The Absurdity of the National Debt.
by The Duke of Bedford
-1947-
IT is a remarkable proof of the ignorance of politicians in regard
to matters of finance and, in consequence, of their unfitness
to play the important part which of necessity they do in the
conduct of the nation's affairs, that neither the
Conservatives, Labour nor Liberal Parties, not to mention the
I.L.P., Communists and Common Wealth, have ever made
any important statement of a policy in connection with the National
Debt, nor shown the slightest indication that they
realize 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 bank notes 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 likewise have done so
at the mere cost of paper and printing; there would have been no need
for interest to be paid to anybody; 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 19th 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
Gradually, also, as the years went by, the Government increased
the National Debt by borrowing at interest more and more
money. It borrowed, either new money from the banking system, or
existing money from private individuals and organizations,
instead of keeping out of debt by causing the banks to create
the money which it required, without any interest-charge, using
anti-inflation taxation, when necessary, to keep the
money-supply within proper bounds.
The
practice of the Government when borrowing and adding to the
National Debt, is to issue Government Bonds and
Securities of different kinds, of which Consols, War Loan
and War Savings certificates are familiar examples. These
Government Securities are really bits of paper giving the holders
the right to receive interest. This may sound all very nice, but
there is a snag about the practice which will be explained later.
The Government Securities, or in other words the 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, as already indicated, with
newly-created money, for, according to banking practice, a Commercial
Bank like Barclay's or the Midland, 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." These latter consist of coin
and notes and cheques drawn on the Bank of England. For
example, someone banking with the Midland might deposit £100
in notes, or a cheque to the value of £100 drawn on the
Bank of England. That would give the Midland Bank the right to
create, either for buying Securities (including
Government Securities which add to the National Debt) or for
making loans, or partly for the one purpose and partly for the
other, up to £900 of new cheque money.
The
National Debt, always increasing, has, within the last half
century, 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 proceed to deal with
some of its other highly objectionable features.
In 1914, before the outbreak of the First World War, it
had increased from the original £1,200,000 to £700
millions; 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 millions had been spent from
taxation in mere interest-charges, without the capital of £700
millions being in any way reduced. This is important,
and indicates one way in which the mad practice of borrowing
at interest from the banking system and other sources is so
thoroughly unsatisfactory and unfair. As year succeeds year,
and interest payment piles up on interest-payment, the time
comes when the unhappy country has paid out, in interest-charges much
more than the original sum borrowed. and yet it is as far as ever away
from making its escape from debt, for, in spite of the huge
sums paid to the lenders, the principal remains unreduced and
the right to go on levying interest continues indefinitely! It is
important to note that, because of this ridiculous state of affairs,
although the last bill for munitions, etc., was
probably met within a year or two of the conclusion of
hostilities, 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 millions to about £7,000 millions at which figure it
stood during the period between 1918 and 1939. The average
interest-charges during this period of twenty-one years,
amounted to £240 millions a year or just over £ 5000 millions
drawn out of the pockets of taxpayers yet without ever
reducing the capital sum of £7,000 millions. The first World War,
it is important to remember did not materially decrease
this country's capacity to produce and import
real wealth in the form of goods and services. Indeed,
it is probably correct to say that, by reason of war
inventions and discoveries, the capacity of Britain to
produce and import goods actually increased.
In spite of this, however, the power of people of all
classes to buy and enjoy the goods and services which
either were produced or could have been produced, was
diminished by the vastly increased taxation. Rich people had to
pay far more in super-tax. Poor people had to pay more in
"indirect taxation." (Indirect taxation means Customs and Excise
dues on imported goods, which add to the price of the
latter and increase the amount of money which purchasers,
including the poor have to pay in order to obtain them.)
USURY CREATES POVERTY
Educated people who were wealthy, or had once been wealthy, never had
the sense to ask themselves why, when the nation's power to
produce goods and services was greater than before, they,
because of increased taxation, must be content with less; nor did
they ever inquire why the poor could not be given a larger amount
of the increased wealth in goods, without their own standard of
living being reduced. Most of them attributed the heavy taxation
and diminution of their power to purchase what they needed or
desired, to the increased expenditure on Government
services, including education, unemployment relief, etc. Here
their ignorance of financial matters led them into error, for
as far as its effect on taxation was concerned, increased expenditure
on Government services was a mere flea-bite
by comparison with the amount they had to pay in order to provide
interest on the ever-growing National Debt. The more selfish among
the complainants, and those who were not eye-witnesses of the
sufferings of the poor, grumbled because more money was being
spent—and rightly spent—in helping members of the weekly
wage-earning class. They remembered cases they had come
across of lazy workmen, and they thought and argued as though
ail the unemployed were lazy. The weekly wage-earners, on
the other hand, equally ignorant of financial matters and
naturally angered by the selfish and unfair criticism of those
who, in spite of their reduced standard of living, were still
far better off than themselves, hated their critics and
demanded that they should be taxed still more heavily, believing
that only by such means could their own lot be improved. Thus
it came about that the spirit of class hatred and antagonism
tended to increase, largely because both sides were putting the blame
in the wrong place!
