The People Who Borrow
[Excerpted from chapter 6 of Debt: Private and Public, Good and Bad, 1938]British World War I Propaganda Poster
Good debt is, as we have seen, an essential part of our financial foundations; without it the purposes of commerce could not be accomplished. The business of supplying us all with our daily needs necessitates some means of exchanging a present sacrifice for a future benefit, a process or transaction that is essentially individualistic in its nature. Broadly speaking no other sort of debt existed before 1914. The figures, even then impressive enough, of government debts represented a mere fraction of the mass of personal debt which made the trade and intercourse of the world possible and easy.
Where before 1914 a government would owe a hundred million, there would be some thousands of millions owing by the private individuals living under that government. Of all these millions every sixpence depended absolutely upon a personal signature, all of them were backed by goods or services, personal belongings, or personal earning power, and all of them therefore possessed such qualities and such defects as, we shall see, are wholly absent from the new sort of debt, public debt, about which we are here concerned.
Rather an impressive picture comes up to the mind when looking at the money markets of the world in 1914 and noticing the astronomical figures of the dealings in London, Paris, New York, Berlin, and elsewhere, if it is remembered that behind every fraction in these figures was some very personal little problem. The security and smooth working of the whole were due to the fact that there were reputations to be lost, bankruptcy to be faced, personal degradation or personal success hanging on every transaction however large or however small.
The man with little credit and the firm or institution with cast-iron credit were each accommodated on appropriate terms without difficulty, and the varied interests of each were properly cared for. There was no shadow of trouble in carrying on the work of the world insofar as that work involved the transfer or movement of money from one individual to another on any part of the earth's surface.
The picture is worth reconstructing in these days when we have entered a new world, and the old has almost disappeared. There is a good deal of talk about revolutions. In our capacity as politicians we are proud or worried about the way in which we have improved or altered all sorts of things: the widening of the franchise, the status of woman, or whatever it may be. We think of Russia when we talk of revolutions and are inclined to attach an importance to the substitution of one tyranny for another, which is of very minor consequence compared with the substitution of one financial system for another by the new habit of piling up public debt. The greatest of all the revolutions has proceeded almost silently in our very midst, and the great majority of those who are quite prepared to talk glibly about world affairs are simply and wholly ignorant of much more important things going on day by day under their very noses.
It is usual to talk of public debt in connection with the War, because it was the war that started this great revolution. In the autumn of 1914 there were politicians, economists, and financiers who comforted us with the assurance that the war would be over by Christmas, for the simple reason that our money would be exhausted by then. Those people knew nothing of the possibilities of public debt, which, invented out of the necessities of the war, have continued to be our undoing ever since. The most active of the public securities of the stock markets is still called "war loan," a little fact which lends color to the theory that our burden of debt is part of the price of the war. It is all the more necessary therefore to have it clearly in our minds that only about one-third of the present public debt is due to the military and naval expenditure upon the war, and that the other two-thirds must be charged to our postwar enthusiasm for doing all sorts of original things in original ways."We are inclined to attach an importance to the substitution of one tyranny for another, which is of very minor consequence compared with the substitution of one financial system for another."
Since 1914, public debt has increased out of knowledge. Sums which would have been regarded as in the realms of fancy prior to this new fashion have been raised by governments or authorities all over the world. We should in all humility recognize that we led the way, and that it was our example which encouraged many a small nation to proceed to its own destruction.
After 20 years of this orgy of borrowing we have the dubious satisfaction of noticing that most of the money borrowed has been lost, wiped out by bankruptcy, written off by currency depreciations, repudiated by revolutions, or in some other way cleaned off the slate. Germany disposed of the whole of her public debt by currency manipulation, and at the time there were those who would have had us believe that by so doing Germany was reaping an advantage. It is not quite so easy at this length of time to understand the nature of that supposed advantage.
France has reduced her public debt to one-sixth of the amount she borrowed, again very easily, by juggling with the value of the franc. Other countries have taken the simpler course of refusal to pay, and while their debts remain on paper the paper itself is in many cases of more value than the debt.
