‘Bankruptcy’ Is Here

November 13, 1950

How big a national debt can we stand? What will happen if it ever exceeds that figure?

One of the strangest things about these questions is that they are still being put in the future tense, as if nothing important had happened up till now. A typical letter I frequently get reads something like this: “Years ago economists told us that the nation couldn’t stand a debt of more than $50,000,000,000. But now the debt is $257,000,000,000, and we seem to be doing OK. What about it?”

Congress, it is true, has frequently set a so-called legal debt limit (which could have served a real function as a danger signal), but has as frequently raised the limit as soon as it was approached. Thus in the Second Liberty Bond Act of 1917 it set a legal debt limit of $45,000,000,000. It increased this to $49,000,000,000 in 1940, to $65,000,000,000 in 1941—and it is now set at $275,000,000,000.

The sad truth is that our government has already exceeded the safe debt limits of the past. It has already in practical effect done what a bankrupt—government or individual—always does, which is to make only a partial repayment—to pay its debts off at only so many cents on the dollar.

In form, of course, our government has paid off its debts 100 cents on the dollar, and will doubtless continue to do so. It has reduced its repayment in substance, however, by depreciating the dollar itself, the unit in which the debt is measured. According to official index numbers, the purchasing power of the dollar in terms of consumers’ prices is today only 57.5 percent of its purchasing power in 1935 to 1939. In other words, a citizen who bought a government bond at par in 1935–39 gets back today in real purchasing power less than 58 cents for every dollar he invested. In still other words, he has taken a real capital loss of more than 42 percent.

We have been following, in fact, precisely the course governments have followed from time immemorial in melting down their internal debts. In The Wealth of Nations, Adam Smith, of laissez-faire fame, wrote in 1776:

“When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment.

“The raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment. . . . [In 1776 most governments had not yet learned the easier trick of printing paper money instead of coining hard metals.] A pretended payment of this kind, instead of alleviating, aggravates in most cases the loss of the creditors of the public.... It occasions a general and most pernicious subversion of the fortunes of private people; enriching in most cases the idle and profuse debtor at the expense of the industrious and frugal creditor, and transporting a great part of the national capital from the hands which were likely to increase and improve it, to those which are likely to dissipate and destroy it.

“When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open, and avowed bankruptcy is always the measure which is both least dishonorable to the debtor, and least hurtful to the creditor. The honor of a state is surely very poorly provided for, when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious.”

Smith then proceeds to recite examples of such “juggling tricks” of currency depreciation from Roman times on. He describes in effect what is happening to our own Federal debt today. It is too late to forestall “bankruptcy” of the United States. Our problem is to prevent such bankruptcy from going any further than it has.