Can the United States Support a 300 Billion Dollar Debt?


By OLIN GLENN SAXON, Professor of Economics, Yale University

Delivered Before Pittsburgh Real Estate Board, Pittsburgh, Pa., May 4, 1943

Vital Speeches of the Day, Vol. IX, pp. 692-696.

IN 1943, it is estimated, the U. S. will spend about 62 per cent of its national income for war purposes, the United Kingdom 69 per cent of its income, New Zealand 63 per cent, Canada 45 per cent, and Australia 40 per cent.

Estimates of the post-war national debt of the United States vary widely, ranging from $250,000,000,000 to $500,000,000,000, depending upon the length of the war. In any case the debt, in honest money, will be an all-time world's record. It staggers all imagination as well as the comprehension of anyone who does not believe in the "deficit spending" and "we will owe it to ourselves" doctrines, preached by Keynes, of London, and Hansen, of Harvard, and practiced so fervently of late years on the Potomac.

At the reported current rate of Federal expenditure of $2,000,000,000 per week, some estimate that the debt will be $240,000,000,000 on June 30, 1944, with $70,000,000,000 to $100,000,000,000 more for each year of global war thereafter.

It is quite doubtful if we can actually spend $2,000,000,000 per week. But it is reasonable to assume that the war will necessitate a total debt of $300,000,000,000 to $350,000,000,000 by the end of 1945 or before the world has once again settled down to relative stability.

Assuming a final gross debt of, say, $350,000,000,000, can this gigantic sum, the equivalent of our entire national wealth in 1940, be redeemed in money of present of pre-war purchasing power, or will it be repudiated directly or inflated out indirectly in whole or in part?

The answer, is, it can be paid, and will be, if our people have the moral fibre and economic good sense to do it. If we want to preserve our constitutional democracy and to avoid totalitarian dictatorship, the debt must be repaid in dollars of approximately their present value. Otherwise we will have fought the war to end dictatorship only to embark upon the road to dictatorship, despite victory, through the route of national bankruptcy, the direct cause of the Italian, Russian and German dictatorships of today.

The Nation's Debt Record

However, our debt record as a nation is confusing and conflicting. Despite our present good intentions, our past performances in debt redemption cast shadows of doubt over the future. In the final analysis, the decision will rest with the ballot box.

Let's look at the record briefly. In our colonial period, despite widespread prevalence of straight-laced, stiff-necked blue laws, and the like, 12 of the 13 original colonies defrauded their creditors and citizens by currency manipulation of various types—ten of them depreciated their currencies SO per cent or more in gold value. In some the currencies became utterly worthless.

During the Revolution the paper monies issued by many of the States depreciated 99 per cent and were finally repudiated. Alexander Hamilton, by gargantuan efforts, finally was able to establish the credit of the newly bornUnited States by full redemption at gold parity of all foreign loans made to the Continental Congress. By a log rolling deal with Jefferson, Hamilton finally was able to effect Federal assumption of all State debts incurred as a result of the Revolutionary War, in exchange for an agreement to remove the Capital from Philadelphia to Washington. To do so, however, he was politically forced to repudiate entirely the paper money, issued during the war by the Continental Congress, which had already become practically worthless.

Yet, less than 50 years later, the new nation was able to declare a dividend to the States from a surplus in the national treasury. A little political courage and patience would have permitted full redemption with honor.

In the '30s and '40s of the 19th century some of our States repudiated bonds sold to foreign investors to secure funds for internal development of State resources, railway construction, etc.

Following the Civil War, the Federal Government, to discourage rebellion, rightly insisted that all bonds and currency of the Confederacy be repudiated. In subsequent years certain States again defaulted on bonds sold abroad.

A Proud Civil War Record

During the Civil War Federal bonds and greenbacks, not redeemable in gold on demand, depreciated about 65 per cent in terms of gold. Following the war three political campaigns were fought to determine whether these bonds and greenbacks should be redeemed at par. Finally, 15 years after the war, honesty and integrity prevailed. They were made redeemable fully at par, and the Supreme Court courageously enforced the gold clause in all contracts. At the close of the war, the Federal debt was only $2,700,000,000, and within 28 years it was reduced to less than $1,000,000,000, the lowest in all our history since 1862.

