The Danger of Mounting Deficits: There Is One Way Out


DICKENS’S famous character, Micawber, gave young David Copperfield a piece of financial advice that is universal in its application. He said, ‘Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.’

Those who continually fail to live within their incomes — whether they be individuals or nations — sooner or later come to grief. History is replete with testimony to the soundness of Micawber’s advice. But those who now ignore it feel that unusual circumstances justify their action. They fail to realize that the mere fact of excess expenditures does the damage. Motives and circumstances — however noble or unusual — play no part in the matter.

Yet we are told to-day in this country that the exigencies of the times and the ‘social need’ for large Government expenditures justify the accumulation of an enormous deficit by the Federal Government. This is the same old story. Circumstances are always unusual. Motives are always of the highest. It is one thing to rationalize a deficit. It is another thing to liquidate it.

In the fiscal year 1931, the Federal Government incurred a deficit of $902,000,000. In 1932, a further deficit of $3,148,000,000 was created. Another $3,063,000,000 was added in 1933. In 1934 the Federal Government ran $3,989,000,000 in the red. The 1935 deficit was $3,575,000,000, including amortization charges, and present budget estimates place the 1936 deficit at $4,529,000,000. This indicates a cumulative deficit of about $19,206,000,000, including sinking-fund requirements, in a period of six years.

Among all modern nations, the United States to-day has the largest deficit, both in total amount and in relation to income. The $11,000,000,000 deficit incurred in the four fiscal years from 1931 through 1934 was more than 100 per cent of the Government revenues for the same period. In the fiscal year 1935, the deficit was almost 100 per cent of revenues collected. And according to budget estimates the 1936 deficit will be more than 110 per cent of the revenues for 1936. In other words, the Government has been spending more than twice as much money as it has received.

A comparison of the position of other leading nations shows that from this standpoint Italy’s record is next poorest. But Italy’s accumulated deficit of $780,000,0001 from 1931 through 1934 was only one fourteenth as large as that of the United States and represented only one fifth of her revenues for the period in which it was incurred.

Many other leading nations of the world have suffered deficits in recent years. But in nearly all cases they have been involuntary, whereas the deficits of the United States have been planned and deliberate. Other countries have made conscientious efforts to balance their budgets. The deficits that have resulted have been caused primarily by the failure of revenues to materialize in accordance with budget estimates. The United States, however, has made no such attempt to balance its budget. It has budgeted its deficits in advance and financed them by the issuance of enormous amounts of new Government bonds. As a consequence, the national debt has increased approximately 85 per cent since 1930. This figure does not take into account the enormous contingent liabilities incurred. These, although they cannot be exactly determined, apparently amount to an additional $6,000,000,000.

Much of the existing deficit of the United States is accounted for by socalled extraordinary expenditures incident to the Government’s programme of spending as an aid to recovery. The futility of this spending effort has been discussed in previous articles. For a programme that has achieved imperceptible results in the matter of employment, we have incurred a deficit of more than fourteen and one-half billions, and expect to add another four and one-half billions to this figure in the next fiscal year.

Billions of dollars! There was a time not so long ago when even a million dollars seemed a rather stupendous figure. But now the word ‘billion’ is bandied about freely. The nonchalant, careless, jovial sloshing of a billion dollars here and a billion dollars there has become so commonplace a part of the daily news that there is danger that we may not appreciate the real significance of the word. Familiarity with it has bred contempt. Consequently, it is not amiss here to ask the question, ‘How much is a billion?’

Upon reflection, it almost staggers the imagination. A man with a $5000 annual income would have to work 200,000 years to earn a billion dollars. At our present average rate of individual income, a city of 100,000 people would have to work more than fifteen years to earn a billion dollars. Only a billion minutes elapsed between the birth of Christ and the year 1902 A.D. A billion one-dollar bills laid end to end would girdle the earth four times.

A billion dollars should never be thought of as merely a sum of money. It should be thought of as representing many years of labor by many thousands of people. Only in such terms can the significance of our enormous national deficit be appreciated. Only then can we understand the extent to which we have mortgaged our future.


We have all witnessed the disaster that comes to the individual who continues to spend more than he makes. He finally goes bankrupt, and his creditors seize his remaining property, leaving him penniless. Everyone agrees that this is foolhardy procedure for an individual. What people do not realize is that excessive spending by a Government brings much the same sort of bankruptcy to all the people.

