Posted by: Dirk | October 23, 2014

“Gentlemen … the national debt … is PAID.”

As some commentators here in Germany demand that the national debt has to be repaid, it should be interesting to look at instances when that has actually been achieved. I did not know of any until I stumbled upon the case of the US in 1835. NPR reports:

On Jan. 8, 1835, all the big political names in Washington gathered to celebrate what President Andrew Jackson had just accomplished. A senator rose to make the big announcement: “Gentlemen … the national debt … is PAID.”

That was the one time in U.S. history when the country was debt free. It lasted exactly one year.

By 1837, the country would be in panic and headed into a massive depression.

Not surprising, then-president Andrew Jackson oversaw weak government investment and was benefitted by a real estate bubble in the West, which meant that tax income was up. Nevertheless, there was no happy end, as NPR reports:

Jackson had already killed off the national bank (which he hated more than debt). So he couldn’t put the money there. He decided to divide the money among the states.

But, according to economic historian John Steele Gordon, the party didn’t last for long.

The state banks went a little crazy. They were printing massive amounts of money. The land bubble was out of control.

Andrew Jackson tried to slow everything down by requiring that all government land sales needed to be done with gold or silver. Bad idea.

“It was a huge crash, and the beginning of the longest depression in American history,” Gordon says. “It actually lasted six years before the economy began to grow again.”

During the depression, the government started borrowing money again.

There are modern discussions of why a government surplus is not a good idea, and one of them throwing his hat in was Alan Greenspan:

At zero debt, the continuing unified budget surpluses now projected under current law imply a major accumulation of private assets by the federal government. Such an accumulation would make the federal government a significant factor in our nation’s capital markets and would risk significant distortion in the allocation of capital to its most productive uses. Such a distortion could be quite costly, as it is our extraordinarily effective allocation process that has enabled such impressive increases in productivity and standards of living despite a relatively low domestic saving rate.

 

So to all those arguing that in good times government should accumulate net wealth – I think I have seen some papers supporting this idea – there are at least two problems: 1) Government starts to own private businesses and that cannot go on forever (and hence will stop) and 2) tax payments are made harder if government sucks out deposits from the banking system. This reminds me of a Shakespeare quote from Hamlet:

Though this be madness, yet there is method in’t.


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