Another Proud Record

We entered the first World War with a national debt of about $1,200,000,000. It rose in 1919 to a peak of $25,500,000,000, in bonds containing the gold clause promise of the Government to redeem the bonds in gold dollars of the same weight as of date of issue. This clause had become necessary to assure their sale to the public, which was skeptical of Government promises in the light of the record. In the 10 years following 1919 this debt was reduced to $16,900,000,000, at the rate of almost $1,000,000,000 per year, with an average annual national income of about $72,000,000,000 for the period. Yet in this period Federal taxes were substantially reduced from 8.7 per cent of the national income in 1921 to an average of only 5.6 per cent.

The Gold Clause Repudiation

The depression years, 1930-33, increased the debt to $22,500,000,000. In 1933, gold payments were outlawed by the Federal Government on both Government and private contracts, thereby repudiating the Government's promise to

redeem its bonds and currency in gold dollars at a fixed weight. This action of the Federal Government was sustained by the Supreme Court in 1935. All bonds, Federal and private, since then, have been permitted to carry no protection against devaluation.

From 1933 to 1941 the Federal debt almost doubled, reaching $42,900,000,000. Since the outbreak of war in 1941, it has risen by leaps to about $130,000,000,000 today, and will approximate $250,000,000,000 by June 30, 1944. It is all payable in dollars of no definite standard. It can be redeemed in dollars of any value determined by Congress or (if the power of devaluation is again delegated, as it was in 1933), by the President at his discretion.

On the record, therefore, the chances of redemption, in dollars of present or pre-war value, of a national debt of $300,000,000,000 or more would appear uncertain.

The higher the debt goes, the greater will be the pressure to redeem it in dollars of much lower value than at present or pre-war rather than tax it away over a long period of years. However, sustained integrity of purpose in government and the economic good sense of our people, who are realizing increasingly the issues underlying debt repudiation, are good omens that we shall again have the moral fibre to redeem the debt honestly.

The People's Stake

Secretary Morgenthau on March 22 announced that at that time there were over 50,000,000 investors in war bonds and 25,000,000 participants in payroll savings. In addition, there are about 25,000,000 bank depositors and more than 50,000,000 insurance policyholders in the United States. Approximately 30,000,000 persons are being taxed on their payrolls, establishing credits in Washington for old-age pensions and unemployment compensation. There are several millions of holders of obligations of private corporations and individuals totaling $115,000,000,000, others who hold obligations of the States, counties and cities totaling $16,000,000,000. In January, 1943, the banks of the country held 47 per cent of the total Federal interest-bearing debt and the insurance companies held 10 per cent, a total between them of 57 per cent of the entire Federal debt, then estimated at $114,300,000,000. In the aggregate, therefore, more than half our population, and, in fact, every family in the country, has a direct and vital stake in preservation of the present or pre-war purchasing power of the dollar.

All who advocate the cowardly way of inflation or direst repudiation will do well to examine the real temper of the people before accepting the easy road of repudiation or inflation rather than the harder, more courageous road of honesty and integrity. The people can readily recall the utter destruction of the middle classes, of the salaried and wage classes as a result of European inflations which paved the way for violent revolution and dictatorships—the French Revolution in 1789, Russian Communism in 1917, under Lenin and Trotsky, Fascism under Mussolini in Italy in 1921, and Hitlerism in Germany in 1932.

Will Politics Force Repudiation?

At present, in light of various over-ambitious, unofficial post-war plans, the future is not too reassuring. For instance, assume for the moment a national income after the war of $100,000,000,000 and a gross national debt of $350,000,000,000. The State and local governments are spending $9,000,000,000 annually; the Federal expenditures over the past 10 years averaged $8,000,000,000. This makes a total of $17,000,000,000 for ordinary expenses of government. Add $6,000,000,000 to $8,000,000,000 for interest on thepost-war debt, between $10,000,000,000 to $20,000,000,000 estimated for "Cradle to the Grave" social security, $20,000,000,000 for the post-war armed services (as estimated recently by Vice-President Wallace), and $1,000,000,000 at least for veterans and dependents. This totals to about $70,000,000,000 of the $100,000,000,000 estimated national income without allowances for debt redemption, world-wide relief, and other favorite projects. There's the major cause of most of the doubt. Merely to tabulate the cost shows the absurdity of the program.

