American Socialist, December 1956
During the war it was federal borrowing; since the war it has been consumer and mortgage credit—for fifteen years, debt pile-up has helped sustain the economy. Can it go on indefinitely?
Let us all be happy and live within our means, even if we have to borrow
the money to do it with.
—Artemus Ward
FOR fifteen years, the American economy has resembled the tippler who staggers on a daily round from pawn shop to bar. In 1940, the total net debt, public and private, was $189.1 billion. By the beginning of 1955 it had risen to $605.5 billion. That is more than three times the valuation of federal government property; it is far more than double the value of all one-to-four family homes in the country. Never in the field of human economics was so much owed by so many to so few.
Contrary to the prophecies of amateur radical economists, money cranks, and lunatic fringers, there is not necessarily a point at which debt becomes bankruptcy, and our government or economy ‘collapses’ like a fly-by-night appliance dealer. The matter is far more complicated than that. It may be stated this way: The whole problem of prosperity in a capitalist economy is to keep production profitable so that it keeps going and growing. But the innate trend of capitalist economy is to provide consuming power at too slow a rate to sustain full production at a profit. In the past fifteen years, the monster growth of debt, both public and private, has been the chief supplement to the ‘normal’ market.
First, in massive wartime doses, roughly $200 billion of public debt piled up in the years 1941-45 got us out of the depression and brought full employment. Then, in the ten years following, another $200 billion, this time of private debt, has kept the economy at or near top speed. The danger to the economy is not the debt itself, but what will happen when it is not possible for either the public or private debt to grow at the pace that has been set for it over the past decade and a half.
Our federal government at present owes roughly $280 billion as compared with $1 billion in 1902, $19 billion in 1932, and $72 billion in 1942. Let us delve first into this situation and see what is disclosed.
KEYNESIAN economists theorized during the last depression that deficit spending on the part of the government could lift an economy out of the doldrums. While Keynes himself did not elaborate the subject too greatly, followers like Alvin Hansen and A. P. Lerner (with his ‘functional finance’) took up the thread of the argument. We must break, they said, with the concept of a balanced budget. It is far healthier for the budget to be unbalanced. In bad times, the government should spend what it hasn’t got, in order to inject more purchasing power into the economic bloodstream. Then, when times are good and an inflationary and speculative boom threatens, the government should spend less than it takes in, so that the tendency to frenzy is dampened and the national debt is reduced. In that way, the extreme peaks and valleys of the economy will be leveled out, and likewise the federal debt will even itself out. What is lost in bad times will be made up in good.
The theory has been put to the test of a certain big budget experience. It is amazing how economists who above all Federal pride themselves upon their ‘pragmatism’ and ‘experimentalism’ have been loath to face the test of experience and sum up its meaning. Undoubtedly, the reason is that if the experience is summed up coldly and objectively, it opens such a void before contemporary economics that the fear of confronting it overrides the scientific instinct.
What has happened? Rooseveltian deficit spending during the depression years was large by any previous standards: an average increase in the federal debt of about $5 billion a year. But it was only when war spending came along, and started boosting the debt by more than $40 billion a year—an amount equal to half of our started 1929 national income—that we pulled sharply out of the return depression and everybody had a job. Evidently the principle discovered by the Keynesians was sound, but in the application the massiveness of the problem had been underestimated. The sickness of the capitalist imbalance between productive capacity and consumer demand was more extreme than any in control of governmental policy had dreamed.
Then what happened? Did the new theory of the budget work out in good times, with a reduction of the federal debt so that it could be ready for a new upward p when depression came again? No, in actual fact the federal debt, huge as it was, proved to be a permanent encumbrance which has grown by another $30 billion since 1945. A growing national debt is shown to be a condition of keeping consumer buying power up whether in good times or in bad, and no one speaks seriously any longer of reducing it by considerable amounts in the foreseeable future. Here was further and still more striking proof that the capitalist economy has been, since 1929, permanently and organically out of whack. Furthermore, when the growth of public debt slowed down, private debt started zooming at an unprecedented pace; but we will return to that later, and for the present restrict ourselves the national public debt.
WE have seen that the first defect of the Keynesian theory is that it assumed that the debt could be a kind of revolving fund which would pour into the economy when needed and be siphoned out when no longer required. But the Keynesians thought in terms of a .business cycle, with its ups and downs, and experience has proved that things are much more serious than that. There is a business cycle, but there is also a long-term trend downwards, a tendency to stagnation. This is plainly shown by the national debt, a category which Keynesian economists above all others ought to be able to read clearly. It does not move up and down, it moves up only, at best holds its own in periods of great affluence.