As a result of the
borrowings at interest made during World War II, the National
Debt has now increased from £7,000 millions to £20,000
millions and it has not stopped rising. It is indeed 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
2½% would exactly double the capital sum every 40 years. If
every male worker in this country were to give £l a month to repay
the capital amount, it would still take I30 years to clear, without
taking into account any interest- charges at all. If current
interest-charges are reckoned at only 2½ average, the sum which
must be drawn out of the pockets of the people year by
year, without ever starting to reduce the principal of the
debt, is £625 millions, or about £10 millions a week, which is
equal to every male worker
contributing about £32 15s. 7d. a year, or £2 14s. 7d. a
month. 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 £I,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
progressively either the colossal principal sum of £26,000
million, or the interest which has to be paid thereon.
WHO BENEFITS?
We will now proceed to consider other aspects of the folly or iniquity of the National Debt.
Remember that all the interest on the Debt, or in other words, all
the dividends paid to holders of every form of Government
Securities, come out of. taxation; and remember that every
citizen who is a holder of Government Securities is also a payer of
taxes, direct or indirect, and usually both.
Absurdity No. 1
is that those who are holders of Government Securities,
or in other words, investors in the National Debt, themselves,
through taxation, provide the Government with the money wherewith
to pay them their dividends! They might therefore be as
prosperous, and in many cases, indeed, much better off, if they
had no money invested in Government Securities and no
dividends paid to them for their holdings, but, as a result, no
taxation to provide such dividends, either! Not only do the
holders of Government Securities themselves, as a class, have to
provide all the dividends that the Government pays them; they
also have to provide a substantial sum of money to
pay the salaries of the host of persons, who doing no creative
work of any kind, merely take their money away from them and hand
it back again. In other words if the interest on the Government
Securities is 2½%, then probably some 3% is actually
needed and collected to include the remuneration of those who
administer the scheme. This means that the people are paying £3
out of one pocket in order that the bureaucracy may hand them back
£2 10s. to put into the other pocket!
Absurdity No. 2
is that the taxpayer cannot spend on his own needs and
desires money which he has to keep in reserve for paying
taxes, including, of course, interest-on-National-Debt taxes: and,
equally, the State cannot spend on any good purpose or social
service, money which it has to keep in reserve for paying interest
to the holders of Government Securities! A large number of
persons, therefore, are being employed, quite uselessly, in the
endless collection and transfer, backwards and forwards between
the taxpayer and the State, and the State and the taxpayer,
of vast and ever-increasing sums which neither party can spend in
any useful way whatever!
Absurdity— and injustice—No. 3
is that the holdings of the small investors in
Government Securities and the National Debt, the "men in the
street," as it were, who have not more than £500 shares, only
amount to some 20% of. the total. Eighty per cent. is held
by banks, insurance companies, and other large organisations,
and, as we have already seen, banks obtain their holdings,
as a general rule, by creating new money by a stroke of the pen.
Banks also, it might be added, have means denied to the small
investor, of disguising their profits and escaping taxation.
Absurdity No. 4
is that the small investors pay in taxation, in order
to provide dividends on their holdings of the National Debt
for the big investors, about four times as much money as they
ever receive as dividends on their own holdings!
Another racket
in connection with the National Debt, quite common in the
1914 -18 war, was for the banks to create new money in the form
of loans and lend it to the insurance companies, etc., to enable
the latter to buy Government Securities and a share in the
National Debt. The holdings in such cases would stand in the name of
the insurance companies, and not of the banks, but might be
dividends on the holdings (obtained of course from taxpayers)
would be shared between the banks and the insurance
companies. Sometimes, too, an insurance company or other big
concern would, during the war, sell shares in some industrial
enterprise which produced goods and services (or sale at a
profit (and quite rightly paid dividends), and use the money so
obtained to buy Government Securities, thus placing itself,
as it were, on the taxpayer's already over-burdened back.
The opinion of experts is somewhat divided on the question of
whether there has been any repetition of this practice during the
last world war.
