National
debt is a staple of global society in the current age of economic and political
interconnectivity. The conventional
wisdom holds that acquiring debt is fairly cheap, leading nations to
essentially sell their debt to other nations.
Virtually every single nation on the planet has a national debt, whether
it be America’s nearly twelve trillion dollars or Poland’s three hundred eighty
billion dollar debt. Even China, much
maligned as it is today as “owning America’s future” has a large national debt,
most of which in fact is owed to the United States, after the Chinese
government defaulted on a loan provided them in 1990. In this entry, I would like to argue that,
theoretically, a nation would be much better off without debt.
Tracing back the origins of national
debt in the United States takes one back to, unsurprisingly, President
Washington. Washington named New Yorker
Alexander Hamilton as the first Treasury Secretary, although most people
regrettably know him only from adorning the ten dollar bill. As the founder of the Federalist Party,
Hamilton sought economic policies to shift the balance of power from the
states, which were supreme under the Articles of Confederation, to the federal
government. While he achieved this
through a handful of different measures, the only one I will discuss currently
is the assumption of state debt.
During the Revolutionary War the
Continental Congress pumped out “Continentals,” backed by nothing but
promises. Congress and the states could
not agree on a monetary policy, leading to fourteen different policies in the
rebelling nation. The Continentals
depreciated rapidly until they were utterly worthless. Due in part to this general meaningless of
the currency, the states accumulated large debts from private citizens as well
as France and, to a much lesser extent, Spain.
In a savvy political move, detested
by Democratic-Republicans Thomas Jefferson and James Madison, Hamilton had the
federal government absorb the states of their debts, creating one large
national debt. Little more than a year
into the new United States of America, the fissure between state-righters and
national-righters began to widen.
Jefferson and Madison, both from Virginia, which had nearly paid off its
debt, did not believe that the Constitution gave the federal government the
authority to implement such a policy.
This action had multiple
purposes. For one, it shifted power from
the states to the federal government, as the Federalists were wont to do. Additionally, those citizens who owned some
of the government’s debt now had a stake in preserving the national government,
as opposed to simply whichever state was indebted to him. The purpose I am focusing on, however, is
that of ensuring foreign states which owned debt in the United States had a
financial stake, just like the private citizens, in the continued survival of
the nation.
The rational is fairly straight
forward. If a nation which owes one debt
collapses, that debt becomes impossible to collect. Even more obvious is that it prevents the
creditor nation from attacking the debtor nation, as this would cost even more
money, as well as likely collapse the economic system of the debtor, again
making the debt all but impossible to collect.
Ever since Hamilton instituted the
policy, known as the Report on Public Credit, the United States has
continuously held a debt, save for 1835, when the government paid off all loans
entirely, only to accumulate more debt the following year. This is not to say that the debt has always
existed due to continuous deficit spending (spending more money than the
government brings in via revenue); in fact, in the years between the War of
1812 and the outbreak of the Civil War in 1861, the government ran an annual
surplus over twenty times. The
government simply spent the money elsewhere as opposed to paying down the
debt.
Despite the near omnipresence of
debt in our nation’s history, as well as the contemporary world as a whole,
this does not mean that debt is without risk. One of the key indicators of debt is the
Debt-to-GDP (Gross Domestic Product) ratio, as this factors the nation’s
economic standing into the equation.
While Japan’s debt is slightly lower than ours, hovering between nine
and ten trillion dollars, that amounts to over two hundred percent of their
GDP. Essentially what this means is that
if every dime that any Japanese citizen and the Japanese government earn was
put to paying the debt it would take over two years to be debt free. While America’s is not as high, it is about a
hundred and three percent of our GDP, still a highly unfavorable rate.
I now will delve into speculation,
as no modern country has ever maintained an economy running on capital as
opposed to debt for any substantial period of time. A trend in place since the end of World War
Two, and heightened by the end of the Cold War, is that of globalization and
global integration. As economies,
culture, and politics become more linked between nations, we see a general
unwillingness to go to war. While, yes,
the United States has been in two wars in the past decade, one of which
continues to this day, the nations which we invaded were not very
integrated. Iraq and Afghanistan were
both very closed off from the rest of the world, Iraq due to sanctions left
over from the first Gulf War and Saddam Hussein’s stranglehold on the Iraqi
people, while Afghanistan remained isolated due to the hardline Islamic
policies in place under the Taliban.
Europe, historically one of the most
belligerent places on earth, has reached a level of cooperation that has
rendered the use of arms irrelevant, in addition to the general unwillingness
of Europeans to go through another devastating war as they experienced twice in
the first half of the twentieth century. India and Pakistan, always at each other’s
throats, are reluctant to use military force against each other due in part by
the economic and political shockwaves it would produce in the region, and also
by their unwillingness to unleash nuclear war.
While it is true that non-state
actors, such as the Mexican drug cartels and various terrorist groups around
the world, continue to use force, states themselves have largely moved away
from interstate military conflicts. Whereas
military might was once the prime mover of international affairs, in the age
where a housewife in Topeka can instantaneously trade stocks in Hong Kong,
economics has risen the forefront, which brings us finally to the question of
debt.
People fear China for holding our
debt, which could be used against us should an armed conflict ever arise
between our two nations. However, as
mentioned previously, China is not exactly debt free either. Now, imagine a nation had the ability to
reduce its debt to nothing, while still maintaining itself economically. If the debt clock provided by www.usdebtclock.org (an incredibly
fun/depression website) is to be believed, the United States could accomplish
this in roughly twenty years by rising taxes and trimming spending by a fair
amount.
Supposing this happens and the world
remains consistent with how it currently is (aka, the EU doesn’t collapse
plunging the world deeper into an actual depression), then the debt-free
nation, a Creditor Nation in the world of Debtor Nations, will undoubtedly be
the supreme power on the planet, providing that is large enough. The Creditor Nation, debt-free and
prosperous, will be the go-to lender for struggling nations. This would lead to the Creditor Nation
holding the vast majority of foreign debt in the world, creating a system of
true economic imperialism.
It is unlikely that the Creditor
Nation will meddle in the domestic affairs of its debtors, for two
reasons. First, even the slightest bit
of involvement runs the risk of spilling into a situation wherein the Creditor
Nation must endanger its own prosperity, such as a civil war or similar
event. Secondly, debt-holding nations in
contemporary society rarely enforce payment of the debts they are owed, as this
removes their power of other nations; the Creditor nation is no different,
preferring to let the country operate itself, content with the knowledge that
it alone has reached a position supreme over all other states.
I stake claim to no economic insight
nor unique knowledge. Instead, the point
of this entry is to explain the historical precedent of national debt and my
own theory of what a nation without debt would look like. I may come back and expand on this point as
future ideas come to me.
No comments:
Post a Comment