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Atlantic Monthly Sidebar

January 1964

The National Debt and the Peril Point

Born in Philadelphia and a graduate of the University of Pennsylvania, J. David Stern began his career in journalism in 1908. Four years later he bought the New Brunswick TIMES, the first of a string of papers across the country whose fortunes he directed in a liberal tradition. As publisher of the Philadelphia RECORD and the New York POST, he became a power in Eastern politics and a close friend and adviser of FDR.

by J. David Stern


If a man had twenty pounds a year and spent nineteen pounds, nineteen shillings, and sixpence, he would be happy, but if he spent twenty pounds sixpence, he would be miserable.

Thus Mr. Micawber expounded his theory of economics to David Copperfield. In modern terms: Balance the budget and all is well; unbalance it on the minus side and you are on the road to hell.

My generation (I am seventy-seven years old) was brought up on this theory, buttressed by eighteenth-century maxims in Poor Richard's Almanack, such as: "The first [vice] is running in debt," "Beware of little expenses; A small leak will sink a great ship," and many others of the same ilk. (Nor are these eighteenth-century proverbs entirely forgotten. Printing Industries of New York recently sent Dr. Walter W. Heller, chairman of the Council of Economic Advisers, a specially printed, deluxe book of Ben Franklin's warnings against debt.)

Bankers swelled the chorus. They extolled thrift and savings accounts, discouraged debt. In those days banks did not have small-loan departments. Small loans were left to "loan sharks," who charged exorbitant interest and were less respectable than pawnbrokers. Only the improvident patronized stores which gave long-term credit.

Conditioned by such propaganda, I was scared when I borrowed $10,000 to buy my first newspaper in 1912. It did not lead to disaster. Having made this first plunge, I kept on going deeper and deeper into debt during my thirty-five years of publishing seven newspapers. When I retired in 1947 my newspapers, radio station, and paper mill owed $5,500,000. My debt had increased 550-fold, but the value of my properties had grown almost a thousand-fold, from $12,500 to $12 million. So there was a margin left for old age.

My experience was not unusual. Most businesses borrow to expand. Credit has been as essential to industrial growth as were steam and electric power. Look over the balance sheets of giant corporations, the "blue chips," in Wall Street parlance. They all are in debt.

Our point of view has changed. Debt has become respectable, not only for the businessman but for the householder. Installment buying is a major force in our economy. The government encourages newlyweds to start their married life in a home bought for next to nothing down and with a forty-year mortgage. Through its Small Business Administration it helps small enterprises to grow by going into debt. And the banks have changed their tune. Now they advertise and promote small loans more than savings accounts. Debt is no longer regarded as evil in itself. It is what you do with the money after you borrow it that really matters; how well you invest and not the fact of borrowing is the true yardstick.

In our expanding economy Micawber seems forgotten--except in one most important instance. When the federal government debt is at issue, Micawber's ghost walks again and resurrects the ancient shibboleths. A protean ghost, it usually assumes the form of an elder statesman to croak, "Debt will ruin the nation." It has been repeating that refrain as far back as I can remember. Sixty years ago it was predicting that a $500 million appropriation for the Panama Canal would bankrupt the country. Thirty years ago, taking the form of General Robert E. Wood, president of Sears Roebuck, it went about the nation alerting the populace to the danger of President Roosevelt' s profligacy. In the guise of General Wood, Micawber's ghost ended every speech with a warning that when the federal debt reached $25 billion, the dollar would be worthless. While performing this Paul Revere stunt the ghost pointed with pride to President Hoover, who balanced the budget, achieved a billion-dollar surplus, and reduced the national debt during the first three years of his Administration. Readers over fifty remember what happened in 1932. At the same time, General Wood, in the flesh, was borrowing money in order to expand his company into the largest retail organization in the world.

Micawber's ghost warns us that the spendthrift Democratic Administration is leading the government into bankruptcy. And our newspapers and magazines, largely controlled by ultraconservative wealth, give the front page to this foreboding.

Typical of this concerted effort to scare the living daylights out of the average citizen was the lead article in the Reader's Digest for May, 1963, entitled "The Real Truth About the Federal Budget." "Incredible. Inviting disaster. Staggering," shouts the ghost from the floor of Congress, this time in the guise of Congressman Clarence Cannon, chairman of the House Appropriations Committee, a fitting embodiment of Micawber's shade since Cannon is almost as old as Micawber and a character straight out of Dickens.