It is almost only in sterling that a public debt remains in the minds of the public as a good, or fairly good, debt. Our pound has lost some of its value, and the good money lent to the government in say 1914 will be paid back, if at all, in money of a slightly lower value. But it remains true, thanks to the financial flair, the experience, the reputation, and the character of the British Empire and its money machine that British public debt is almost the only government security which a serious lender will consider today. America takes a definite second place, for she has thought it wise in her newfound enthusiasm for governmental activities to adopt the age-old device of the devaluation of her currency, and has mutilated her dollar just as effectively as the powers of old with shears and chisels chipped little bits off their coins.
Remembering our glance at the structure of commercial and civilizing debt, the first thing that strikes us in examining this mass of public debt is the absolute and total absence of anything in the nature of personal responsibility about it. Behind this conglomeration of figures there is nowhere a shred of personal quality. There is nobody's name on the back of the bill, and the drawer himself has no personal stake in it.
A couple of illustrations from the national field may help emphasize this point. In a moment of anxiety in the war, Mr. Winston Churchill did one of the silliest things in the whole of the silly record of that period when by a stroke of the pen he gave a 12.5 percent increase in wages to the engineers. In a matter of a few months the engineers were back on a level with the rest of the population, for all our prices adjusted themselves, and something like 12.5 percent went on to everything. That simple bit of folly was responsible for a substantial part of our burden of debt. The calculation is beyond the wit of man but to put it at £500 million is a certain understatement.
Nobody suggests that Mr. Winston Churchill should be punished personally for this ghastly blunder, but had Mr. Churchill, instead of being a minister of the Crown, been a mere chairman of one of the big banks, had he in the same careless and silly way accepted an alteration in the general rate of interest and upset the personal finance of everybody else, Mr. Churchill as a bank chairman would long since have been in discredited retirement, and his word or view would count for nothing in the business world. By contrast the politician can actually get credit and reputation out of failure and may even win a prominent place in history if only his failures are sufficiently spectacular.
A still more serious case is that of Dr. Christopher Addison who, in response to socialistic clamor against profits, arranged to buy our war supplies on a newfangled basis of cost plus commission. The credulous Socialists were pleased to think that despised employers were thus robbed of their profits and given in their place a modest commission.
The arrangement was typical of much of our political improvement. It sounded well. Persons with no experience of buying and selling or of bookkeeping were able to talk about it and able to claim credit for it. The effect, however, was to open the flood gates of extravagance, and Dr. Addison must in that respect be charged with an even larger proportion of the war debt than is properly debited to Mr. Churchill. Neither of them will be asked to accept a shred of personal responsibility or discomfort in respect of transactions which have loaded the rest of us for generations to come with onerous obligations."The politician can actually get credit and reputation out of failure and may even win a prominent place in history if only his failures are sufficiently spectacular."
For the purpose of the lay reader, and it is of course with the layman in finance that we are here concerned, it will be more convenient if we consider the problem of local public debt. There is no difference whatever in essential characteristics between the debt of the parish council and the debt of the Commonwealth of Australia. The figures in the latter case have more [zeroes] at the end of them, but both debts in their origin, character, manner of creation, chances of repayment, and all other essential respects are identical. A very important part of the debt burden is nearly £2 billion borrowed by our local authorities, and most of it borrowed since the war. Having in mind the strictly personal character of debt as we noticed it prior to 1914, remembering how personal wellbeing hung on every fraction of it, it will be seen that this new local debt is absolutely devoid of any such quality.
A bill of exchange concerned with the transfer of a cargo of figs from Asia Minor to Manchester carried on the face of it the reputation and solvency, for what either was worth, of some Turk in Smyrna and an importing house in Manchester. Although the document was dealt with as part of the millions of the money market of London, it was in the last resort dependent upon the various individuals whose names appeared on the back as well as on the face of it. But this public debt of the parish council has come into being without any of these safeguards. The only backing it possesses is a vague and curious notion called the public credit, a credit that, as we are beginning to see, simply does not now exist.
