National Debt

There is one other important matter to note and that deals with passing of debt burdens from one generation to another. Taking the entire populace as a whole and confining the analysis to domestic debts, the creation of debts by one generation does not mean that a future generation will be burdened by the re tirement of that debt. As already pointed out, the borrowing of money by the government represents taking funds from one group and using these funds for the benefit of all or certain groups, all within the same general period of time. Retirement of government debt represents the taking of funds from taxpayers and giving it to the bondholders, all within the same period of time. What actually takes place is a shift in income or wealth within two separate periods of time. If it is claimed that one generation is passing a debt obligation on to the next generation, it must be recognized that it is also passing on an equivalent claim on that debt in the form of the bonds.

Burden of Debt.

It is not possible to make broad generaliza tions concerning the size at which a national debt might be con sidered burdensome on the populace. Insofar as the continuing burden of national debt is concerned, the interest charge is the element of importance, for that represents an obligation of the government which must be paid at regular intervals to the credi tors. The higher the interest charge on the national debt, the higher will be the present or potential tax bill for this purpose.

In other words the current payments or obligations of the tax payer to the government bondholders vary directly with the in terest charge on the national debt. The extent to which this rep resents a burden on the people depends upon the nature of the tax program of the nation. If the taxes were paid by the very persons who owned the government bonds, there would result little shift in income thereby. On the other hand, as with many United States Government bonds, the interest is tax exempt and therefore, the recipient of the interest pays no tax on income from Government bonds. Most government bonds are held by those in the higher income brackets or by institutions, such as savings banks and insurance companies, so that the interest paid thereon goes to those with larger incomes and those with savings. If all taxes were levied on incomes, with moderate exemptions for the very low incomes, and rates were graduated on the basis of size of income, it is probable that taxes would be paid by the very ones who receive government bond interest. However, many taxes, such as sales taxes and real property taxes, do not vary directly with income and are paid directly or indirectly by those with small incomes who hold no government bonds. As a result of such taxes and the tax-exempt features of many government bonds, there is a shift in income as a result of the interest on national debt. Aside from the matter of the interest charge, the national debt is of definite positive significance only when it is incurred or retired. Of course the mere existence of the debt has a varying psycho logical influence upon the people and the business and financial community at all times, but particularly important is the crea tion or retirement of the debt. This is important because in the creation of the national debt and in all debt, there is a taking of funds from an individual or group of individuals and a disburse ment to another group of individuals. Thus when a government

borrows funds to give direct relief to the unemployed, the proc ess is one of taking funds from those with idle resources and giving the funds to those who use the money to acquire the means of existence. If the money is borrowed to build roads, then the idle resources of those buying government bonds are used to make payments to workers and to companies supplying materials.

If the funds are used to make loans to other countries, the money usually goes to domestic producers and the goods are sent abroad. In understanding and evaluating the immediate ef fects of government borrowing, it is necessary to consider the purpose for which the debts are incurred. Similarly when debts are retired, money is taken from taxpayers and turned over to bondholders. The source of the funds will depend upon the inci dence of the taxes of the nation, and the direction of the pay ments will depend upon who are the owners of the bonds. Thus the creation and retirement of national debt involves a redirection of the income and resources from one group to another and this shift can be appraised only by determining the source and the disposition of such funds.

Government Credit and the National Debt.

There are many factors other than the size of the national debt which deter mine the standing of the national credit. With the growth of cen tral banks, governments have been able to exert rather direct influence upon the market for their securities. By direct opera tion of the central banks, by liberalizing reserve requirements as regards government bonds, by direct influence on savings and commercial banks, and by other means, a national government can greatly expand the market for its certificates of indebtedness. The soundness of the national credit depends in large measure upon the stability of the government and the confidence of the people in its successful conduct of public affairs and sanctity of its contract. These same factors in general determine the credit status of a private borrower. A large and successful corporation can borrow more money and at lower rates than can an individual or a small corporation with limited assets, even though the former may already have a substantial indebtedness and the latter be debt free. In addition to these intrinsic factors, credit status of national governments, as reflected by interest rates, depends upon the supply and demand of investment funds. When there are large reserves of idle funds and little competition for such resources, governments can borrow huge sums of money at very low rates, as in the United States from 1933 to 1939. On the other hand when industrial demands for investment funds are heavy, the national government may be required to pay rela tively higher rates. Usually, during periods of depression, when investors seek security rather than speculation and appreciation, the price of bonds goes up, the yields go down, and new or re funding securities can be floated at low rates of interest. The opposite occurs during periods of prosperity when business seeks capital and the investor wants higher returns and perhaps less security. All of these elements enter into a consideration of the standing of the national credit. In the late 1930'5, with the largest debt in its history, the United States Government was able to borrow huge sums of money at new low rates of interest.