3.9 National Debt
There is a significant distinction between the borrowing by producers and borrowing by governments: where the producer borrows, he does so to have capital for a productive undertaking, and the interest is paid with a portion of the profits from the enterprise that was funded by borrowing capital. Where a government borrows, it invariably does so for consumption - the sum that is borrowed is immediately lost and must be paid with capital seized from the public.
In effect, borrowing by government further reduces public capital by removing from it the amount borrowed, ensuring it is not put to profitable use during the time at which the loan is outstanding. As its use of capital is not productive, the interest must also be seized from the public, increasing their future tax burden - which is to say, increasing the among of capital that will be taken from productive employment at that time to pay for a benefit that has already been consumed.
Where government borrows and opts not to repay the principal, but to have the loan outstanding for a number of years while paying only the interest. This prolongs the deprivation of the market of productive capital and increases the fruitless expense of interest on the public.
The only party who is not damaged by government borrowing is the lender, as a loan is his method of making his capital productive, and so long as he is paid per the terms of the agreement, his profit is made regardless of what becomes of the funds that were lent. Where government maintains an ongoing debt, the interest paid on the outstanding balance is a form of annuity to the creditor.
It's also remarked that the creditor who requires the return of his capital may securitize public debt, such that he recovers his principle by selling to other parties the privilege of receiving the interest on the loan. This is also not an unfamiliar method to the investor, as private loans are similarly securitized and sold. The principal difference is that a government has greater longevity than a private individual, so the debts remain unsettled for longer periods of time.
Some mention is made of selling government offices, which is next of kin to selling government debt: a person purchases an office for a sum, and receives in return a salary from the government in a position that requires no actual labor. The jobs are transferrable from one holder to another, in the same manner as public debt.
Issuing credit money is another method of government borrowing: the bills are printed with a promise of future payment, and accepted at a discount rate that is the equivalent of the interest to be earned by the time the bills of credit are redeemed. It is not uncommon in this instance for bills of credit to be repaid with fresh bills of credit, which constitutes an ongoing debt for the government.
Mistaking money as the source of wealth, some have insisted that the issuance of bills by government increases the wealth of a nation, as they are traded in the market as if they were money. While credit money may be accepted in trade, it is for the wealth it represents, not the wealth it has created. If an individual were to write a note indicating he owes the bearer a pound of silver, this act does not create a pound of silver. Neither is any wealth created when government issues notes of debt.
Government credit harms the private sector when the interest offered on loans to the government exceeds the interest that can be offered by productive lenders. Who can be expected to loan to manufacturer or merchant at five percent when the government is offering seven? And in order to offer seven percent (or more) to obtain capital, producers must increase the price of their products to the consumer, whose burden for the debt of their government is thereby increased.
The ability of the state to borrow is seen to offer one legitimate advantage: the cost required to respond to a sudden emergency is not visited all at once on the public, but may be financed over a number of years, over which period the people will suffer slightly increased taxation to repay the debt. Or government may borrow in the spring to provide service through the year, paying interest for the privilege of repaying in the autumn, a more productive season where more citizens can bear the cost of taxation.
While some governments have been known to enter into debt for such reasons, and to settle their debts later, it is more common for governments to maintain an ongoing debt, without the excuse of an emergency or seasonal fluctuations, but merely as a matter of course.
One benefit to national debt is that it gives the public creditors an interest in seeing the perpetuation of the government - for if the government were to fall, the debt to them would not be honored. There is reason in this, and it is for the same reason that a creditor will loan more money to an individual who has not paid his existing debt: the creditor believes that more capital will call back that which has already been extended, and so long as this belief is maintained, the creditor will continue to lend. But at some point, the creditor must realize that the debt must be written off and the debtor abandoned.
It has also been suggested that the amount of debt a state is able to accrue is an index of the public opinion. However, it is an index only of the opinion of its creditors and not its tax-payers, who recognize that the mounting public debt will, in time, be serviced by the seizure of their assets.
All of this considered, Say finds few instances in which a government can enter into debt without harming the prosperity of its citizens. Whether a prospective debtor be an individual or a his government, the only instance in which borrowing has a positive result is when the capital is employed in a manner that covers the interest of the loan.
