Twenty years ago last month, Murray Rothbard published an article in Chronicle about the national debt. At the time it was a paltry three and a half trillion dollars, but in the past two decades it has swelled to 16.5 Trillion. The vast debt is a bipartisan affair, with both sides sharing blame and neither accepting responsibility. What to do about it is a question that hardly anyone wants to think about, let alone actually put forth a sensible solution. Liberals can’t imagine life without a welfare state and Conservatives will give not a penny to reduce warfare spending, thus an impasse exists among the two dominant political groups.
The concept of private debt is a rather simple one, as Rothbard covers in the first section. Mr. Smith borrows $100 from Mr. Jones and agrees to pay the entire amount back over a given term with an agreed upon amount of interest. If the term is for one year and the interest is 5% then Mr. Jones should receive $105 within a year’s time. Everyone wins, for Mr. Smith was able to satisfy his present consumption and delay his payment, while Mr. Jones earned a future profit, according to his time preference.
Obviously some risk is assumed by both parties, namely that a borrower will assume too much debt, become insolvent, and then have to sell off assets to repay debtors; the risk to the lender is of course that his borrower will become unable or refuse to make payments, leaving him with a loss. This happened from time to time and over the course of history governments began writing bankruptcy laws that favored borrowers, allowing them to be pardoned of past debts with little or no compensation given to the lenders.
This encroachment on contracts between the parties is a grave injustice and leads to a host of troubles, namely the moral hazard of deadbeat borrowers taking advantage of the laws to bilk creditors. There are many who reply, essentially, that markets are resilient, and such interventions will be problematic at first, but eventually absorbed by the economy and solutions will be found. Rothbard’s response is “who cares?” This is hardly a moral argument, much less a practical justification for allowing debtors to loot the lenders.
So in the case of private debt, repudiating it is a breach of contract and amounts to a tort against the lender, is it the same with government borrowing? Rothbard argues that it is not, and that there is a fundamental difference between the two forms of debt.
Rothbard explains the difference thusly: “If I borrow money from a mortgage bank, I have made a contract to transfer my money to a creditor at a future date; in a deep sense, he is the true owner of the money at that point, and if I don’t pay I am robbing him of his just property.” The key to all of this is that he promised his own future earnings. “But when government borrows money, it does not pledge its own money; its own resources are not liable.” Because of this fact, the only way for the debt to be paid is either by raising taxes or printing more dollars. And since we’ve reached a point where the debt is so grotesquely enormous, either option would destroy the economy. Therefore, the only viable option at this point is to repudiate the debt.
And now, before moving on, let me first note that “we” never borrowed the money; “they” did, and let’s conflate those two pronouns. Doing so only obfuscates the issue.
Repudiating debt is not without precedent in America’s history. The first time this happened on a large scale was in the 1840s, following a spending binge lead by the Whig party on what we would describe today as “pork.” Rothbard points to the figures from that era, showing that over the course of a decade, state-held debt went from $26 Million to $170 Million, a 1500 percent increase. This again happened in the South following “reconstruction.” The Republicans (spawned from the Whig Party) attempted the same sort of government stimulus to rebuild the devastated South and accomplished mainly to run up unsustainable government debt.
One common objection is that no one in his right mind would make loans to a government that defaulted on its debts. But this is one of the chief benefits of repudiating it; not only may we rid ourselves of the wealth destroying debt, and actually be able to save and invest our own money, but in a way, be inoculated against future advances the State may try to take out on our future output.
Another argument raised against repudiation is that Grandma, with her life’s savings in government bonds, would be harmed if the government reneges on those instruments. The response ought to be: what are the alternatives? Taxing grandma, or debasing her currency, will also be harmful, on net. This is true not only for that holding government debt, but for anyone who pays taxes or deals in dollars.
Finally, some foreign governments hold large amounts of U.S. government debt and defaulting would sour those relationships. This much is true, and this no doubt would have been a much smaller issue to deal with if Rothbard’s advice had been followed twenty years ago. But so long as a fair settlement can be reached, this should deter no one. The overall lesson for all involved is not to do business with governments, plain and simple.
One of the principle ways for a debt-ridden individual to solve his problem is by selling his assets, and governments hold significant assets. Literally, everything must go. The streets and roads, buildings, vehicles, aircraft, the millions of acres of Western land, the parks, and everything else should be sold off and the proceeds used to pay outstanding creditors. This of course won’t take care of the full debt, but selling assets and repudiating the approximate $4 Trillion held by the Fed would go a long way to lifting the burden now dragging us all down. For a simple solution with a lighthearted twist, one that would certainly rid us of Leviathan, see Lew Rockwell’s 30 Day Plan.