas expansion and imperial wars in the eighteenth and nineteenth
centuries. The government could now maintain a huge peacetime naval and
military establishment, readily fund new wars, and need not retrench afterward.
The <ST1:PLACE>
British Empire</ST1:PLACE>
was built on more than the blood of its soldiers and sailors; it was built on
debt. The ever-growing debt had the ancillary benefit of attaching the
interests of wealthy creditors to the government. This example was not
lost on some leaders of the infant <ST1:PLACE>
<ST1:PLACENAME>
American</ST1:PLACENAME>
<ST1:PLACETYPE>
Republic</ST1:PLACETYPE>
</ST1:PLACE>
, Alexander Hamilton for one.</font>
<p class="MsoBodyText"><font face="Verdana">The triumph of the funding system
and its corollary of perpetual debt is undeniable. It rules the world.
While there is some expressed concern about the size of the Bush deficits,
almost no member of either the intelligentsia or the ruling elite has
suggested, or even considered, paying the debt down. Just
consider the likelihood of congressmen agreeing to set aside $400 billion a
year in a sinking fund instead of spending it on programs, projects, and
overseas adventures designed to get him, or her, reelected. The
possibility of it happening is as remote as that of an American mountaineer
summitting the highest peak on Mars. </font>
<p class="MsoBodyText"><font face="Verdana">The Jeffersonian Opposition to
Government Debt</font>
<p class="MsoBodyText"><font face="Verdana">From 1800 to 1860, the glorious
Jeffersonian epoch of American history, the country's political elite viewed
government debt as a temporary expedient, to be contracted only for pressing
national purposes and then discharged within the lifetime of the generation
who contracted it. Amassing debt to fund grandiose national projects and
then funding it to perpetuity was regarded as monarchical, English, and
corrupting. </font>
<p class="MsoBodyText"><font face="Verdana">In the 1790s, Hamilton, Morris,
and other arch Federalists had sought to graft this statist model upon the
infant republic, but they were overthrown by the Jeffersonian Republicans in
"the Revolution of 1800." Hamilton's rationale for a perpetual
public debt included his belief that it would help keep up taxes and preserve
the collection apparatus. He believed Americans inclined toward laziness
and needed to be taxed to prod them to work harder. There is no surprise
why voters opted for <ST1:PLACE>
Jefferson</ST1:PLACE>
and liberty.</font>
<p class="MsoBodyText"><font face="Verdana"><ST1:PLACE>
Jefferson</ST1:PLACE>
on the Injustice of Binding the Generations</font>
<p class="MsoBodyText"><font face="Verdana">In a 1789 letter to his friend
James Madison, Thomas Jefferson raised the philosophical and moral question of
whether"one generation of men has a right to bind another."
He believed the answer was no,"that the earth belongs in usufruct
to the living." He believed it a principle of"very extensive
application and consequence, in every country." Applying it to
government borrowing, he argued that it was unjust and unrepublican for one
generation of a nation to encumber the next with the obligation to discharge
the debts of the first. After all, the following generation cannot have
given their consent to decisions made by their fathers, nor will have they
have necessarily benefited from the deficit expenditures. </font>
<p class="MsoBodyText"><font face="Verdana">For <ST1:PLACE>
Jefferson</ST1:PLACE>
, every generation has the same right to enjoy the bounty of nature and the
fruits of their labor as the preceding ones, without being bound or encumbered
by the profligacy or ambition of those who went before. "No
generation can contract debts greater than may be paid during the course of
its own existence," and if they do so, the following generation is under
no obligation to pay it. "They and their soil are by nature clear
of the debts of their predecessors." </font>
<p class="MsoBodyText"><font face="Verdana">As the French were just then in
the throes of revolution, Jefferson suggested that they would be wise"to
declare, in the constitution they are forming, than neither the legislature,
nor the nation itself, can validly contract more debt than they may pay within
their own age, or within the term of 19 years," and whatever portion of
the debt that should remain unpaid after that time should be cancelled. <ST1:PLACE>
Jefferson</ST1:PLACE>
thought such a provision would check the natural profligacy of governments and
reduce wars by raising the risk premium on bonds, thus raising the expense of
borrowing. It"would put the lenders and the borrowers also, on
their guard. By reducing too the faculty of borrowing within its natural
limits, it would bridle the spirit of war, to which too free a course has been
procured by the inattention of money-lenders to this law of nature, that
succeeding generations are not responsible for the preceding." </font>
<p class="MsoBodyText"><font face="Verdana">James Madison, ever the practical
statesman, replied that the present generation benefited from the productive
labor, discoveries, capital improvements, and defensive wars of
previous ones. Do they have no obligations toward those who went before?