Recent assurances have come from Washington. The Congress has just voted to discontinue the President's power to devalue the currency. The present huge holdings of $22,500,000,000 of gold bullion, more than 90 per cent of the total world supply, are cited as a safeguard against currency depreciation.

There would be still more confidence in the future, if the currency were again redeemable in gold on demand, and if gold were again allowed to circulate freely. This move would go far to prevent any currency depreciation. The revival of the sanctity of the gold clause, protected by constitutional amendment, would give complete assurance.

The next question is the vital one—can we redeem a $350,000,000,000 gross debt in honest dollars, and, if so, how?

The answer is yes, if we have the political courage to attempt it.

The British Experience

Great Britain for many years has carried a national debt more than 100 per cent greater than its national income, treating the debt more or less as a permanent one. Yet it quite consistently maintained a balanced budget in the years preceding the present war.

The Napoleonic Wars, 1793 to 1815, caused an expansion in British debt from £245,000,000 to £734,000,000. This debt is reported to have been greater in relation to British national income at that time than the debt of the 1930s in relation to British national income of that period. While between 1815 and 1850 this debt of Britain remained stationary, yet, because of the rapid increase in population and the substantial increase in productivity resulting from the Industrial Revolution, the debt, which to many in 1815 seemed unbearable, in subsequent years was negligible.

Our First World War Experience

National income is, at best, an inadequate and dangerous concept. It is variously defined and its methods of determination are subject to grave defects. Yet, if used with extreme caution and qualifications, it is helpful in conclusions not otherwise available.

In the period 1909-13, our estimated national income averaged $30,700,000,000. The Federal tax take during this period was only 2.2 per cent of the national income. The war inflation raised prices from 1909-1913 through 1920 (Wholesale Commodity Index) by 126 per cent. National income rose to $73,500,000,000 in 1920, but due to the price rise, the real national income probably did not rise as much as 10 per cent.

During the war, however, the Federal tax take rose to a high of all time up to then of 5.9 per cent of the estimated national income in 1919, 8.4 per cent in 1920, and 8.7 per cent in 1921. This was the high point until the Roosevelt Administration took office.

From 1920 through 1932 prices fell sharply, but national income rose to a peak of about $80,000,000,000 in 1929 (before adjustment to price changes) and fell to about $45,000,000,000 in 1933, the low since 1917. However,

estimated national income for 1919-38 averaged $66,600,000,000 in current prices and $70,000,000,000 after price adjustment. Average national income, therefore, after price adjustment, rose about 55 per cent during the period 1919-38 over the period 1909-13.

This real gain of 55 per cent was due to a sharp increase in population and increased production arising out of improved machine technology. We not only held the gains of the war period, but greatly improved upon them. Despite the subsequent "great depression" years 1930-35, in 1939 estimated national income was $67,000,000,000 before adjustment for price changes, compared with $38,000,000,000 in 1914, an increase of 76 per cent, while prices in 1939 were only 14 per cent higher than in 1914. In this period, however, per capita productivity probably did not increase because of unemployment and shorter hours.

National income in 1940 is estimated at $76,000,000,000, in 1942 at $117,000,000,000, and for 1943 at $135,000,000,000, all before adjustment for price changes. In 1940 the Wholesale Commodity Index (1926=100) stood at 78.6 1 1/2 points over 1939). By March, 1943, the index rose to 103.3, an increase of almost 35 per cent over 1939. Reduced to 1939 prices, the estimated 1943 national income would be almost $100,000,000,000 compared with $67,000,000,000 in 1939, evidencing a very substantial, real increase in production!

Can The Debt Be Paid In Honest Dollars?

Consequently, if the last war and post-war periods are fairly accurate precedents, we can expect, at least, to hold and even to improve upon the present war level of production and of national income, despite sharp fluctuations in prices and national income which can be expected over a period of time. We should, if the forces of production, capital and labor are permitted to operate without bureaucratic domination, look forward to expansion of our national income over the next 50 years very substantially, despite the fact that by 1960-70 our population is expected to become more or less static with an average increase of about 1,000,000 persons per year until then. We can overcome this by full utilization of our man and woman power, by increased production per man hour through constantly improved machine technology and cost-saving devices, and, if necessary, by a longer work week than 40 hours.

