Back in the early
nineteenth century following the Napoleonic Wars and the dissolution of much of
the Spanish Empire, the new republics of Central and South America found they
had a problem: no tax base, and thus no way to meet government
expenditures. This was doubly a problem,
because in order to demonstrate their legitimacy, the new governments had to
assume all the obligations of the old government as well as meet their own
current needs.
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| Tsarist government bond. |
This is a point of
law that few revolutionaries seem to consider, yet it is essential in gaining
recognition not only from one’s own citizens, but from other countries. When a new government repudiates the
obligations of the former government, the individuals, groups, and countries to
which the old government were obligated can justly declare that the new
government is illegitimate.
For example, when
the new soviet government took over the Russian Empire from the tsars, it repudiated all tsarist obligations, leaving holders of tsarist bonds holding
the bag. After the fall of the Soviet
Union, to prove the new government’s legitimacy, the Russian government
redeemed the bonds at face value, although with the near-century of inflation
and devaluations it was more a token than anything else.
On the same point
of law, following the American Civil War a number of the former Confederate
states requested that the U.S. government re-assume its pre-war obligations
that the Confederate states had assumed in order to demonstrate the legitimacy
of the new Confederacy. The U.S.
government agreed, on condition that the former Confederate states (Texas among
them) admit that they had had no legal right to secede, and thus had illegally
assumed the obligations of the U.S. government.
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| Simón Bolívar |
So, the new
republics of Central and South America were on the hook not only for their own
debts, but those of the former Spanish government, unless they wanted to argue
that the Spanish government had been illegitimate, thereby proving that they were. What did they do? Issue bills of credit (government bonds) to
meet their obligations.
These bills were
traded on the stock exchanges of Europe, mostly London, Vienna, and Frankfurt. When the new governments could not redeem
them, the financial markets collapsed, and the world experienced the first
instance of the modern financial panic and the start of the business cycle of
boom and bust: the Panic of 1825.
For some reason
ever since the obvious failure of a financial system built on a foundation of
government debt, governments have been busily establishing and maintaining
their currencies solidly on the shifting sand of their own debt. Why?
According to Dr. Harold Moulton, president of the Brookings Institution
from 1928 to 1952, backing the reserve currency of a nation with government
debt gives the government much more control over the economy than otherwise.
The problem, of
course, is that the size of the public debt (as
Greece and countries indebted to China have discovered) is the single greatest
danger to the independence and sovereignty of a country. This is just as Henry C. Adams pointed out
exactly 120 years ago in his book, Public
Debts: An Essay in the Science of Finance (1898).
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| Global debt: an ongoing problem. |
Currently the world is facing yet another debt crisis,
brought on largely by the idea that a government can continue to spend to
consume wealth that the country does not produce. To be more accurate, what the world is
experiencing is a continuation of the same debt crisis that has had the world
in its grip since the near worldwide adoption of Keynesian economics and the
fixed belief that governments can back currency with their own debt and somehow
stay financially stable.
According to an article in this past Tuesday’s Washington Post (“Global Debt Raises Red
Flags,” Washington Post, 09/04/18,
A-1, A-11) current government debt behind much of the global money supply
stands at $169 trillion. On the eve of
the so-called “Great Recession” (a euphemism that fooled no one at the time,
and now sounds just plain silly. So, of course, the media continue to use it)
total debt stood at $97 trillion.
Some authorities believe the current troubles in Argentina,
Turkey, and other “emerging markets” (another euphemism that means countries
trying to grow their economies by consuming far more than they produce) are
simply the harbinger of a global meltdown waiting to happen.
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| "What, me worry? The government will take care of everything." |
Others, more Keynesian, continue to insist in the face of
all experience for the past century or so that the size of a government’s
outstanding debt is irrelevant. They claim
to believe that monetizing more and more government debt just means that existing
wealth in the economy is being divided into smaller and smaller pieces.
The only problem with that is that except in a socialist
economy the government does not own that wealth. Currency backed by government debt is really
backed by the government’s power to tax and collect that wealth — and that
depends in turn on the citizens’ willingness and ability to pay the taxes
needed to redeem the government debt backing the currency.
What is needed is an intensive program to be implemented
throughout the world that will at one and the same time restore an asset
backing to the currency and the rest of the money supply, and build purchasing
power into consumers, thereby restoring Say’s Law of Markets. One possibility is Capital
Homesteading.
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