"....Although largely forgotten by historians and by the public, repudiation of public debt is a solid part of the American tradition. The first wave of repudiation of state debt came during the 1840s, after the panics of 1837 and 1839.

Those panics were the consequence of a massive inflationary boom fueled by the Whig-run Second Bank of the United States. Riding the wave of inflationary credit, numerous state governments, largely those run by the Whigs, floated an enormous amount of debt, most of which went into wasteful public works (euphemistically called "internal improvements"), and into the creation of inflationary banks. Outstanding public debt by state governments rose from $26 million to $170 million during the decade of the 1830s. Most of these securities were financed by British and Dutch investors.

.... The next great wave of state debt repudiation came in the South after the blight of Northern occupation and Reconstruction had been lifted from them. Eight Southern states (Alabama, Arkansas, Florida, Louisiana, North Carolina, South Carolina, Tennessee, and Virginia) proceeded, during the late 1870s and early 1880s under Democratic regimes, to repudiate the debt foisted upon their taxpayers by the corrupt and wasteful carpetbag Radical Republican governments under Reconstruction."

Repudiating the National Debt

[Day 16 of Robert Wenzel's 30-day reading list that will lead you to become a knowledgeable libertarian, this article ran in the June 1992 issue of Chronicles (pp. 49–52).]

In the spring of 1981, conservative Republicans in the House of Representatives cried. They cried because, in the first flush of the Reagan Revolution that was supposed to bring drastic cuts in taxes and government spending, as well as a balanced budget, they were being asked by the White House and their own leadership to vote for an increase in the statutory limit on the federal public debt, which was then scraping the legal ceiling of $1 trillion. They cried because all of their lives they had voted against an increase in public debt, and now they were being asked, by their own party and their own movement, to violate their lifelong principles.

The White House and its leadership assured them that this breach in principle would be their last: that it was necessary for one last increase in the debt limit to give President Reagan a chance to bring about a balanced budget and to begin to reduce the debt.

Many of these Republicans tearfully announced that they were taking this fateful step because they deeply trusted their president, who would not let them down.

Famous last words. In a sense, the Reagan handlers were right: there were no more tears, no more complaints, because the principles themselves were quickly forgotten, swept into the dustbin of history. Deficits and the public debt have piled up mountainously since then, and few people care, least of all conservative Republicans. Every few years, the legal limit is raised automatically. By the end of the Reagan reign the federal debt was $2.6 trillion; now it is $3.5 trillion and rising rapidly. And this is the rosy side of the picture, because if you add in "off-budget" loan guarantees and contingencies, the grand total federal debt is $20 trillion.

Before the Reagan era, conservatives were clear about how they felt about deficits and the public debt: a balanced budget was good, and deficits and the public debt were bad, piled up by free-spending Keynesians and socialists, who absurdly proclaimed that there was nothing wrong or onerous about the public debt. In the famous words of the left-Keynesian apostle of "functional finance," Professor Abba Lernr, there is nothing wrong with the public debt because "we owe it to ourselves." In those days, at least, conservatives were astute enough to realize that it made an enormous amount of difference whether — slicing through the obfuscatory collective nouns — one is a member of the "we" (the burdened taxpayer) or of the "ourselves" (those living off the proceeds of taxation).

Since Reagan, however, intellectual-political life has gone topsy-turvy. Conservatives and allegedly "free-market" economists have turned handsprings trying to find new reasons why "deficits don't matter," why we should all relax and enjoy the process. Perhaps the most absurd argument of Reaganomists was that we should not worry about growing public debt because it is being matched on the federal balance sheet by an expansion of public "assets."

Here was a new twist on free-market macroeconomics: things are going well because the value of government assets is rising! In that case, why not have the government nationalize all assets outright? Reaganomists, indeed, came up with every conceivable argument for the public debt except the phrase of Abba Lerner, and I am convinced that they did not recycle that phrase because it would be difficult to sustain with a straight face at a time when foreign ownership of the national debt is skyrocketing. Even apart from foreign ownership, it is far more difficult to sustain the Lerner thesis than before; in the late 1930s, when Lerner enunciated his thesis, total federal interest payments on the public debt were $1 billion; now they have zoomed to $200 billion, the third-largest item in the federal budget, after the military and Social Security: the "we" are looking ever shabbier compared to the "ourselves."

To think sensibly about the public debt, we first have to go back to first principles and consider debt in general. Put simply, a credit transaction occurs when C, the creditor, transfers a sum of money (say $1,000) to D, the debtor, in exchange for a promise that D will repay C in a year's time the principal plus interest. If the agreed interest rate on the transaction is 10 percent, then the debtor obligates himself to pay in a year's time $1,100 to the creditor. This repayment completes the transaction, which in contrast to a regular sale, takes place over time.

So far, it is clear that there is nothing "wrong" with private debt. As with any private trade or exchange on the market, both parties to the exchange benefit, and no one loses. But suppose that the debtor is foolish, gets himself in over his head, and then finds that he can't repay the sum he had agreed on? This, of course is a risk incurred by debt, and the debtor had better keep his debts down to what he can surely repay. But this is not a problem of debt alone. Any consumer may spend foolishly; a man may blow his entire paycheck on an expensive trinket and then find that he can't feed his family. So consumer foolishness is hardly a problem confined to debt alone. But there is one crucial difference: if a man gets in over his head and he can't pay, the creditor suffers too, because the debtor has failed to return the creditor's property. In a profound sense, the debtor who fails to repay the $1,100 owed to the creditor has stolen property that belongs to the creditor; we have here not simply a civil debt, but a tort, an aggression against another's property.

In earlier centuries, the insolvent debtor's offense was considered grave, and unless the creditor was willing to "forgive" the debt out of charity, the debtor continued to owe the money plus accumulating interest, plus penalty for continuing nonpayment. Often, debtors were clapped into jail until they could pay — a bit draconian perhaps, but at least in the proper spirit of enforcing property rights and defending the sanctity of contracts. The major practical problem was the difficulty for debtors in prison to earn the money to repay the loan; perhaps it would have been better to allow the debtor to be free, provided that his continuing income went to paying the creditor his just due. Finish reading:  Repudiating the National Debt - Murray N. Rothbard - Mises Daily