Yet debt is simply a new form of currency that is issued, bought, priced and sold like any other currency, and the fear that it will fatally undermine the nation is much like the belief in the 19th century that paper dollars would destroy value and rob the middle class, or the fear that silver would do the same, or the concern in the 20th century (and now) that unless all value is tethered to gold, economies will collapse. The debt freakout is the latest installment, the only difference being that those who believe debt will destroy us have more political power. Debt may not undo us, but actions flowing from the fear of it could come close.
It’s not just the tea party movement, of course. The dangers of debt are preached widely. The establishment consensus is that there is too little growth and too much government spending everywhere in the developed world. Germany still hasn’t psychologically recovered from the debt and currency traumas of the 1920s. Brazil and much of the rest of Latin America are scarred by the memories of the 1970s and East Asia by the 1990s, when debt debacles nearly sank those economies.
Yet an amen chorus is not the truth, and consensus is not fact. Debt can be a fatal liability if used unwisely, but used well it can be a powerful tool. It allows governments, businesses and individuals to expand what they can do in the present in the belief that future gains will ensue. It can fund education, underwrite infrastructure and fuel research and innovation. The fact that debt is so often used poorly, to paper over problems or fund ephemeral spending, represents a serious and potentially crippling problem. But that is not an indictment of debt; it is an indictment of what is done with it.
The current assumption is that debt is out of control and has been for many years. Consumer debt in the early 2000s gave way to sovereign debt today, and Greece and its Mediterranean brethren are held up as Exhibit A in the prosecution’s case. Yet this animus harkens back to moments when shifts in the financial system have triggered anger and panic. Our debt fixation, then, may be less a product of debt itself than one of adjusting to a new currency.
Argument spans centuries
The tea party is less than three years old, but anxiety about the national debt extends to the early days of the American republic. Governments have often run up debts to pay for wars, and massive borrowing allowed the American colonies to fight the British during the Revolution. But then came the aftermath. The collapse of the first union of the states under the Articles of Confederation stemmed from the inability of either the states or the central government to repay those loans.
Alexander Hamilton indelibly shaped the union by arguing persuasively that such debt should be nationalized and repaid by the federal government. Less explicitly, Hamilton believed that debt used responsibly was a powerful tool for both national unity and advancement. A properly funded federal debt, he said, “if it is not excessive, will be to us a national blessing.”
That, of course, didn’t sit well with Thomas Jefferson, enamored as he was with the independent yeoman farmer. Jefferson thundered with words that the tea party could easily make its motto: “The perpetuation of debt has drenched the earth with blood, and crushed its inhabitants under burdens ever accumulating.” And if debts had to be incurred by the federal government, he argued, then they must never be so large that they would be passed from one generation to the next.
In some respects, we are still actors in the passion play of Jefferson and Hamilton. For much of the 19th century, government debt faded as an issue, given that there was minimal federal debt in those years except during the Civil War. The real problem was a bewildering set of currencies. There was no national bank; states, counties, and private banks issued their own paper notes, and there were heated debates over whether those notes should be backed by gold or silver.
The country was wracked by disruptive economic crises every decade, and some of them — from the Panic of 1837 to the one in 1873 or another in 1893 — were as severe as the Great Depression, though not as long-lasting. Almost all of them started with bank failures. As the country expanded, so did the demand for different forms of currency to finance industrialization, urbanization and settlement of the continent, not to mention various wars.
By the end of the century, money pegged to gold was seen by farmers and not a few workers as a devious tool wielded by bankers and industrialists in New York to rob them of their hard-earned income. To the bankers and business people, gold meant less inflation because there would be fewer gold-backed dollars in circulation; to the working class, it meant less money and more burdensome debts.
The country was shaken by protests and violent, often lethal confrontations. These discontents were crystallized by the crusading Democrat William Jennings Bryan, who lost the 1896 election declaring that Americans would not be crucified “upon a cross of gold.” Today, some see gold as the only store of real value; at that time, it was seen by many as way to steal from the working class.
