Chapter 66 - The Absurdity of the National Debt

Based on the article: The Absurdity of the National Debt by The Duke of Bedford in 1947

It is a remarkable indication of the ignorance of politicians in regard to matters of finance and, in consequence, of their unfitness to play the important part which they do in the conduct of the nation's affairs, that neither the main political parties have ever made any important statement of a policy in connection with the National Debt, nor shown the slightest indication that they realise that it is desirable to do anything about it.

How It Started!

The National Debt started in 1694, when the Government of the day unwisely arranged that a private syndicate, which later became known as the "Bank of England," should lend it £1,200,000 in gold, at 8% interest. With even greater stupidity, they then allowed the syndicate to issue banknotes to the value of £1,200,000 which it was able to lend into circulation, charging interest. Thus, although the Bank of England was not put to any expense beyond the cost of the paper and printing, it was allowed to draw interest on two lots of money - its own gold and the new notes to the value of the gold! Later, the Bank of England managed to obtain still more gold which they also lent to the Government at interest, and, whenever they did so, they increased their issue of virtually costless paper money until they were getting interest on £16 millions in gold and £16 millions in paper notes. If the Government had done the obviously sensible thing and, instead of borrowing, had decided to issue its own paper money, it could have done so at the cost of paper and printing and the taxpayer would not have been burdened to provide interest.

As time went on, the Bank of England increased the amount of the paper money it created over and above the amount of gold it held, until it was soon lending out in notes nearly ten times the value of its gold holdings.

During the first half of the l9th century, the Commercial Banks invented and began to use, "cheque" money. This new kind of money did not exist even in the form of paper notes, but was brought into being by the simple process, either of entering in bank books the figures recording the granting of loans; or of filling-in cheques to enable the banks to buy themselves Securities. These cheques, it is important to note, did not, like a private individual's cheque, draw on and transfer money already in existence; they created new money to the value of the figures written upon them.

Swelling The Debt

As the years went by, the Government increased the National Debt by borrowing more and more money. It borrowed, either new money from the banking system, or existing money from private individuals and organizations. The practice of the Government when borrowing is to issue Government Bonds and Securities of different kinds. These Government Securities are really bits of paper giving the holders the right to receive interest. The Government Securities, which are holdings of the National Debt, are bought by private individuals and organisations with money already in existence. In the case of banks, however, they are bought with newly-created money, for, according to banking practice, a Commercial Bank can, by the mere filling-in of the cheques making the purchase, create new money for buying Securities (or making loans) up to about nine times the amount of its "cash reserves."

The National Debt has gone up by leaps and bounds. We will first consider the extent of the increase, and some of the mathematical problems and absurdities involved. We will then deal with some of its other objectionable features.

In 1914, before the outbreak of the First World War, it had increased from the original £1,200,000 to £700 000 000; income tax was 1s. 4d. in the pound; and the average of taxation per head was about £3 per annum. During the seventy years prior to 1914, some £1,500 million had been spent from taxation in interest charges, without the capital of £700 million being in any way reduced. This shows one way in which the mad practice of borrowing at interest from the banking system and other sources is so unsatisfactory and unfair.

After a few years, the unhappy country has paid out, in interest-charges much more than the original sum borrowed, the principal remains unreduced and the levying of interest continues indefinitely! Because of this ridiculous state of affairs, we are still paying interest on money borrowed for the Napoleonic Wars; still paying interest on money borrowed for the Crimean War; and still paying interest on money borrowed for the Boer War, not to mention, of course, money borrowed for the two World Wars!

By the time the 1914-1918 war had ended, the National Debt had risen from £700 million to about £7,000 million at which figure it stood during the period between 1918 and 1939. During this period of twenty-one years £5000 million was drawn out of the pockets of taxpayers yet without reducing the capital sum of £7,000 million.

Usury Creates Poverty

Educated people had been wealthy, never had they asked themselves why, when the nation's power to produce goods and services had increased, they, because of increased taxation, must be content with less. Most of them attributed the heavy taxation to the increased expenditure on Government services, including education, unemployment relief, etc. Increased expenditure on Government services was a mere flea-bite by comparison with the amount of interest on the ever-growing National Debt. The more selfish grumbled because more money was being spent in helping members of the weekly wage-earning class. They thought and argued as though all the unemployed were lazy. The weekly wage-earners, on the other hand, hated their better off critics and demanded that the better off should be taxed still more heavily. Thus, creating a spirit of class hatred and antagonism, because both sides were putting the blame in the wrong place!

As a result of the borrowings made during World War II, the National Debt has now increased to £20,000 million and it has not stopped rising. It is doubtful if it can stop rising! If the Government started repaying the National Debt at the rate of one million pounds a week, it would take more than 400 years to clear off the capital alone, regardless of the interest-charges which, if these were only 2.5% would exactly double the capital sum every 40 years. Is it any wonder that we feel crushed and strangled by taxation? Is it not incredible that none of the major political parties are in the slightest degree interested in this vital matter?

A new arrangement made since the Bank of England was nationalised, whereby the Bank pays into the Treasury an annual sum of £1,746,360 "which will be applied to the payment of any interest which would otherwise have fallen to be paid out of the permanent annual charge for the National Debt," in reality does nothing useful to effect a progressive reduction in the burden of the Debt. This is so, because we find elsewhere in the Nationalisation Bill that the same amount-£1,746,360 - is to be collected by taxation for the benefit of the former stockholders of the Bank. This tax in effect adds to the interest-charge on the National Debt, so that the arrangement whereby the Bank pays an equivalent amount into the Treasury, merely cancels out an annual addition to the debt and fails, as I have already pointed out, to reduce either the colossal principal sum of £26,000 million, or the interest.

Who Benefits?

We will now consider other aspects of the folly of the National Debt. Remember that all the interest on the Debt, or in other words, all the dividends paid to holders of Government Securities, come out of taxation.

If the question be asked, "What should be done in order to put an end to the National Debt and to the evils connected therewith?" the answer is not very difficult. In the first place, a clear distinction should be drawn between those who have bought their holdings of the National Debt with money they have saved, earned, inherited, or otherwise obtained by normal means; and those who have bought their holdings with newly-created money, i.e., the banks and those bankers' nominees who have been granted bank loans with which to make their purchases. Banks should be ordered to sell their holdings of Government Securities to the State who's Treasury would pay the banks with newly-created non-debt money. This would nullify that portion of the national debt.

If this action were taken, a part of the National Debt would be wiped out immediately, without any risk of inflation, and all the attendant nonsense of endlessly collecting taxation to pay interest to the banks would cease. No injustice would have been inflicted even on the banks for they have already done extremely well out of the interest received in the past from Government Securities which were purchased neither with their depositors' money nor with money they had to save or earn. If it were desired to treat bankers generously for the work they do as the nation's accountants, they could be paid the most ample salaries, just like any other public servants, but this could be done without burdening the whole country with the hocus-pocus of the National Debt. With regard to bankers' nominees, i.e., those to whom the banks have lent newly-created money to enable them to buy Government Securities, these, if they should still exist, should be dealt with in a rather similar way. The banks should be directed to call in their loans made to these nominees. The Government would then give the nominees newly-created, non-debt money to enable them to make the repayment.

There would remain only that part of the National Debt purchased by private individuals, organisations, etc., with money already in existence and obtained in a normal manner. These persons should be paid the full value of their holdings with newly-created non-debt money and they could then spend the money so received or invest it in Industry.

US National Debt History.

UK National Debt History. Adapted from Wikipedia.