The Golden Rule
for
Debt Servicing
In 1902, a young American college student who was to become one of the most influential economists of the century wrote his doctoral dissertation on the Union government?s financing of the Civil War. Wesley Clair Mitchell propounded the view that the Lincoln Administration should not have left the gold standard in 1862 in order to pay for the war with "greenbacks," i.e., dollars whose value was no longer guaranteed in gold by the government. Mitchell demonstrated that in the inflation that followed, it quickly took twice as many greenbacks to buy an ounce of gold -- and twice as much to buy the materials of war. In addition, interest rates doubled on the greenback bonds the government floated, which meant the taxpayers were burdened by much higher post-war costs of debt service.
Mitchell became a well-regarded professor of economics at Columbia and a founder of the National Bureau of Economic Research. His ideas about the financing of war debt became a fixture in the decades that followed. They were in many ways responsible for the United States keeping the dollar as good as gold, at $35 an ounce, as it financed WWII, the most expensive war in its history, at 2% interest rates. The public debt in 1945 was the equivalent of $2,400 or 68.5 ounces of gold per capita. By contrast, today?s public debt is $11,500 per capita, but after a half century of inflation, the amount is equivalent to only 40 ounces of gold. In other words, a much heavier debt in 1945 was being financed by the government?s creditors at a third of today?s 6% rate.
###
polyconomics.com |