Before we leave the question of
"rackets" it may be well to call attention to another dishonest
practice in connection with the National Debt to which
governments are prone to resort. Investors are sometimes tempted
by the assurance that at a future date they will be paid a larger
sum for their investments in Government Securities than they
originally gave. It has originally been stated, for example,
that the original National Savings Certificates were
first issued at either 15£ or 15/9, to be worth 21£ in seven
years' time. When the seven years had elapsed no allowance,
however, was made for the fact that the purchasing power of the
£ had declined to about 8d by comparison with its value at the
time that the National Savings Certificates were first issued. The
result was that the people who invested 15£ worth of purchasing power in
1940, in 1947 got back 21£ worth in name, but only 9£ worth in
actual fact! In other words, they made no real profit at all,
but have incurred a loss of 6£ on every 15£ invested! In spite
of this, people have again been invited to invest 10£ on
the understanding that they will get 3£ back in ten years' time!
The defence is sometimes put forward that the National Debt is
really quite harmless, as it virtually amounts to taking money
out of one pocket and putting it into another and it also
operates as a form of anti-inflation taxation. Why it
should be defensible to waste a stupendous amount of time
and labour and put millions of people to unnecessary
trouble in order to accomplish the useless result of taking
money out of one pocket and putting it into another, is not revealed!
As for the National Debt operating as a form of anti-inflation
taxation, this may be true in so far as it keeps a large sum of
money out of effective
circulation—regardless, it might be added, of whether general
conditions render anti-inflation taxation, or that amount of
anti-inflation taxation, desirable or not. There is, however, a
well-known saying about burning down the house in order to
roast a leg of pork. By comparison with sensible, businesslike
anti-inflation taxation, carefully designed to take out of
circulation during a given period that amount of money, and that
amount only, which, if left in people's pockets, would
prove redundant, the National Debt is entirely comparable to
the destruction, by fire, of a splendid mansion in order to
reduce raw pork to a cooked state.
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 normally acquired;
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 wherewith to make their purchases. Banks
should be ordered to sell their holdings of Government Securities
to the State, which, as a matter of book-keeping, would
pay them with newly-created non-debt money. This money, in
accordance with existing banking practice, the banks would
then be required to destroy, for, just as under the
present system they create new money when making loans or
buying Securities, so do they destroy money when they
receive repayment of the principal of loans or sell Securities,
keeping only the interest for themselves. 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 money by taxation,
distributing it and collecting it again, 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, and the banks,
on receipt of this money, would, again in accordance with present
practice, cancel and destroy it.
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, as rapidly as could be arranged
without risk of inflation, and they could then spend the
money so received or invest it in Industry. It might be found
possible and desirable to speed up this process by granting
fewer bank loans during the period when it was
carried out. The less money created by bank loans, the more can
safely be created for other purposes. If it were felt that special
consideration should be shown to elderly persons of small means
who have been encouraged to invest in Government
Securities because of the certainty of the income to be derived
therefrom (neither they, nor anyone else, seems to have
appreciated the connection between the "certainty" of the income
and the "certainty" and inevitability of the taxation which
provides it!), an arrangement could easily be made to allow
them suitable annuities for which, incidentally, they would not
have to help to provide the money, out of the taxes which they
themselves paid !
The Government's present
policy of reducing rates of interest on holdings of the National
Debt, without attempting any fundamental reform of the
financial system, is neither fish, flesh, fowl nor good red
herring so far as small investors in the National Debt are
concerned. The low rate of interest brings them but a miserable and
inadequate return for the sums of money they have, with
difficulty, saved and invested, while at the same time they get no
compensating advantage in reduced taxation consequent on a
thorough overhaul of the entire financial system. If the
question be asked, "How can the Government obtain the
money which it formerly got by borrowing at interest?" the
answer is again very simple. It can direct the banks to create
it not in the form of interest-bearing debt, and it can use
anti-inflation taxation to collect, from time to time, just as
much of that money as may be necessary in order to prevent an
excess from remaining in circulation. Money, it must never
be forgotten, derives its value from the presence in the
country of an adequate backing of goods and services. It does not
derive any value from the fact that it was first created as
interest-bearing debt, or, indeed, debt of any kind.
On the Author:
Hastings
William Sackville Russell, 12th Duke of Bedford (21 December 1888 – 9
October 1953) was a British peer. He was born at Cairnsmore House,
Minnigaff, Kirkcudbrightshire the son of Herbrand Russell, 11th Duke of
Bedford and his wife Mary Du Caurroy Tribe, DBE, RRC, FLS, the aviator
and ornithologist.[1] He was noted for both his career as a naturalist
and for his involvement in politics.