Was it not just that they should help pay for improvements or endeavors when
the expenses incurred were too much for previous citizens to discharge in one
generation? "The improvements made by the dead form a charge
against the living who take the benefit of them." </font>
<p class="MsoBodyText"><font face="Verdana">According to him,"debts may
be incurred for purposes which interest the unborn, as well as the living,"
such as"debts for repelling a conquest, the evils of which descend
through many generations." With the American War of Independence in
mind, he added,"debts may even be incurred principally for the benefit
of posterity … which far exceeds any burdens which the present generation
could well" bear. Of course, he opposed"imposing unjust or
unnecessary burdens" on succeeding generations. Madison's exceptions
provided plenty of room through which to drive the train of war and empire.
What government ever describes its deficit financing as unjust and unnecessary?</font>
<p class="MsoBodyText"><font face="Verdana"><ST1:PLACE>
Jefferson</ST1:PLACE>
was not impressed with Madison's reservations.</font>
<p class="MsoBodyText"><font face="Verdana">American National Debt,
1800-1900</font>
<p class="MsoBodyText"><font face="Verdana">President Jefferson inherited a
national debt of $83 million, most of which had been contracted to fund the
revolutionary war. In his first year, he had his treasury secretary,
Albert Gallatin, set up a sinking fund to begin retiring the principal.
Despite the unexpected expenditure of $15 million for the purchase of <ST1:STATE>
<ST1:PLACE>
Louisiana</ST1:PLACE>
</ST1:STATE>
, he and Gallatin reduced the principal by $37 million, leaving only $57
million when he left office. His successor, <ST1:CITY>
<ST1:PLACE>
Madison</ST1:PLACE>
</ST1:CITY>
, reduced it to $45 million by early 1812. However, renewed borrowing to
fund the War of 1812, denigrated as"Mr. Madison's War" by his <ST1:PLACE>
New England</ST1:PLACE>
critics, coupled with a precipitous decline in tariff revenue incident to the
war, increased the debt to $127 million by early 1816. </font>
<p class="MsoBodyText"><font face="Verdana">In mid-1813, a year after Congress
declared war on England, Jefferson wrote the chairman of the House Ways and
Means Committee, John W. Eppes of <ST1:STATE>
<ST1:PLACE>
Virginia</ST1:PLACE>
</ST1:STATE>
, a remarkable letter recommending the propriety of laying a special tax
sufficient to pay the annual interest on the new war debt as well as a portion
of the principal each year until it was retired. He recommended the full
redemption of the principle within 19 years. He thought taxes should be
laid to help fund the war. "Our government has not, as yet, begun
to act on the rule of loans and taxation going hand in hand." He
regretted this because a"redeeming tax" would act as"a
salutary warning" of the consequences that flow from amassing debt.
It would also establish"a salutary curb on the spirit of war and
indebtment [sic], which, since the modern theory of the perpetuation of debt,
has drenched the earth with blood, and crushed its inhabitants under burthens
[sic] ever accumulating." He conjectured that had the principle
that all public debts be retired in 19 years"been declared in the
British bill of rights [1689], England would have been placed under the happy
disability [meaning inability] of waging eternal war, and of
contracting her thousand millions of public debt." If only the
Americans had been this wise in 1788.</font>
<p class="MsoBodyText"><font face="Verdana">The next president, James Monroe,
another <ST1:STATE>
<ST1:PLACE>
Virginia</ST1:PLACE>
</ST1:STATE>
republican, reinstituted the sinking fund and in eight years (1817-25) shaved
the debt down to $84 million. During his one-term (1825-29), John Quincy
Adams continued the process of paying off debt until it was $58 million.