Let us go on: We are now the proud possessors of a national debt seven times as large as in 1939, and far bigger than anyone foresaw in the pre-war years. While most have treated this subject either with flippant lack of seriousness or with the elaborate disregard which mankind seems to reserve for calamities about which nothing an be done, there is no question that some important results follow. In the first place, while nobody can set a limit to the national debt beyond which we will be ‘bankrupt,’ still it is clear that new depression troubles can not be met with the same kind of debt expansion that took place after 1941. The burden of interest would become very heavy; the political resistance would be huge (if the borrowing were to take place in peace time by voluntary decision and not in war time under constraint of military decision); and the consequences of so vast a cheapening of the federal financial structure in terms of inflation cannot be easily foreseen.
In the second place, the debt, as it now exists, is a sizable burden. Of course, much that is said and written on this aspect of the thing is nonsense. The nation as a whole is not impoverished by the existence of the debt, because if the government owes it, others in the country own it. Were it a foreign debt, owed to other countries, then we would be in real trouble right now. This can be seen from the huge difficulties Britain has had in managing her relatively much smaller foreign debt; income and resources are, in such a case, siphoned out of the country’s grasp. Our national debt is owed by Americans (or American institutions) to Americans (or American institutions).
But this undoubted fact does not change the equally clear fact that those who owe the national debt are not the same people as those who own it. The government owes it, and that means that each of us, in our capacity as taxpayers, has to carry the load. One of Marx’s famous epigrams is appropriate: ‘The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt.’ And who owns it? The following table shows the distribution of total federal securities outstanding in April 1954:
Individuals $ 65.8 billion
Commercial banks 62.5
Federal Reserve banks 24.6
Insurance companies 15.6
Mutual savings banks 9.2
Other corporations 18.9
State and local gov’ts 12.8
U. S. gov’t accounts 48.2
Miscellaneous 13.5
Total $271.1 billion
Source: Treasury Department Miscellaneous includes savings and loan associations, corporate pension trust funds, dealers and brokers, etc.
We do not have a breakdown of the individuals who own government bonds, and so cannot show the distribution according to rich, middle, and lower income brackets, but even without that, if it be assumed that all the individual owners are people in modest circumstances, it is still clear that the federal debt is held overwhelmingly by financial institutions out of the reach of the average man. Thus the piling up of the huge national debt has meant a shift in the claims on the future produce of the economy in the direction of the banking and corporate world.
THE federal debt is managed by periodical issue of new securities in order to get the money to pay off the old. In this way the government is able to get away with not really paying off the debt; it is doubtful that it will ever be paid off. Many have drawn the conclusion that it has no meaning for that reason. Here again, another important fact is overlooked. To sustain the debt, interest payments must be made to its owners, as patriotism has hardly ever been known to extend to the making of interest-free loans. In 1939, the government paid out under a billion dollars as interest, but in 1955 it paid out 6 ½ billions, some ten percent of the federal budget. Again, it is too slick to say that the money is taken from the people in taxes and paid back in the form of interest. It is taken from all, or most, of the people, but in its great bulk it is paid back to a concentrated few, as the above table shows. This means that the national debt has become a huge siphon for redistributing national income.
The irony of this is not appreciated as it should be. The very Keynesian mechanism which is designed to help consumer demand has saddled the nation with an automatic device for shifting money out of the hands of the consuming public and into the hands of capital-accumulating institutions! The amount of money involved is by no means negligible. As a matter of fact, it is so large that it pretty well cancels out the spreading of consumer income down among the people by such devices as social security benefits and unemployment compensation.
Thus far we have been discussing the federal debt. The major part of that debt was piled up during the second World War. But let no one imagine that the debt problem came to a halt when the war ended. As we have indicated, an ever-growing debt of all kinds has become a permanent feature. Leland F. Pritchard, Professor of Finance at the University of Kansas, has written an unusually good article in the Commercial and Financial Chronicle of Nov. 10, 1955, in which he points out: ‘Prior to 1929 profit expectations, operating within the framework of a system that was basically capitalistic, were apparently adequate for the achievement of high and rising levels of production and employment. Increasingly since 1929 government deficit financing or government guarantees or other inducement to private debt expansion have been relied upon.’ So well has Prof. Pritchard stated the framework of the problem, it would be best to cite fully from his article:
‘The sharp and unprecedented expansion in the Federal debt after 1940 was virtually the sole force which finally pulled the country out of the slough of the Great Depression. Even so it was 1942 before a condition of full employment had been achieved. During the 1940-45 period total real debt expanded by approximately $193.5 billion. Thus in the short space of five years the total cumulative net debt in existence at the end of 1940 was more than doubled. Practically all of this expansion, or $185 billion, was accounted for by the expansion of the Federal debt.
‘The post World War II period has been chiefly characterized by an unprecedented expansion of private debt. From the end of 1946 to the end of 1954 total net debt increased by $208 billion of which $187.7 billion can be accounted for by the expansion of private debt. Thus it may be seen that the postwar period almost duplicates, in aggregate terms, the war period but with the roles of the Federal Government and the private sector reversed. . .
