Reader takes issue with national debt letter
You printed a recent letter titled “Nation’s budget deficit skyrocketing under Trump.” The author assumes that the national debt is a bad thing and that everybody agrees that it is a bad thing, but he doesn’t give any evidence. We have a fine college and a community college, so there ought to be someone in the economics department who is able to explain basic economics to the local population. But they are too busy reading the New York Times and the Wall Street Journal to take time to read the Marietta Times and be a resource to the locals. So that leaves it up to me, a knowledgeable amateur. If what I write is mistaken, the author of the letter is free to enlighten me and the local readers of the Times.
First we need to understand what the National Debt is, or any debt. If an entrepreneur wants to start an enterprise, chances are he doesn’t have the cash on hand to pay for it. So he goes to a bank to borrow it. Now the bank doesn’t have the money on hand, because all the money they have is already out there working for somebody else. So the bank invents money it doesn’t have in the form of credit, which it gives to the entrepreneur to start the business. So the entrepreneur uses the credit to procure a location, either by building or renting, equipping the building, buying the raw materials or inventory, hiring employees to run the machines and the other parts of the business. By the time the business is up and running and producing a profit, a lot of money that never existed before is circulating through the community and making it richer. That money exists in the form of debt. At some point the business has to pay off the debt to the bank. When it gets it, the bank doesn’t simply take that money back out of existence where it was before it was invented. The bank uses it to finance other enterprises, some of which were made necessary by the improved economy in the community.
Banks have been inventing money since the beginning of the Commercial and Industrial revolutions. Our whole economy is built on the credit that banks invented to start the businesses that define our economy. But as the economy grew, banks had the problem of failing in the inevitable business cycles. But bank debt didn’t count as National Debt, even though it functioned exactly the same way as national debt. The nation and the states borrowed from the banks when they needed more money than the revenues on hand. In order to regulate the banks, the nation set up the Federal Reserve System, which operates as a super bank,and at the same time it limited the power of the commercial banks to invent money — that is, advance credit. But the economy still needed money to expand, so that became the function of the Federal Reserve Banks, to create the money and lend it to the commercial banks to pump it into the economy.
The letter writer’s assumption is that the National Debt is something that is owed to someone and will have to be paid back someday. When is never said. But my question to the writer is: When has the National Debt ever caused an economic problem? During the Great Depression, the Democrats and Republicans were in agreement that budget deficits were a bad thing, so they tried to slow the growth of the National Debt, even as they had to deal with the huge poverty and unemployment problem. As a result of their parsimony, the Great Depression lasted more than a decade.
What cured the Depression? WW2! To fight the war, we had no choice but to spend whatever was needed to wage it — money that had to be invented because it didn’t exist. According to the letter writer’s logic, there should have been a collapse after the war. Instead the citizens took the money they had been obliged to save during the war and went on a spending spree that financed the great economic expansion known as the Post War Era. We have had economic ups and downs since, but none have been generated by the National Debt.
Should we pay down the National Debt? The answer is no. To pay down the debt is to take money out of existence. And that money is simply the credit side of our economy. To expand our economy, we need more credit (that is, debt) to fund it. And if the debt seems high when we put it into words, it is because our economy is so large. We need to be fiscally responsible enough not to generate inflation, but that doesn’t seem to be a problem. Whatever expansion of the National Debt that doesn’t generate inflation is by definition what we need to keep the economy expanding properly.