Divergent Theories of National Debt

Abstract

The prolonged deficit financing by the national government in the decade of the 1930's precipitated extensive discussion in this country on the issues of public debt. The rapid increase in the total debt during the war period has intensified the problems and augmented the argument. In the more recent years and months a great portion of the current economic literature and discussion has dealt with questions of post-war economic adjustments and policies, and a large part has been directly concerned with issues of public debt and debt management. Examples are so numerous that no effort is made here to include the extensive bibliography that would be necessary to cite all the material on the topic.' Although the views of different individuals have varied widely in certain respects, two definite and divergent schools of thought with respect to public debt at the national level of government are readily discernible. The differences in the argument and conclusions of the two schools involve some major differences in fundamental theory which are often overlooked in the discussions on public debt. In fact, too much of the discussion has been both emotionalized and at cross purposes by reason of debates on specific questions without adequate consideration of the divergencies in the underlying theory, or at least the underlying assumptions, implicit in the thinking of the opposing constestants. It is precisely this tendency that prompts the effort here made to examine the issues in terms of the broader underlying theories. To thus consider the divergent views in a brief discussion necessitates extreme condensation and over-simplification of statement. It is recognized that accuracy is lost in the process of making the wide generalizations, but such result is perforce unavoidable. Of the two schools of thought on debt theory, one seems to be currently called the traditional or classical school. The traditional or classical view, based on the neo-classical theory, is that held by perhaps the great majority of American economists. Although the numerous individuals differ widely in opinions on specific issues of fiscal policy and debt management, there is a fundamental core of thought common to all. This core would include the following concepts of public debt. Public debt is justified only in cases of emergency or extraordinary expenditures. Once created, the debt should be reduced as rapidly as possible until it is relatively small as compared to wealth and income, or until the amount is just sufficient to meet the needs of our financial institutions for highly liquid securities in their operating procedures. This reduction is considered desirable in order to preserve the credit standing of the government, and reduce the depressing effects