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.
|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.
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).
|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.
|"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 .