Into Its Third Century and Still Growing
A certain amount of funded debt … is a national blessing. The creation of a new species of money by this means naturally increases the circulation of cash, and extensively promotes every kind of useful undertaking in agriculture and mechanics. … In short, a debt originating in … patriotism … may thus be converted into a cement that shall strengthen and perpetuate the Union of America.
THE ABOVE pronouncement is not the defense of policy by a New Deal administrator in the 1930s. Nor is it the political platform of a presidential hopeful in the 1980s. It is the text of a creditors’ petition presented to the nation’s First Congress in 1789.
A national debt is the result of deficit spending by the federal government—that is, when the money the government pays out exceeds the money it takes in. In fact, our national debt was born before our nation was—in the turbulent first months of the Revolution when the colonies found they had to borrow money from the public to carry on the fight against the British. Today that debt has surpassed $1 trillion and is projected to rise by something like $200 billion a year over the next several years. Fewer and fewer people are seeing it as a “national blessing”; the former senator Sam Ervin, Jr., for instance, has joined the critics in calling the debt our most serious problem: “We have borrowed money we have no intention of repaying.” Still, it seems ironic that this red-ink institution that some see as threatening the very economic foundation of the nation is not only older than the government but one of the reasons why it exists.
Financing the Revolutionary War proved an expensive undertaking. The Continental Congress soon found it couldn’t pay its bills simply by new emissions of paper money that glutted the marketplace and shrank to a fraction of its face value. Eventually the stresses created by the vast expense clearly demonstrated that the Continental Congress and the individual states lacked the resources to meet their obligations. This weakness was a major issue in the Constitutional Convention of 1787, which denied states and granted Congress the power “to borrow Money on the credit of the United States.”
Though never popular, the idea of the national debt has had its defenders, among them Alexander Hamilton, who was George Washington’s choice as the first secretary of the Treasury Department. Although he instituted a series of reforms aimed at reducing a debt that by 1790 stood at more than $70 million, Hamilton saw it as a kind of status symbol. “It is a well-known fact,” he said, “that in countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money.”
FEW EARLY Presidents shared Hamilton’s tolerant view, and thus began a debate that continues to this day. Washington urged “avoiding … the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertions in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burdens which we ourselves ought to bear.” Thomas Jefferson favored “a government rigorously frugal and simple, applying all the possible savings of the public revenue to the discharge of the national debt.” And Andrew Jackson set as a goal for his administration the elimination of the debt, after which “our population will be relieved from a considerable portion of its present burthens, and will find not only new motives to patriotic affection, but additional means for the display of individual enterprise.”
Abraham Lincoln, however, said in the midst of the Civil War that “the great advantage of citizens being creditors as well as debtors with relation to the public debt is obvious. Men readily perceive that they cannot be much oppressed by a debt which they owe to themselves.”
UNTIL THE MIDDLE of the twentieth century, borrowing to fund war efforts caused the greatest impact on the national debt; the War of 1812, the Civil War, and the two world wars each created mammoth deficits equal to more than half the total government expenditures during those years. The debt reached $127 million as a result of the War of 1812; the Civil War pushed the figure from $90 million to $2.8 billion; and it climbed to $25.5 billion by the end of World War I and to $269.4 billion by the end of World War II.
In the 112 peacetime years between 1791 and 1916, by comparison, there were 82 surpluses, 16 of them so great that revenues exceeded expenditures by more than 50 percent. Ironically even these surpluses became a source of presidential anxiety. In 1836 Jackson cautioned the nation that “it will be in vain that we have congratulated each other upon the disappearance of this evil if we do not guard against the equally great one of promoting the unnecessary accumulation of public revenue.” In 1887, after a string of surplus years, Grover Cleveland worried lest “the public Treasury, which should only exist as a conduit conveying the people’s tribute to its legitimate objects of expenditure, [become] a hoarding place for money needlessly withdrawn from trade and the people’s use, thus crippling our national energies, suspending our country’s development, preventing investment in productive enterprise, threatening financial disturbance, and inviting schemes of public plunder.”
FOR A CENTURY and a half neither good times nor bad substantially influenced economic policy away from the traditional view dating back to Adam Smith’s Wealth of Nations , which first appeared in 1776. A balanced budget and limited government activity in peacetime were essential to economic stability. Smith had written that once a nation “foresees the facility of borrowing, it dispenses itself from the duty of saving.” Then, in the depths of the Great Depression, Franklin Roosevelt embraced the theory outlined by the British economist John Maynard Keynes, who held that government has an active economic role to play- indeed, that increased spending, even at the expense of an inflated national debt, stimulates the economy and promotes growth. “I expect the approval of Congress and the public for additional appropriations,” the President said in 1938, “if they become necessary to save thousands of American families from dire need.”
BUT EVEN AS Roosevelt called for such spending increases, he was careful not to step on the cherished American ideal of a budget in balance. “We shall soon be reaping the full benefits of those programs,” he promised, “and shall have at the same time a balanced budget that will also include provision for reduction of the public debt.” How long “soon” was he didn’t say. It turned out to be never. Still, the ideal survives to this day in proposals to prohibit deficit financing that crop up in Congress from time to time, in campaign rhetoric of candidates who attack the excesses of big government, and even in the statutory debt limit designed to restrict federal borrowing and, theoretically, forbid federal deficits.
In reality, of course, increases in the debt limit are regularly approved by Congress. Without exception, Roosevelt’s successors have accepted the practice of a managed economy, and the debt has more than quadrupled since World War II. In 1955 an Eisenhower economist acknowledged that “budget policies can help promote the objective of maximum production.” In 1963 a Kennedy tax cut to create “a manageable budgetary deficit” led a newsman to note that the President had entered “Keynes’ wonderful world of color where most of the ink is red.” And in 1971 Richard Nixon proposed a deficit budget and openly admitted, “I am now a Keynesian.” Even the current policies of Ronald Reagan, who no doubt would shun allegiance to the “new economics,” prompted one national business publication to predict that Reaganomics would bring a smile to “the ghost of John Maynard Keynes.”
No doubt the old nineteenth-century fears that a borrowing government could be likened to “rapacious wolves seeking whom they may devour” have subsided. But contemporary economists note that deficits still are associated with “a lack of discipline, with fiscal irresponsibility, with waste and corruption, and even with socialism.” Moreover, the debt becomes increasingly expensive to maintain as interest payments to creditors amount annually to a growing percentage of the gross national product, presently about 3.5 percent. Even more important, most experts agree, deficit spending promotes inflation by adding to the nation’s money supply and boosts interest rates by contributing to increased competition for credit with private investors. As for the current deficit projections, congressional leaders have said that they are “terrifying” and could lead to a “financial collapse.”
THUS THE FLAMES of controversy fueled by Alexander Hamilton two centuries ago still burn; and there are those who continue to echo the antiKeynesian who noted sardonically that in FDR’s administration “no balanced budget is needed but, on the contrary, an ever-increasing public debt is necessary for full employment and prosperity if we are to roll along happily and smoothly. … Every day in every way we will work more—eat more—owe more!”