The Creditor's Perspective
A creditor loans money with the confidence it will be repair, and the greater the confidence in repaid, the less interest is demanded of the borrower. In that sense, a creditor who loans to a government charges no premium for the risk of non-payment, except in unusual instances, in which a government is unstable or has a reputation for dishonoring its engagements.
Individual debtors are at risk as any misfortune may render them unable to repay their debts, temporarily or permanently. Their income is tied to a specific and small-scale operation: the wreck of a single ship can ruin the fortunes of a merchant. Governments are more diverse and widespread, and their ability to repay is not based on a specific operation: so long as there are citizens remaining to be exploited, government can obtain revenue. For the same reason, a creditor has greater faith in his ability to sell government debt to another creditor should he require the early return of his capital.
It follows, then, that loaning to government is at a lower interest rate than loaning to private individuals, and where there is any demand for credit on the part of creditworthy borrowers, government is the least profitable bidder. (EN: This is not necessarily so, especially in present times where taxes are forgiven on interest earned on loans to government but charged of interest on private investments. Also, it cannot be presumed that all creditors have an unlimited appetite for risk in pursuit of higher returns. Were this so, no-one would seek to invest in a safer, low-interest investment where there any opportunity for greater profit in a high-risk investment.)
Where authority is vested in a single individual, such as a monarch, public credit is seldom extensive, as the behavior of monarchs is highly unreliable and there is no security that any loan will be repaid. Under representative governments, there is greater security in that such establishments have greater longevity and are more judicious in their use of funds: the decision to default on an obligation is not done at a whim, but after much deliberation.
Public credit facilitates public prodigality, and many political writers have reckoned it to be fatal to national prosperity: a nation with the power to borrow vast sums becomes unconcerned with the result of spending it. The undertaking of "gigantic products" with little chance of success, or for which success is not even defined, become feasible when they can be done on credit, as there is little need to negotiate for a share of the fixed amount in the public treasury.
Say looks to the practice of sinking funds to ensure that public debt is subject to due consideration: where any grand project or massive expense is proposed, there should be a plan in place for its repayment from the treasury. In that way, the legislators are made to consider the gross amount of public debt they incur, and can assess whether the annual amount necessary to service the debt is feasible - and then to reconsider whether the debt should be undertaken for the sake of the project it is meant to finance. The use of such a sinking fund has helped to preserve the creditworthiness of Britain, in spite of a public debt in excess of 800 million pounds.
The ability to repay debt with debt, to redeem credit by issuing more credit, also exempts those who propose such projects from ever being held accountable to the treasury for the expense, and from ever repaying creditors with any actual value. This facility has made even the safeguard of a sinking fund into a delusion. Say quotes Smith, who declared that "national debts have never been extinguished except by national bankruptcy."
It is generally misconstrued that a bankruptcy of a government is a bankruptcy of a nation, but this has no basis: the productive assets of the people (land, labor, and capital) are not effected, save for any amount that represents the public debt: those who have loaned to the government have lost the repayment of those loans, but nothing more. If anything, the public welfare is improved, as any amount owed by their government would have been taken from them in taxation. The debt of the people is thus forgiven in equal measure to the amount lost to the capitalists who loaned to a bankrupt government.
Debt vs Savings
The sole benefit to public debt, if it can rightly be called a benefit, is that it eliminates the need for public savings. Amassing funds to stock a treasury requires the collection of taxes for some future need that may not arise, whereas credit is the increase in future taxes to pay for a present need for which there is no capital.
Any collection of taxes in excess of the present expense of government, which is necessary to amass a reserve for future needs, is a needless seizure of private property that would have been put to productive use had it not been collected. Whether the loss of productivity created by stocking the treasury is more detrimental to the welfare of the people than public debt is a mater of mathematics.
What does appear historically is that the funds amassed in a treasury or no less likely to be squandered than funds obtained by taking on public debt, save for the fact that a treasury contains a known and finite amount that provides a limit on the ability of the sate to squander.
Ultimately, the ability to command large sums of capital is a dangerous temptation to a government: public funds are accumulated at the expense of citizens who "rarely, if ever profit by it" and those who manage the resources of a government would be well reminded that all value, and all wealth, originates from the people.