By 1960 we should have a population of 150,000,000. If we in the meantime take advantage of our reduced costs of production (resulting from increased supply of skilled labor, improved plant and equipment, and increased machine technology growing out of the war) to reduce prices and tap the huge unexploited markets at home and abroad in the lower income-groups, we will use our productive plant, our magnificent labor force, and our huge capital funds to the maximum. Our national income in dollars, despite lower prices based on lower costs, could increase substantially over present levels, more than making up in increased volume what is lost in lower prices.

It would appear quite feasible for us to maintain a permanent minimum national income of $100,000,000,000, and even to expand it to $150,000,000,000 over the next 50 years or more. In the immediate post-war years of reconstruction abroad and satisfaction of bottled-up demands at home, it should be comparatively easy. In fact, we may well be short of man and woman power to do the job, rather than be faced with unemployment.

In subsequent years, the full working force, capital funds and productive capacity of the nation can be kept fully at work, especially if we gradually accept the doctrine of

buying abroad those things produced cheaper there and selling there those things we can produce cheaper here. Our real standards of living will be raised thereby, through lower prices, and huge foreign markets will be opened to us. Furthermore, only by allowing our debtors to pay us their debts in surpluses of our imports over our exports, can we receive repayment of huge sums to which we will be entitled.

Necessary Changes In Federal Policies

All this, however, will require governmental policies fostering maximum production based on lower costs rather than subsidized restriction of production with prices artificially pegged by government above their true level. It will require maximum employment rather than subsidized unemployment, wages and hours determined by collective bargain-ink on a free, rather than a statutory, artificial market. It will require encouragement of lower rather than higher paces, and the re-establishment of free determination of prices on a free competitive market. It will also require recognition of the fallacies that higher prices make for prosperity and that we will have more for distribution among all of us by restricting production. It will also require the rehabilitation of the profit motive as the necessary stimulant and incentive to maximum production.

All this will mean full employment of capital, plant, and man power. It will mean greater and surer social security without Government domination. It will mean higher real wages, a higher standard of living, and in the long run a shorter work week than the Government can ever assure by legislation.

How The Debt Can Be Paid

From 1922 through 1932 the Federal tax take averaged only 4 1/2 per cent of the national income, but under the present administration it rose in the 1930s to an average of per cent, and in 1938 reached 9.7 per cent, the all-time high until the present war.

In 1932 Federal, State and local taxes took 17.4 per cent of the national income, 4 per cent going to the Federal Government, 13.4 per cent to the others. By 1938 the total take was 22.4 per cent of the national income, 9.7 per cent going to the Federal Government. In 1933 England and France took in taxes for all government 26.7 per cent and 27.8 per cent, respectively, of their national incomes, while in 1938 they took only 21.7 per cent and 24.9 per cent, respectively.

With a minimum national income of $100,000,000,000, expanding over the coming years, and an annual tax take of not more than 25 per cent for all government purposes (State, local and Federal) we would have a minimum of $25,000,000,000 for all governmental purposes. In the '30s the State and local expenditures averaged $8,000,000,000 and the Federal expenditures $8,100,000,000 though the average Federal expenditures in 1923-1933 were only $3,000,000,000 per year.

Allowing $8,000,000,000 per year for State and local governments, we will have $17,000,000,000 for Federal purposes out of the $25,000,000,000 total tax take. Since a national income of $100,000,000,000, with a relatively static population, will mean relative full employment and reasonable farm incomes, Federal subsidies for relief (which cost $25,000,000,000 in the last ten years) and for agriculture, etc., can be substantially reduced, if not eliminated. Ordinary Federal expenditures of the '30s can therefore reasonably be cut from an average of $8,100,000,000 to $6,000,000,000, still a 100 per cent increase over the average Federal expenditures for 1923-33.

Subtracting the $6,000,000,000 from the $17,000,000,000 left after the State and local expenditures, leaves only $11,000,000,000 for increased veterans' benefits ($557,000,000 in 1940), for annual debt retirement and interest, and for additional costs of the armed services. Allowing $1,000,000,000 for additional veteran and dependents' benefits, $10,000,000,000 is left for these other purposes.

This clearly does not allow much for interest, amortization, the armed forces, and emergency expenditures, but we are using minimum revenue figures.

