Wednesday, October 21, 2009 10/21/09 - population growth and national debt

In today's excerpt - modern governments,
those that arose with the Industrial
Revolution and after, have had an
uninterrupted tendency to overspend and
accumulate large debts. However, since
populations have increased almost ten-fold
since then - and economic growth rates had
been even higher - Western governments have
routinely been 'bailed-out' by population and
economic growth. Simply stated, if a
government that had amassed staggering debts
could simply avoid increasing spending, and
the population doubled, the effective debt
would be cut in half on a per capita basis.
It remains to be seen what other debt
reduction strategies governments will need to
employ now that global population growth
rates are slowing:

"Although Hamilton saw a properly funded debt
as a blessing, he did not see
a big debt as one. He warned that
transferring heavy financial obligations to
coming generations threatened the nation's
future creditworthiness. In his
view, debts incurred during wartime should be
paid down during periods
of peace. In his First Report on Public
Credit, Hamilton wrote that he wished
'to see it incorporated as a fundamental
maxim in the system of public
credit of the United States that the creation
of debt should always be accompanied with the
means of extinguishment.'

"In December 1791, he further
pointed out that 'as the vicissitudes of
nations beget a perpetual tendency
to the accumulation of debt, there ought to
be a perpetual, anxious, and
unceasing effort to reduce that which at any
time exists, as fast as should be
practicable, consistent with integrity and
good faith.' ...

"Revenues increased significantly through the
later part of the 1790s. However, Washington
and John Adams after him incurred significant
expenses: building the new national capital,
financing the army and the navy
during what came to be known as the Quasi-War
with France, fighting
Indians, and paying tributes to the Barbary
pirates. These expenditures
thwarted their administrations' ability to
reduce the federal debt despite
their intentions. Government debt rose from
$77 million in 1790 to $83 million in 1801,
although it was offset in part by cash
balances in the Treasury and the value of the
stock the government held in the newly chartered
Bank of the United States.

"The United States enjoyed rapid economic
growth during the 1790s.
On a per capita basis, its wealth rivaled
that of Great Britain. Because the
economy grew more rapidly than borrowing,
debt declined as a portion
of GNP from 40 percent at the very end of the
Revolution to 18 percent in
1795 (editor: a period in which the
population grew by almost 30%). Robust
revenues enabled the government to service
all of Hamilton's
bonds on time, and U.S. government securities
came to enjoy a high degree
of investor acceptance in Europe. By 1795,
the United States was able to
borrow $8 million in Dutch florins from
private bankers in the Netherlands, a strong
testament to the financial credibility the
nation had achieved
in its brief history. It was the last time
the federal government borrowed in
a foreign currency until the late twentieth

Robert D. Hormats, The Price of
Liberty, Times Books, Copyright 2007 by
Robert D. Hormats, pp. 23-24.


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