Notice that because of the second war with England, a conflict that brought
not one benefit to the people of the United States, unless one
considers military and naval prestige to be worth a blood and wealth
sacrifice, the country paid taxes for 20 years just to bring the national debt
back down to where it had been when Jefferson left office in 1809.
However, Jefferson's principle was being followed. The debt contracted
to fund the war had been paid for in just over 19 years. </font>
<p class="MsoBodyText"><font face="Verdana">The Jacksonian Era</font>
<p class="MsoBodyText"><font face="Verdana">It was left to the next president,
Andrew Jackson of <ST1:STATE>
<ST1:PLACE>
Tennessee</ST1:PLACE>
</ST1:STATE>
, to finish the work. Under his administration, the last outstanding
bond was retired, and in 1835 the country stood un-encumbered of a single
dollar of national debt! The country remained debt free for one more
year (1836) but it would never again enjoy this desideratum. From 1837
through 1843, the federal government ran deficits totaling $46 million,
financed by treasury notes. Such were the fruits of the panic of 1837,
the depression of 1839-43, and annual tariff reductions. However, the
debt had risen to only $16 million when James K. Polk, a Jeffersonian Democrat
from <ST1:STATE>
<ST1:PLACE>
Tennessee</ST1:PLACE>
</ST1:STATE>
, took office in 1845. Polk was a hard-money and a low tariff man, but
he was also a continental expansionist, like Jefferson and Jackson. He
was determined to have <ST1:STATE>
<ST1:PLACE>
California</ST1:PLACE>
</ST1:STATE>
and the other <ST1:STATE>
<ST1:PLACE>
northern provinces</ST1:PLACE>
</ST1:STATE>
of <ST1:COUNTRY-REGION>
<ST1:PLACE>
Mexico</ST1:PLACE>
</ST1:COUNTRY-REGION>
; so he started a war. Whatever the justice of the Mexican War
(1846-47), it had at least two consequences. The country acquired an
immense amount of valuable and scenic territory that would eventually be made
into six new states (<ST1:STATE>
<ST1:PLACE>
California</ST1:PLACE>
</ST1:STATE>
, <ST1:STATE>
<ST1:PLACE>
Nevada</ST1:PLACE>
</ST1:STATE>
, <ST1:STATE>
<ST1:PLACE>
Arizona</ST1:PLACE>
</ST1:STATE>
, <ST1:STATE>
<ST1:PLACE>
Utah</ST1:PLACE>
</ST1:STATE>
, <ST1:STATE>
<ST1:PLACE>
Colorado</ST1:PLACE>
</ST1:STATE>
, and <ST1:STATE>
<ST1:PLACE>
New Mexico</ST1:PLACE>
</ST1:STATE>
), and the national debt increased from $16 million to $63 million by the end
of 1848. Debt reduction was not a priority for the next president,
Zachary Taylor. He was a Whig, and the Whigs were the predecessors of
the neo-mercantilist Republican Party. Under his administration, the
debt actually crept up to $68 million by 1851. However, the next
president was frugal son of <ST1:STATE>
<ST1:PLACE>
New Hampshire</ST1:PLACE>
</ST1:STATE>
and a Jeffersonian Democrat, who was sincerely committed to free trade, hard
money, and economical government. From 1853-57, President Pierce retired
more than half the national debt; it fell from $64 to $28 million. The
national debt would never again be that low. </font>
<p class="MsoBodyText"><font face="Verdana">The Debt of the Civil War</font>
<p class="MsoBodyText"><font face="Verdana">The War Between the States caused
an explosion of debt that would have startled <ST1:PLACE>
Jefferson</ST1:PLACE>
. It rose from $75 million in March 1861 to $28 thousand million
($2.7 billion) in August 1865. The debt was now $75 per capita. It
had been $2 per capita in 1860. Such was one of the costs, but by no
means the dearest, of coercing the southern states into a consolidated and
centralized union, which was formerly a confederation, now a unitary republic.
