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Home | Mises Library | Perpetual Debt: From the British Empire to the American Hegemon

Perpetual Debt: From the British Empire to the American Hegemon

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Tags U.S. EconomyU.S. HistoryWar and Foreign PolicyFiscal Theory

01/27/2004H.A. Scott Trask

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 Soviet Union.  In March 2002, Secretary of State Powell warned that the war "may never be finished, not in our lifetime."  A month later, Homeland Security Director Tom Ridge warned that the threat of terrorism "is a permanent condition to which this country must permanently adapt." 

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." 

Since Prime Minister Sir Robert Walpole's introduction of the funding system in England 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 British Empire 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 American Republic, Alexander Hamilton for one.

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 summiting the highest peak on Mars.  

The Jeffersonian Opposition to Government Debt

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. 

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 Jefferson and liberty.

Jefferson on the Injustice of Binding the Generations

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. 

For Jefferson, 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." 

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.  Jefferson 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."  

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." 

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?

Jefferson was not impressed with Madison's reservations.

American National Debt, 1800-1900

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 Louisiana, he and Gallatin reduced the principal by $37 million, leaving only $57 million when he left office.  His successor, Madison, 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 New England critics, coupled with a precipitous decline in tariff revenue incident to the war, increased the debt to $127 million by early 1816. 

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 Virginia, 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.

The next president, James Monroe, another Virginia 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. 

The Jacksonian Era

It was left to the next president, Andrew Jackson of Tennessee, 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 Tennessee, 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 California and the other northern provinces of Mexico; 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 (California, Nevada, Arizona, Utah, Colorado, and New Mexico), 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 New Hampshire 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. 

The Debt of the Civil War

The War Between the States caused an explosion of debt that would have startled Jefferson.  It rose from $75 million in March 1861 to $28 hundred million ($2.8 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 (La., 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. 

American National Debt, 1900-2000

Once again, war would negate the fruit of years of patient but modest debt reduction.  At President Wilson's urging, Congress declared war on Germany in April 1917.  In just two years, the debt skyrocketed from $3 billion to $26 billion.  Fiscally conservative Republican presidents (Harding, Coolidge, and Hoover) brought the debt down to $16 billion by mid 1930, before the Depression began ratcheting it up again.  In ten years, Roosevelt 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 Japan and Germany caused the debt to reach the Olympian heights of $260 billion by the end. 

The Cold War Debt and its Successor

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 January 1, 2004).  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.


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