‘The evidence seems to suggest that any real slowing down in the rate of debt expansion will produce an intolerable level of unemployment, and make the existing structure of debt insupportable.’
The merit of Prof. Pritchard’s broad canvas here is that he has clearly shown the deficit-financed character of the economy for an entire period since the Depression, with private debt taking up where federal debt left off in 1946. The average expansion of our indebtedness to the tune of some $25 billion a year since 1946 shows that the problem was by no means overcome by the one glorious wartime burst of government spending.
PRIVATE debt, to which we now turn, means in its major aspects consumer debt in the form of installment buying of cars and other hard goods, plus mortgage debt in the form of low-down-payment home buying. These two forms of debt were exhaustively covered by Fortune in two articles last year (March and April issues). A few facts show the dimensions of the trek to the hock-shop.
In the twenties, consumer debt was in the range of $5-6 billion, about 8 percent of disposable income. Today it is over $36 billion, more than 14 percent of disposable income. And let us not forget that the twenties have been looked back on as a time of rash installment buying! Mortgage debt shows a similar comparison. In the notorious twenties, it increased in the five years 1925-29 from $13 billion to $19 billion, or by 46 percent. But in the depression-proof fifties, mortgage debt went up (1951-55) from $45 billion to $89 billion, or nearly 100 percent. And the rate of increase is accelerating from year to year, so that the line on a graph looks like a mountain peak that is getting so steep it is nearly vertical.
It should be noted that this enormous growth of consumer indebtedness also carries with it a tendency, because of interest payments, to shift a portion of national income away from the consumer and into the hands of the commercial banks, sales finance companies, and, to a lesser degree, retail outlets and loan sharks. And here the figures are staggering. The consumer has been habituated to think of his installment purchase not in terms of how much it costs in interest and service charges, but how much it will cost him in monthly payments. He is therefore being flayed alive by usurious interest rates that make Shylock look like a philanthropist. The cost of borrowing money to buy a new car is from 12 to 24 percent, and up to 36 percent for used cars. Other goods may be bought with hired money at a charge of from 9 to 43 percent. These are the ‘responsible’ and regulated rates; illegal or unregulated rates may run as high as 200 or even 1,000 percent!
HOW much consumer income is being shifted out of consumer hands by these interest charges? In 1955, outstanding installment debt was about $28 billion, and the carrying charges plus interest on this debt came to the fabulous amount of more than $4 billion, or about 16 percent. Thus we have the spectacle of a befuddled nation putting itself into hock at a feverish pace and paying medieval interest rates for the privilege, in order to keep a system going it could well do without. This goes by the name ‘the soundest prosperity we have ever had.’
As is usually the case with pious thieves, a bit of tongue-clucking is done on Sundays, but the chief lament is that the racket can’t possibly keep going. Thus Fortune grieves: ‘Inevitably there will come a time when the economy must be deprived of this extraordinary stimulus it got from the soaring growth of debt in the past few years.’
If we look back now on what has been shown, we see the following: To get out of the Depression, a huge debt had to be accumulated by the government at the rate of about $40 billion a year during the war. When the war ended, consumers had to take over the job by accumulating a debt at the rate of about $25 billion a year. But these giant debts on our heads tend to lessen consumer income by shifting money out of mass hands into corporate and banking hands. The debt stimulates the economy only as it is being piled up, by providing each year an additional market to make up for the hole which the normal process of American capitalism has left between consumption and production ever since 1929.
Nor can this pile-up of debt continue indefinitely. The government, in the absence of another major war, is unlikely to be able to get back into the indebtedness business on the scale required to make a dent in the economy. And the private consumer, already up to his neck, will have a hard enough time keeping his monthly payments going on the present level without increasing his indebtedness much more (for the factual demonstration of this, see the articles in Fortune).
IF debt stops rising, or if its rise slows down, what will take its place? The three major markets in the economy are the government, the consumer, and the capitalists who buy new plant and equipment. Some are already putting their money on an expansion of the capital-goods market to take up the slack left by the flagging consumer who has gone so deep into hock doing his part. Fortune, for instance, hopes that capital goods and commercial construction will fill in the gap.
When put in cloudy economic terminology, this, or any other, solution can have the ring of authority and practicality. But let us try it out in plainer words: When consumer demand starts to level off, finds it impossible to grow at its former rate because of the impossibility of going deeper into debt, the economy will find a solution by building up the country’s capacity to produce still more goods than ever before. That is what the capital-goods solution means in simple terms. And it is not so senseless as it sounds—for capitalism. As a matter of fact it is generally the inherent trend of a boom, and a factor prolonging the boom. But it also points inexorably to the fact that the boom must eventually bust.
If it be finally objected that most authoritative leaders in the fields of business, finance, government and economics expect things to go along as they are, with some easily handled dips at worst, that too is part of the usual pattern.