Offsetting, Realizable Assets

Assuming a gross debt of $350,000,000,000, there are many off-setting items which can be listed. The Director of the Federal Budget Bureau recently stated that at the end of the war the Government would have on hand $50,000,000,000 of surplus supplies (exclusive of plant and equipment) scattered all over the world. This sum is greater than our entire national debt in 1941 and about the same at present exchange rates as Britain's entire national debt in 1942 after three years of the present war.

We have advanced to our Allies under "lease-lend" about $10,000,000,000 and we can reasonably expect that account to reach $25,000,000,000 before the end. There is also the matter of about $14,000,000,000 due us from the Allies on account of the last war.

The Government has also invested at least $5,000,000,000 in Government owned plants for war production and $25,000,000,000 in other construction. Probably another $5,000,000,000 will have been invested in real estate and $5,000,000,000 in loans to Latin American countries. Probably as much as $25,000,000,000 will be in Government owned shipping at the end of the war. These figures do not include many billions of dollars of Government financed plants and equipment, industrial and other, much of which is under option to private industries at the end of the war. All in all, the total will amount to more than $150,000,000,000, more than three times our national debt in 1941.

Let's hope that at least $75,000,000,000 will be salvaged to reduce the gross debt over a period of years from $350,000,000,000 to, say, $275,000,000,000. It can be done, if there is the will to do it. And it will be much easier to salvage 50 per cent ($75,000,000,000) than to produce that same volume and to tax it from our people.

But let's figure a salvage of only one-third, or $50,000,000,000, leaving a net debt of $300,000,000,000 to be repaid over the years. With a minimum national income of $100,000,000,000 we can, judging from British experience, reasonably sustain a national debt of twice the size of our national income, or, say, a net debt of $200,000,000,000. In fact, there are many reasons to believe that our country can sustain a greater debt in relation to our national income than the British can. The $300,000,000,000 figure will, however, severely strain all our resources to carry it, and balance income and expenditures. But it can and must be borne and redeemed in honest dollars, if we are to avoid national bankruptcy and dictatorship.

A Balanced Budget Necessary

It makes relatively little difference how long it takes to repay the debt. What matters most is popular confidence in the honesty and integrity of purpose of the Government to repay it. And the best means of establishing that confidence is the maintenance of a balanced budget, which has not been attained by the Federal Government since 1930.

With a national income of $100,000,000,000 we could, by taking the entire national income, repay it all in three years. By taking $3,000,000,000 for debt redemption, we can repay it in 100 years and maintain a balanced budget, but the carrying charges will be heavy.

Assuming a debt retirement of $3,000,000,000 per year and subtracting that sum from $10,000,000,000 still available from our assumed annual Federal revenues of $17,000,000,000, we have left $7,000,000,000 per year for interest on the debt, for additional expenses for the armed services and for emergency expenditures, if we are to keep the budget in balance.

Interest On The Debt

A debt of $300,000,000,000, converted into bonds with an indefinite maturity date (rather than permanent bonds) can possibly be carried at an interest rate of, say, 2 per cent. If necessary, to assure this rate, special inducements could be offered, such as partial inheritance or income tax exemption, or redemption in gold dollars of a fixed weight. This rate would mean an interest charge annually of $6,000,000,000, leaving only $1,000,000,000 for the armed forces and emergencies.

With some substantial support from the rest of the world, which we presumably will be policing for some years to come to maintain peace, $1,000,000,000 should, after a reasonable time, suffice for maintenance of the armed forces.

In case of emergencies, such as necessary subsidies in various quarters, or additional funds for the armed services, or additional interest on the debt (if a 2 per cent rate proves too low), the total tax take could be raised temporarily from time to time by 5 per cent, but 25 per cent of the national income for taxes is, from past experience, about all that a nation can stand, except in emergencies, without disastrous repercussions. However, even a total tax take of 30 per cent of the national income, yielding an additional $5,000,000,000 for the Federal Government, would be only 7.6 per cent more than was taken by all Government in the United States in 1938 when tax rates were considerably lower than in 1941, not to mention present war-time rates.

It is also well to remember that over the next 50 to 100 years our national income can be reasonably expected to reach $150,000,000,000. A 25 per cent or lower tax take on such an income would give the Federal Government ample leeway to balance the budget, reduce taxes, or increase the annual debt redemption rate.