Governments never go bankrupt in the sense that an individual does. Like individuals, Governments have the power to appropriate and expend money. But they also have a further power which the individual does not have — namely, the power to manufacture money. When its credit becomes impaired, a Government does not file a petition in bankruptcy. Instead it avails itself of the power to issue additional money.

The continued issuance of such money by a government that is really insolvent leads to steady dilution of the value of its currency. Ultimately the currency becomes worthless. This cheapening of the value of money wipes out the accumulated savings of the people, until in the end an amount formerly regarded as a small fortune may no longer be sufficient to buy a loaf of bread. The great middle class, which is the backbone of any nation, is always the chief sufferer.

During the entire period in which this debasement of the currency is proceeding, there is intense suffering. This is because prices rise rapidly as the value of money is diluted. Moreover, wages and salaries in such a period cannot be adjusted upward rapidly enough to offset the tremendous increase in the cost of living. As a consequence, the standard of living declines rapidly, and the entire population suffers.

There is nothing new about the experiment of Government spending as an instrument of economic recovery. It has been tried at various times in the world’s history by many Governments. The result has always been the same. It has invariably led to debasement of currency, the destruction of savings, the ruination of the middle classes, and the impoverishment of the entire people. Only very wealthy people or clever speculators manage to survive the catastrophe.

The deficits incurred by the Roman Empire resulted in the depreciation of its currency to one ninety-sixth of its former value. The deficits of the Crown in France forced the issuance of paper money which resulted in economic collapse. The deficits of France a century later under the Constitutional Assembly again destroyed the value of its currency. The deficits of the Russian Government in 1917 compelled the issuance of paper money that impoverished the people and made them more willing listeners to revolutionary propaganda.

The United States itself has already suffered a number of times from deficits that compelled the manufacture of fiat money, such as Colonial paper money, the Continental currency, and the infamous ’greenbacks.’ Inflation and collapse have always followed.

In recent years, a new technique has been developed for the financing of Government deficits. Instead of issuing paper money, Governments sell their bonds to central banks, which in turn issue the money with which to pay for such bonds. The difference is only one of method. The results have been the same as in the cases of direct issuance of paper money. In the postwar period, the deficits incurred by Germany, France, Belgium, Austria, and Italy were financed by the sale of Government bonds to central banks. In all cases this policy resulted in the destruction, or partial destruction, of the value of their respective currencies.

Now it is important to remember that in all these cases the Governments in question had little or no choice in the matter at the time the fiat currency was issued. The deficits then existed. There was no other way to meet them. The choice must be made earlier, and Government spending stopped. In all ages and under all circumstances it has always been true that, if deficits are allowed to accumulate to an amount which makes it impossible for a Government to do further borrowing, there is then no alternative except debasement of the currency.

The United States to-day has an accumulated deficit of approximately $14,677,000,000. How has it been financed? How will the future deficits already budgeted be financed?

If deficits of a country are financed out of savings, it is an indication that the credit of the country — at least to that point — still exists. This is proved by the fact that individuals are willing to place their savings voluntarily in the bonds of the Government. Moreover, this method does not inflate the volume of money or credit outstanding.

But the deficit of the United States has not been financed in this way. It has been financed by the creation of fiat credit issued by the country’s banks in exchange for huge amounts of Government bonds which have been virtually forced upon them by the Government. Except for certain technical differences, this method differs little from the thoroughly discredited method of selling Government bonds to central banks which create currency to pay for them. The effect of fiat credit is slow but insidious. Its full effect is usually not apparent until industrial production gets under way. It took France six years after the World War to feel the full effect of such credit inflation, and by that time Government deficits were actually being reduced.

Since 1930, our Federal debt has increased about 85 per cent. The dollar amount of this increase was $11,723,349,000. Of this total of newly issued debt, 85 per cent was accounted for by increases in the holdings of Government bonds by banks. The total of Government bonds in the hands of banks increased over 200 per cent in the same period.

When a bank purchases Government bonds, it rarely pays for them with cash money that someone has deposited in the bank. It merely creates on its books a credit against which the Government is entitled to draw. When the Government draws against this credit and puts it in circulation in its spending programme, the effect is the same as if the bonds had been sold to a central bank that issued paper currency in payment.

Moreover, the credit drawn by the Government from one bank finds its way into other banks in the form of deposits. In this connection it is interesting to note that between 1931 and 1934 the increase in bank deposits has corresponded almost exactly to the increase in the Government bond holdings of the banks during that same period.