These contests were not settled by the creation of the Federal Reserve in 1913 nor by the gold standard that held up even after the Bretton Woods system in 1944 made the dollar the global currency. In fact, the gold standard prevailed until President Richard M. Nixon ended it once and for all in 1971 and ushered in our current era of fiat currencies. With inflation soaring in the 1970s, the end of the gold standard was taken by many as proof that inflation, debt and implosion were the most likely fate of the economy, and the sorry state of sentiment and economic activity in the 1970s seemed to bear that out.
The latest phase of the debt war began in the 1980s, when deficits became the norm in Washington. The first national debt clock was installed in New York City by real estate developer Seymour Durst in 1989 to highlight the dangers of $2 trillion in federal arrears. Although the clock was briefly turned off in 2000 when the budget was balanced under President Bill Clinton, the die had been cast (or, as the history recounted above would suggest, cast again). “Balance the budget” became a catchphrase of national politics, and the idea took on a new intensity in 2009 with the combined effects of massive government stimulus and an expansion of government spending on health care.
Clearly, then, debt is not a problem particular to our time. Rather than seeing debt as a ticking time bomb, however, it should be seen as a medium of exchange. After all, it is issued like currency; debt instruments are priced by markets like fiat currency and are bought, sold and traded. Debt is used to conduct transactions as simple as buying groceries and as complicated as buying corporations. It is a future obligation, certainly, but it is also a real-time coin of the realm.
Paying the wrong debts
So what’s the problem? It’s not debt or deficits themselves, but rather how those debts have been used.
Throughout the developed world, levels of public debt have jumped at precisely the time that organic growth has ceased to generate levels of affluence that people have come to expect and need. In the United States, government debt began rising just as middle-class wages began to plateau. The financial crisis of 2008-09 punctured the dream of endless prosperity that characterized the last half of the 20th century (except for a brief halt in the 1970s).
The reality of “growth for all” started sputtering long before the recent ballooning of national debts. It began in the 1980s; it just took 30 years to notice it. Government deficits have been one way, along with housing bubbles in the 2000s and Internet bubbles in the 1990s, to delay dealing with that fact.
So, we have borrowed to close the gap between our dreams and our reality, and much of that gap has been consumption. We have used deficits primarily to maintain our desired levels of buying stuff and using stuff, whether that stuff is next-generation fighter jets or larger homes. We have used deficits to fight wars, and we have also used them to maintain our collective commitment to the many millions who cannot earn enough to meet basic needs such as housing, food and health care.
Either way, we are using deficits in the manner most likely to cause subsequent problems. Debt or investment that yields future return is the height of rationality. Public debt for education, for infrastructure, for research and development, or for public-private partnerships all could yield massive returns. But that is not the primary use of our current debt. Instead, we use it to avoid making hard decisions.
Still, the fear of debt itself is misplaced. It may be that Jefferson today would be at the head of the tea party, but that doesn’t make him or them right (all due respect to the sage of Monticello). Debt is a tool — one that arouses a particular passion, to be sure. Downplaying its risks tends to engender a level of rage on par with hot-button issues such as gun control, abortion and Middle East politics. Measured arguments are rare.
In the midst of these debates, remember that we’ve been fighting these fights for generations. The difference today is that the promise of unlimited frontiers seems ever more tenuous, and the past 30 years have seen a gradual erosion of our economic model. That deserves passionate and intense action _ to invest smartly in the future while we still can and to let go of unrealistic expectations of easy growth forever.
The debt fight is a distraction. How we spend and how we use debt will shape our future. We will be none the richer if we eliminate our debt without building a new economy. Debt used unwisely might hasten our decline, but not using debt at all might ensure it.
Karabell is president of River Twice Research, where he analyzes economic and political trends. He is the author of “Sustainable Excellence: The Future of Business in the 21st Century.”