Does Reducing the Federal Debt Cause Financial Collapse?
Of all the reading in Modern Monetary Theory that I’ve been doing of late, perhaps the most eyebrow-raising paragraphs I’ve come across are these, from the redoubtable Randall Wray:
With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” (See Wray 1998, p. 63, and Stabile and Cantor 1991.) In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since.
Since 1776 there have been six periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. (Thayer 1996) The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929.
This all to support the Modern Monetary Theory theory that government creates money through deficit spending (spending creates money, taxing destroys it), and that a growing economy requires more money — hence more deficit spending by government. (Whether those deficits are “financed” through borrowing/bond sales is something of a side issue now that we’re off the gold standard; government could just issue dollar bills instead of T-bills.)
Wray cites a two-page, unsupported (by citations) 1996 article by Frederick C. Thayer. Let me encapsulate it for you:
|Debt Decline Years||Debt Decline||Depression Start|
|1852 to 1857||59%||1857|
|1867 to 1873||27%||1873|
|1880 to 1893||>50% [57% per Thayer]||1893|
|1920–1930||Approx 33% [36% per Thayer]||1929|
That’s enough to make a fellow think. But I’m from Missouri, so I wanted to see the numbers for myself, and in graphical form.
There are a lot of ways to characterize government debt, of course — nominal or inflation-adjusted, total or per-capita, or as a percentage of GDP. Wray and Thayer seem to be talking about nominal totals, which in MMT thinking is the quantity of existing dollars. Here’s that, zoomed in on various periods so you can see the changes (I’ve marked the starts of depressions with arrows):
This seems to bear out what Wray and Thayler say. Every depression was preceded by a big decline in nominal Federal debt. It suggests that a decline in federal debt is a necessary (though obviously not sufficient) cause of depressions.
But what about post-war, and in particular our recent (near-)depression?
First, we have to shift from gross to net debt, a.k.a. debt held by the public, which subtracts money the government owes itself (to the social security and medicare trust funds, and especially recently, to the Fed) to give comparable numbers.
The rabid tea-partier who runs usgovernmentspending.com notably doesn’t share net debt figures (wouldn’t want to spoil the story…), so rather than go dig it up elsewhere I’m going to punt and let Wikipedia give us the picture:
We saw a downturn in nominal debt leading up to the dot-com crash. Otherwise the trend has been flat to increasing.
What all this ignores, of course, is privately-issued debt, something that — confusingly to me — many MMTers don’t talk much about, if at all. I haven’t clarified my thinking on that issue, so I’m going to pass you for the moment to Rodger Mitchell. I haven’t thought through his ideas or data carefully, but I find it useful that he looks at private debt, federal debt, and their relationships over time — something I haven’t found well done elsewhere.