However, the libertarian and constitutionalist traditions proved too
strong to continue to be suppressed by the reigning Republicans. In
1869, Salmon Chase, who had been Lincoln's treasury secretary but was now the
chief justice of the Supreme Court, wrote a majority opinion ruling that the
Legal Tender Acts of 1862 and 1863 had been unconstitutional. In 1872,
the income tax expired and was not renewed, and in 1895 the Supreme Court
ruled that it had been unconstitutional. In 1877, federal government
ended military rule of the last two occupied southern states (<ST1:STATE>
<ST1:PLACE>
La.</ST1:PLACE>
</ST1:STATE>
, SC), and the tyranny of radical Reconstruction was at last over. The
gold standard was restored in 1879, with all national bank notes being
redeemable in gold on demand. Lastly, the national debt came down a
little each year. By 1880, it stood at $2.1 billion; by 1890, $1.1
billion; and by 1900, $1.2 billion. </font>
<p class="MsoBodyText"><font face="Verdana">American National Debt,
1900-2000</font>
<p class="MsoBodyText"><font face="Verdana">Once again, war would negate the
fruit of years of patient but modest debt reduction. At President
Wilson's urging, Congress declared war on <ST1:COUNTRY-REGION>
<ST1:PLACE>
Germany</ST1:PLACE>
</ST1:COUNTRY-REGION>
in April 1917. In just two years, the debt skyrocketed from $3 billion
to $26 billion. Fiscally conservative Republican presidents (Harding,
Coolidge, and <ST1:CITY>
<ST1:PLACE>
Hoover</ST1:PLACE>
</ST1:CITY>
) brought the debt down to $16 billion by mid 1930, before the Depression
began ratcheting it up again. In ten years, <ST1:PLACE>
Roosevelt</ST1:PLACE>
and his New Deal managed to more than triple the national debt from $22 to $72
billion, which was by any measure the largest peacetime increase in American
history. The 1941-45 war against <ST1:COUNTRY-REGION>
<ST1:PLACE>
Japan</ST1:PLACE>
</ST1:COUNTRY-REGION>
and <ST1:COUNTRY-REGION>
<ST1:PLACE>
Germany</ST1:PLACE>
</ST1:COUNTRY-REGION>
caused the debt to reach the Olympian heights of $260 billion by the end. </font>
<p class="MsoBodyText"><font face="Verdana">The Cold War Debt and its
Successor</font>
<p class="MsoBodyText"><font face="Verdana">Peace would inaugurate a new era
in American history. After a brief demobilization, the country would
return to a permanent war footing, and forge the Cold War State. It
would also discard the venerable tradition of postwar debt reduction.
The new tradition was relentless upward ratcheting. Apart from very
slight declines in 1947-48 and 1956-57 (the last year there was any reduction
at all was 1960), the debt began an upward trajectory into the infinite
reaches of outer space. By 1970, the national debt had reached $390
billion. In 1980, it was a modest $930 billion. Next was the
deluge. Under Reagan and his Republican Senate, the debt rose to $2,700
billion ($2.7 trillion). Under Clinton and the Republican House, it
reached $5.7 trillion. Under Bush and the Republican Congress, it has
risen to $6.9 trillion (as of <ST1:DATE Month="1" Day="1" Year="2004">
January 1, 2004</ST1:DATE>
). Assuming Bush's re-election, the continuation of the illimitable
"war on terror," and another recession, the national debt could
breach the $10 trillion mark by 2008.</font>
<p class="MsoBodyText"><span class="334540314-27012004"><font face="Verdana">________________________________</font></span>
<p class="MsoBodyText"><font face="Verdana">Historian Scott Trask is an
adjunct scholar of the Mises Institute. </font><font face="Verdana">hstrask@highstream.net</font><font face="Verdana">.
See his </font><font face="Verdana">article
archive.</font><font face="Verdana"> Sources: <ST1:CITY>
<ST1:PLACE>
Davis</ST1:PLACE>
</ST1:CITY>
Dewy, The Financial History of the <ST1:COUNTRY-REGION>
<ST1:PLACE>
United States</ST1:PLACE>
</ST1:COUNTRY-REGION>
(New York, 1902); Thomas Jefferson, Writings (New York: Library of
America, 1984)<span class="334540314-27012004">.
</span></font></font>
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