In defense of this programme it has been argued that fiat credit is created by banks in the same fashion when they finance general business. This is true. But there are important differences. First, the bank can exercise complete discretion in the matter. Second, the uses to which the credit is put are productive. Third, if such credit is granted for sound purposes, it is shortterm and self-liquidating. It ceases to exist when it has served its purpose of financing the production or distribution of goods. Whenever fiat bank credit has been created for other purposes, such as speculation, disastrous consequences have always followed. To use bank credit to finance Government deficits is to abuse credit, for it loads the banks with loans that do not produce the goods or services with which such loans can be repaid.

How has the Government been able to load the banking system with its bonds in this fashion? First, through its RFC activities, the Government is in a position to coerce banks into buying its bonds. Second, banks that have been anxious to show a strong investment position have been willing to buy large amounts of Government securities, on the theory that there could be no criticism of such assets. Third, the Government’s policies have so frightened sound borrowers that there has been virtually no demand for bank credit from the business community. As a consequence there is little that a bank can do to meet its overhead except buy Government securities.

There are also other elements of weakness in the situation. By artificial means the Government has been able to force interest rates down. And through the operation of a stabilization fund and through various Government corporations the Government has been able to purchase its own bonds in the open market whenever prices were weak. As a consequence, the prices of Government bonds are fictitious. The only true test of the credit of a Government — a test not yet applied — is what savings are willing to pay for its bonds.

We find, then, that our present deficit is being financed, not by the savings of the people, but by the creation of fiat credit, which differs only in minor respects from the issuance of paper money. We find that the Government spending programme, which accounts for this staggering deficit, has proved wholly ineffective as an instrument of reëmployment. It has, in fact, proved an actual detriment to employment. For the threat of currency depreciation, which is always present when Government deficits are mounting, has grievously impaired the general confidence that is necessary to foster the investment of funds that would bring about the reëmployment of idle workers.


Must the present reckless rate of spending continue? Or will millions of individuals, to protect the value of their own small savings, rise up and demand an end to a futile programme that all history shows bids fair to result in the final destruction of their savings through currency depreciation?

It is difficult for many people to appreciate the seriousness of the course we are following. Americans have a great faith in the ability of their country to weather economic storms. The average man or woman likes to believe that nothing really serious could happen to the United States because it is too wealthy. Yet as recently as 1862 the credit of this nation was definitely impaired, and the infamous greenbacks were issued. To be sure, much of the country’s wealth was at that time undeveloped. But the national debt was less than $600,000,000, as compared with the present figure of $29,000,000,000. Bankruptcy is a matter of the relationship between assets and liabilities. The mere existence of enormous assets is no protection against it. We have all seen big corporations go bankrupt while smaller ones remained solvent.

America’s great gold stock is regarded by many people as a steadying influence and an anchor against currency inflation. If such gold is not used, however, it affords no protection. Ours is not being put to use, because we are now on a completely irredeemable paper basis. And if we were to use our gold it would disappear from circulation into hoarding the moment currency inflation seemed imminent. Russia’s 1,250,000,000 gold rubles in 1917 were no protection against the collapse of her currency.

Many people believe that if we achieve economic recovery the increased income of the Government will make possible a balancing of the national budget, despite the present rate of Government expenditures. There is no sound basis for this belief. The greatest income ever collected by the Federal Government was obtained in the Wilson Administration, which collected from taxpayers a maximum of $6,600,000,000 in a single year. This was possible only because the country was experiencing boom times. The present Administration, however, is planning the expenditure of something like $8,500,000,000 annually. This is about $2,000,000,000 more than the Federal Government has ever been able to collect from its taxpayers even in the days of great prosperity. So, even assuming complete economic recovery, how is this enormous gap to be bridged?

Others maintain that, if a Government is justified in spending to win a war, it is also justified in spending to overcome a depression. This line of argument fails to take into account one very important difference between the two situations. The need for war spending ends of its own accord. But, more often than not, spending as an instrument of recovery does not stop, because of the political difficulties involved in withdrawing Government bounties from the millions who have become accustomed to such special privileges. Moreover, Government spending can win a war. But there is no evidence that Government spending ever conquered a depression.

War spending is also bad. Our own deficits incurred during the war and financed by fiat credit inflation contributed to the post-war inflation which has now ended in severe deflation, widespread unemployment, and great suffering. The purpose for which the deficits are incurred has no bearing on the outcome. The fact is that any deficit financed by currency or fiat credit inflation is bad. Why should the process now be deliberately repeated?