When the financial revolution of the last 20 years begins to have its effects the politicians will have some pungent things to say about this public credit. In the careless manner of the postwar period we have hurried along with a new slogan on our lips, and public credit has seemed to us to be quite a good idea. A little later we shall have time to think it over, and it will dawn upon us that the credit of the state is only the sum of the credit of all the individuals who compose the state. When we have completed the process of destroying the credit of those individuals the state will have no credit left. There was a public credit at a time when the individuals were left in their own responsibility with resources which could, in case of need, be commandeered by the state. We are approaching the stage when, those resources having been collected by the state and the state having spent them, the phrase "the public credit" will be full of bitter disillusionment.
Let us consider the way in which these public debts are created and the people who create them. For the sake of simplicity let us go back to the least important of our local authorities, whose accounts will show only a few score of thousands of money borrowed upon the credit of the public.
We are entitled to ask who it was who arranged these debts and what were their qualifications for dealing with matters of such importance. The first point that strikes us is that these local authorities are composed of "temporary" councilors. There is not a man or woman in public affairs whose tenure of office extends beyond five years. A member of Parliament may, although he seldom does, last for five years, and the local councilor cares for his ward for three.
Here we touch perhaps one of the most important points in the discussion, for it must be remembered that debt is a deal in futures. The future is the essence of a good debt. That future in the case of a proper commercial debt will be in the care of the man who borrowed the money. No such safeguard is thought to be necessary with public debt. The councilor who authorizes the loan will be out of office long before any question of repayment arises.
Further consideration of this aspect of the matter drives the financial mind to desperation. The temporary councilor will not be dismissed from his office because of his bungling in finance, but for altogether different reasons. He may even be a good judge of a money transaction. He may understand the best ways of arranging the details of a debt, but just at the critical moment in the life of an important financial scheme he will be dismissed from his office because the electors do not like his views on licensing or some other question.
The director of a company, thanks to the Limited Liability Acts, is relieved of ultimate personal responsibility for the whole of his folly, but his position is a very different one from that of a councilor, who from the moment he starts to the moment he finishes never has any suggestion attached to him of personal responsibility for anything. This is not the place to discuss the position of women in public affairs. It may however be noted in passing that women have taken a full and equal share in local administration during a period which has been characterized more than in any other way by this debt phenomenon.
Every man, woman, and child in Great Britain is responsible for something like £50 of local as distinguished from national debt, and that has happened side by side with the revolution in the status of woman. A knowledge of finance and facility in dealing with large-scale business matters may in course of time come to woman, just as in perhaps another century it will come to the American nation. We are not here concerned with that argument, but the fact that hitherto woman has not had a share in the working of the money machinery of the world, and is therefore without experience of these matters, is not in dispute.
Glancing at the old debt picture and the one which confronts us today, the next big point that emerges is the presence of our friends the Socialists. This £2 billion of local public debt is very largely due to Socialist influences. To be fair the responsibility is not direct. Most of the money has been spent by woolly brained Conservatives who fondly imagined that they were defeating Socialism by stealing the Socialists' program. But this much at least is obvious. If a council is considering a proposal for borrowing a large sum, the Socialist will vote for that proposal, if he is a good Socialist, quite apart from its particular merits. He is, in obedience to his faith, committed to the destruction of capitalism, and is therefore bound to vote for the borrowing of any sum, however vast, for any purpose however futile, knowing that by so doing he is knocking another nail into the coffin of the hated system.
When the Socialist is convinced that the proposal is wise and good in itself, that view will be strengthened if he is one of those very exceptional Socialists who really understand socialism. He will delight in the knowledge that he can kill two birds with one stone, carry out his beneficent purpose of a park or a swimming pool, and at the same time do something towards the hastening of the Marxian heaven. In the realms of higher finance those super-Socialists, who call themselves planners, welcome every million added to the burden of debt, because it increases the pressure under which they hope we may be reduced to the adoption of one or other of their many brands of imported panaceas.
