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Volume 24, Number 4
April 2004

Snowdrifts of Debt
Christopher Mayer

Debt is an institution in American government, long estab-lished and widespread. A cursory glance at debt statistics will quickly show that there has been a lull in the truth about debt, namely, that it cannot grow indefinitely at the rate at which it has been growing—at least not without a serious revaluation of the dollar, something we are already in the midst of seeing.

We know that the US government is the world’s largest debtor with deficits feeding debts that pile on in increasingly larger numbers of numbing proportions. The current federal debt outstanding according to the Bureau of Public Debt stands at $6.9 trillion.1 It was only in 1981 that the legal debt ceiling was $1 trillion. Then again, expecting debt ceilings to curb debt growth is sort of like trusting the fox with the henhouse.

Though it may be surprising to some, particularly those who believed in the supposed fiscal responsibility of the Clinton years, the public debt has risen without interruption since 1956. Incredibly, the $6.9 billion is conservative because if you add in all the off-balance-sheet contingencies and guarantees (implicit and otherwise) you probably triple that figure, at least. This also excludes debts incurred by states, municipalities, etc.

Given the large amount of debt outstanding, it is easy to see that creditors are not likely to win any votes in deciding the future monetary policy of the country. Democratic hopefuls are not likely to rail against the effects of inflationary monetary policy in transferring wealth from creditors to debtors. The Bush administration is not likely to lead a charge for hard money. No, the more likely path will be to perform some sort of con, like legalized counterfeiting—the modern form of the old art of repudiation.

Statecraft learned the art of repudiation a long time ago, at least as early as Solon, the lawgiver of Athens in the 7th–6th centuries BC. Thomas Cahill, in his latest book Sailing the Wine-Dark Sea, called Solon "a sort of Athenian Franklin D. Roosevelt." Indeed, both men led famous swindles on the citizens they governed.

It was Solon, according to the historian Plutarch, who lightened the debt burdens of Athenians by "raising the value of their money; for he made a pound, which before had passed for seventy-three drachmas, go for a hundred; so that, though the number of pieces in the payment was equal, the value was less; which proved a considerable benefit to those that were to discharge debts."

In fine Athenian fashion, and very much like our own modern age, treachery was given a pretty name. This was "softening the badness of a thing," as Plutarch called it, where harlots were mistresses and tributes were customs and a jail became a chamber. The Greeks called Solon’s act a seisacthea, meaning a relief or a disencumbrance. Plutarch cites a poem, credited to Solon where he "takes honor to himself that" "The mortgage-stones that covered her [Athens], by me, removed—the land that was a slave is free."

Solon forced a revaluation, in effect transferring wealth from creditors to debtors. The mortgage stones would make their marks again and again through the ages. Solon’s financial alchemy would not be unique.

It was probably not Cahill’s intent, but his linking Solon with FDR is most apropos in this respect, because FDR, too, pursued a similar policy of debt relief in the 1930s—by breaking contracts.

Faced with paying for the extravagance of the New Deal and also grappling with a severe crisis, Roosevelt chose the tried old hand of repudiation. (Note, we call it the "New Deal" when in fact it was basically "Old World Socialism," more "softening the badness of a thing.")

In 1933, the incoming Roosevelt administration assaulted the monetary order of the country, forcing it off the old gold standard, confiscating the gold of American citizens and putting it under the ownership of the Federal Reserve. They placed an embargo on the export of gold and devalued the dollar to $35 an ounce, where once an ounce of gold could be had for about $20.

The Roosevelt administration also stepped in and repudiated private and public contracts that required payment in gold. In other words, it had been customary for contracts to have gold clauses requiring payment in gold and thereby protecting the creditor. Roosevelt said that this was no longer legal and that if you had signed a contract stating that you promised to pay in gold, you no longer had to do so. A promise was not a promise any more.

The anti-New Dealers, a spirited group still clinging to simple morals and personal liberty, fought the Roosevelt administration. History would later show they were part of a rearguard action. For the most part, they are written out of mainstream histories of the period. The victors do write history, after all.

This group was dealt a severe blow when the Supreme Court upheld the government’s repudiation of private and public contracts to pay in gold, by the slimmest of majorities, 5–4. The court reasoned that these contracts interfered with the government’s ability to control the supply of money—which they did and which was precisely the point of such clauses.

These actions were largely consistent with the goals of the New Deal. As economist Benjamin M. Anderson noted in his financial history, "the New Deal tax policy from the beginning has been more concerned with the redistribution of wealth than with raising revenue." All of these schemes simply robbed creditors and handed the gains to debtors.

With all the debt still saddled on the US, it is an irony that the rising stock market and happy GDP statistics have given most Americans the hope that things have turned and the boom is on. GDP is growing, we are told, among other things. The economy, many believe, has turned the proverbial corner and is now gingerly making its way forward once again. But what sort of prosperity is this?

Commenting in the 1930s, Albert Jay Nock noted the "the regular pre-election effort to start a boom in the stock market" and observed how optimistic Americans remained despite the large amount of debt and deficits. He wrote that "Americans have a strange notion that the ordinary laws of economics do not apply to them. So doubtless they will think they are prosperous if the boom starts, and that deficits and indebtedness are merely signs of how prosperous they are."

This false sense of prosperity has deceived many and has produced a fertile field for the institution of debt to grow—fertilized as it is by a fiat currency, a central bank, fractional reserve banking and other monetary interventions.

The laws of economics likewise never cease. These debts must be dealt with. They cannot grow indefinitely at their current rates. History tells us that these debts are not usually repaid as agreed. In a world of fiat currency, debt relief takes a subtler path than the overt aggression of a Roosevelt. Inflation (an expansion of the money supply) or legalized counterfeiting, is the modern spin on an old idea. The forces that led to these earlier swindles are converging now on a debt-laden America. From Solon, to Roosevelt, to Nixon’s closing of the gold window, the tradition of fraud is evident. In today’s world, all you need is a printing press. My guess is that Bernanke’s printing press will be busy.

Christopher Mayer is the editor of Capital & Crisis, a financial newsletter. He is also a commercial lender near Washington, DC (


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