Lotteries For Debt Retirement

Another device worthy of some consideration to provide a good margin of safety for possible emergencies and to reduce the huge debt more rapidly in any case, is an annual lottery, conducted by the Federal Government. It could reasonably be expected to yield from $5,000,000,000 to $10,000,000,000 per year, if properly managed, with adequate prizes. Our people love to gamble, as is evidenced by the stock market, the dog and horse races, our national game of "craps" and the widespread popularity of bingo. Some will object, on moral grounds, but the alternative to lotteries may be much worse, to say the least. Lotteries have been used by governments in the past, and our laudable objectives will fully justify them. In any case, they would be as palatable as a sales tax to raise a like amount.

Post-War Taxation

In closing a word must be said about post-war taxation. Redistribution of wealth and income since 1929 has gone on at such a rapid pace that the wealthy are fast disappearing and the so-called middle class is seriously threatened.

In these groups lie the savers of the nation, whose capital is so vital to economic progress.

In 1917 there were 141 Federal tax returns of $1,000,000 or more. In 1920 there were only 33, by 1921 only 21. They rose again to more than 500 in 1929 to fall to only 41 in 1935.

In 1938 the total income of all persons receiving $5,000 or more was only $6,500,000,000, only enough to finance this war 3 1/4 weeks at the reported rate of expenditures—$2,000,000,000 per week.

Since the war began, wages and weekly pay-rolls have risen much more rapidly than cost of living. So likewise with income of farmers. Industrial workers and farmers are the chief beneficiaries of the increased national income arising from the war effort.

The Federal tax structure must be revamped so as to secure a larger yield from the lower-income groups and ease the strain on the higher-income levels, if we are to maintain the savings so vital to our machine technology and to our steady economic progress.

Post-war taxes must be levied with an eye to reducing costs of production, encouragement of saving, and preservation of our free economy from government ownership or bureaucratic domination of all economic activity.

Declining Private Debt

One encouraging note, worthy of mention, is that between 1930 and 1940, while the Federal debt increased about $32,000,000,000 and State and local debt rose $1,500,000,000, a total increase of $33,500,000,000, private debt in the United States declined $28,600,000,000, almost offsetting the rise in government debt. If the private debt, which was $115,000,000,000 in 1940, can be cut to $80,000,000,000 by 1945, and steadily reduced under conditions of high production, as seems feasible, the governmental debt can be maintained more readily.

There is also real hope that State and local debt and taxes can be substantially reduced during the war and the subsequent years of increased productivity. Taxpayers' groups, such as the Pennsylvania Economy League, are now operating in 32 States, advocating good government at less cost, and making the people tax- and debt-conscious.

"A Little Repudiation—A Little Inflation"

Just a word in regard to the all-too-prevalent view that we can take care of the huge post-war debt by a little repudiation, a little inflation, and a little taxation. It won't work. Repudiation or inflation, in large or small doses, penalizes those who can least afford to pay. They do not take into account the individual's ability to pay, and they are unscientific and utterly dishonest.

There is no assurance that inflation, based on devaluation, would work in any case. A 50 per cent devaluation, in hopes of doubling prices, would probably be offset in five years or less by lower prices resulting from lower production costs, arising out of the war and from increased competition and rising production, as prices in the early stages began to rise. Furthermore, devaluation can and will be upset by competitive devaluations by other nations, selling to us and our customers. Also, we have no assurance that simultaneous devaluations by the various nations would have any effect at all, if the same rates were used by all. Finally, controlled inflation, wherever attempted, has never worked without complete dictatorship. Small doses are ineffectual and are offset. They are then followed by larger and larger doses until the middle class is destroyed. Of course, controlled inflation will work if all prices are enforced by the bayonet, the firing squad, and the concentration camp.

No Easy Way Out

There is no easy road out of debt. "Taxes are paid in the sweat of every man who labors, because they are a burden on production. If excessive, they are reflected in idle factories, and tax-sold farms. Our workers may never see a tax bill, but they pay in deductions from wages, increased costs of what they buy, or in broad cessation of employment."

The author of that statement, Franklin d. Roosevelt, holds today the fate of this Nation in his hands. We can only hope that he and his Administration will remember that principle and couple it with another just as vital and just as powerfully expressed by the President: "Too often liberal governments are wrecked on the rocks of loose fiscal policy."

[This speech appeared as an article in the Commercial and Financial Chronicle, May 13, 1943.]