Side by side with the Socialist on the local authority there will sit the squire or his wife, and here we come across one of the most curious of the undercurrents of the postwar financial revolution. The squire's resources have been greatly diminished by the weight of modern taxation: his ability to perform all his traditional functions has thus been curtailed, and he will often unthinkingly vote for raising money to relieve himself of social obligations which he finds harder than ever to maintain and, by so doing, make more certain than ever of his eventual extinction as a factor in society."The modern notion that the acts of a political council have, as such, better moral foundation than the acts of the stock exchange is of course nonsense."
The parson who occupies the next seat to the squire's wife is a poor man, sorely troubled with the way in which the sources of charity are drying up, and will similarly be driven to support the Socialist in the raising of a loan to take over work formerly considered to be the function of the church. So far as he can see, for why should a parson be expected to understand finance, he is merely getting his good works out of the other tap.
This council (we cannot go through the personal history of each of its members) will contain its proper proportion of black sheep. Mankind has its good and bad qualities. There are black sheep in every grade, and the modern notion that the acts of a council have, as such, better moral foundation than the acts of the stock exchange is of course nonsense, so that a proportion of the debt of the council will be due to the persuasion of people who have something to make out of it. This is a subject of its own and will one day become a front-page subject in the newspapers. Under the skilful guidance of the Fabians, we have for half a century been beguiled with the iniquities of the black sheep of capitalism, but the next half century is very likely to see a change in the fashion, and our skilful purveyors of the details of all sorts of dirty work will turn their attention to the curious doings to be discovered up the backstairs of many of our town halls.
This is quite natural, as these people with all their virtues and all their faults are elected by a free democracy, and on the whole they represent the rest of us in our proper proportions. They do some good things and some silly things just like the rest of us. To the best of their ability they follow current opinion for what it is worth. If they make mistakes, they are mistakes which would be made by the rest of us under majority rule. They are the working evidence of a democratic system which is, or should be, very precious to us, and in that way they represent our hope as a nation and embody our chances of holding our place in the world.
It is not therefore any part of our present purpose to criticize what they do in so far as they are concerned with our own personal comfort or discomfort, and our own personal money and responsibility. Debt, however, concerns the future and is the biggest of all the many questions in public affairs, yet the only question which is hardly in the mind of the elector. A loan may be described as the receipt of an immediate benefit in consideration of a promise of a future sacrifice. In the light of that definition it is obvious that our local council has for 20 years past been accepting immediate benefits and thoughtlessly, but nonetheless criminally, leaving the question of the ultimate sacrifice for the future to consider.
In discredited Victorian times we laid it down by law that a local authority could borrow for a maximum period of 30 years. In these more expansive times that healthy rule has been removed, and we can see by the prospectuses of local loans, appearing in the newspapers from day to day, how money is borrowed for 60, sometimes 80 years ahead, to be spent upon purposes which must be exhausted in much shorter periods.
Whereas we of this generation are not called upon to part with a penny in respect of the ideas of our grandfathers, our grandchildren will be faced with the necessity of paying rates and taxes in respect of our current notions of what is proper. That limitation deliberately placed by us upon future generations will of course diminish the ability of those generations to carry out their own ideas, which, it is fair to imagine, may be rather different from the ideas entertained by us.
Here we come across another of the great social changes of recent times. The 19th century was filled with enthusiasm for passing on to the future something better, for leaving behind rather more than it inherited, for providing for the children of the next generation. The 20th century, with a wholly different point of view says, without a blush, "We ourselves will have a better standard of living, we don't care where it comes from, and seeing that our children and their children have done nothing for us, to hell with posterity."
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This article is excerpted from chapter 6 of Ernest Benn's Debt: Private and Public, Good and Bad, London: Ernest Benn Limited, 1938.
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 This was written before World War II, hence Benn refers to World War I simply as "the War."
 Churchill was minister of munitions from 1917–1919.
 Christopher Addison (later Viscount Addison) preceded Churchill as minister of munitions.
 The Limited Liability Act 1885, 18 & 19 Vict. c. 133.
 A socialist intellectual movement active in Britain since the 1880s.
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