Much has been made of the fact that the so-called ‘ordinary budget,’ providing for the routine expenses of Government, is in balance, and that all other expenses, which result in the deficit, have been segregated into what is termed the ‘extraordinary budget.’ This distinction is a mere trick of bookkeeping. Whether the Government keeps a record of it in one book or two is a matter of no moment. The fact remains that the money is being spent. Many other Governments in South America and Europe have at various times deluded the people with this device of the extraordinary budget. In all cases in which it has been resorted to, a collapse of the currency and the destruction of the people’s savings have resulted. The reason is that it has always proved impossible to stop the extraordinary expenditures and the Government deficits they create, which in turn necessitate continued borrowing that leads to bankruptcy.

It is this problem that is now facing the United States. The present national debt, even though far greater than it should be, as a result of recent deficits, is not yet unbearable. But can further deficits, which may prove disastrous, now be avoided? Can Government spending now be stopped? The experience of other nations indicates that it will require more fortitude and determination than politicians usually have. There are few instances in which Government activities, once started, are relinquished. The whole tendency of Government is to grow bigger and cost more.

Government spending always creates vested interests which obtain great benefit from such spending. Will the millions of people now receiving Government largesse be willing to have the Government cease such spending? Will retail merchants whose business has been helped by the Government’s distribution of enormous sums be willing to see a cessation of such spending? Will bureaucracy itself, created by Government spending, permit itself to be dismembered? How many municipalities will be willing to shoulder again the burdens that they have turned over to the Federal Government? Also to be considered are the continuing costs incident to increased fixed charges and to obligations incurred in connection with Public Works under contracts already made, which run many years into the future.

Moreover, no Administration that has openly espoused Government spending as an instrument of recovery can be expected to cease such spending. For, the minute it does, the illusion of recovery that has been created immediately fades. This reveals the basic fallacy of the entire programme, which is that the benefits of such spending last only as long as the spending continues.

These obstacles to a cessation of Government spending seem almost insurmountable. Yet they must be overcome, for the value of all our savings is at stake.

The impoverishment of the middle class as a result of currency depreciation caused by Government deficits lays the foundation for profound social changes. This is freely admitted by F. Preobrazhensky, friendly commentator on the Russian Revolution and author of Paper Money during the Proletariat Dictatorship, in the preface to which he says:—

I would like to dedicate this imperfect work of mine to the one who, by the perfection of his own work and by its unbounded abundance, gave me the impulse to write these pages. I refer to the printing press of the People’s Commissariat of Finance. . . . Glory to the printing press! To be sure its days are numbered now, but it has accomplished three quarters of its task. In the archives of the great proletarian revolution, alongside the modern guns, rifles, and machine guns which mowed down the enemy of the proletariat, an honorary place will be occupied by that machine gun of the People’s Commissariat of Finance which attacked the bourgeois régime in its rear — its monetary system — by converting the bourgeois economic law of money circulation into a means of destruction of that same régime and into a source of financing the revolution.

Government deficits incurred in the hope that they will promote recovery defeat their own purpose. This is because such deficits, as they continue, cause a growing fear of currency destruction and radical social changes. This fear, which all history shows is fully justified, naturally discourages the use of savings in new productive investment. And without such use of savings the permanent reémployment of idle workers cannot be achieved.

It is for this reason that we do not witness to-day the absorption of unemployed workers in productive private enterprise. Instead we have the employment of idle workers by the Government itself in unproductive tasks. But, despite this frantic effort of the Government to create artificial employment, the total number of unemployed people has actually increased. Meanwhile, the Government’s futile efforts may create a temporary appearance of recovery. But it has no solid foundation, for it disappears when Government spending stops; and sooner or later Government spending must stop.

Since this article was written the President’s budget statement of September 29 has been made public. In it the estimated deficit for 1936 is reduced to $3,281,982,860. This does not change the dangers of the Administration’s fiscal policy. An analysis of the statement shows that expenditures for 1936 are much greater than for either 1934 or 1935. Consequently it contains no evidence of an effort to retrench, and the deficit, while smaller than estimated in January, still remains at the fabulous figure of $3,281,982,860.

The next article will discuss some of the steps which might be taken to bring the national budget into balance within a reasonable period.

[Interested readers will turn to page 9, front section]

  1. This figure is borrowed from the New York Trust Company. — AUTHOR