By the end of the Reader's Digest article the ghost has assumed an even more appropriate corporeal form, that of Senator Harry F. Byrd, chairman of the Senate Finance Committee, boss of Virginia, and president of the Micawber Chowder and Marching Club, which proudly flaunts its slogan, "Debt is a dirty word." So faithful is Byrd to Micawber's theory of economics that he has forbidden the state of Virginia to contract any more debt. As a result, Virginia's cities and counties must finance essential public works, schools, water, sewers, and so forth, at much higher rates of interest than the state could command. So Byrd's loyalty to Micawber is costing his fellow citizens many millions of dollars a year. Virginia lags behind other states in urgently needed improvements, and some of the leaders in Byrd's own organization are in open revolt. What does the ghost, posing as Byrd, have to say at the close of the article?-- "This loose spending must stop." No matter how many shapes the ghost takes, it is consistent.

Another typical Micawber article was the lead in the Saturday Evening Post of May 18, 1963. The title "Spending into Trouble" is followed by a subhead "We are stealing from our grandchildren in order to satisfy our desires of today." This time the ghost speaks through President Eisenhower. Like the Reader's Digest tirade, it is packed with half truths and forebodings of doom from debt. Neither these two pieces nor any of the warnings which clutter our press give comparative statistics on which an intelligent appraisal of the national debt can be based. Nor do they measure the national debt against growth in business, wealth, and population.

Without some frame of reference, discussion of the debt is meaningless. Such attacks on the Kennedy Administration's fiscal policy are tedious repetitions of Micawber's theory: balance the budget or ruin.

What are the facts?

The nation is growing faster than its debt.

Its debt is shrinking in proportion to its wealth and ability to pay.

As a result of World War II, our national debt in 1947 was $257 billion. That was 10 percent more than the gross national product, or total business done in that year. In 1962 the national debt was 55 percent of the gross national product, proportionately half as much as it had been fifteen years before.

The GNP is a useful yardstick for economists. But let us use a more familiar tape measure: take-home pay, or personal income after taxes, or "personal disposable income," as the President's Council of Economic Advisers calls it.

In 1947 the national debt was 151 percent net personal disposable income; in 1962, 80 percent. Here are the figures of the Administrations from Truman through Eisenhower to Kennedy:

National Debt Net Disposable Percentage of

(billions) Personal Income National Debt

(billions) to Personal Income

1947 $257 $170.1 151%

1952 267.4 258.7 112%

1957 275 308.8 90%

1962 304 382.7 80%

Not only is the national debt decreasing in relation to personal income and volume of business; it is also decreasing in proportion to population. Since 1947 the population has increased 29 percent, the national debt 18 percent. The above figures can be restated on a per capita basis as follows:

Per Capita Per Capita Percentage of

Personal National Per Capita Debt

Income Debt to Per Capita

Population Income

1947 144,126,000 $1180 $1783 151%

1952 156,947,000 1521 1700 112%

1957 171,278,000 1803 1600 81%

1962 186,591,000 2051 1600 78%

We can translate this table into the budget problems of a family of five. Mr. and Mrs. John Doe and their three children consider the household budget. "In fifteen years our debts are down," says Mr. Doe. "From $8900 to $8000," complains Mrs. Doe. "I don't call that much." "But at the same time my take-home pay has nearly doubled," replies Mr. Doe. "So we are really much better off. By budgeting ten percent of the family income we could pay off all our debts in eight years. It would have taken twice as long at the rate we were going fifteen years ago. That's progress."

As far as the national debt is concerned, we are certainly making progress. But during the past fifteen years corporate debt has increased 204 percent; personal debt, including home mortgages, 389 percent; state and local government debt 400 percent. These facts are never mentioned when Micawber's ghost damns the national debt. We will now all rise while the ghost leads us in singing the patriotic song: "Debt's OK, in every way, for everyone, but not for Uncle Sam."

Without considering the income and resources of a debtor it is impossible to calculate whether his debt is too great. I am reminded of a profound question, worthy of an elder statesman, propounded by my granddaughter, aged six.

"How much is too much?" she asked.

"'Too' and 'much' are connecting words," I explained. "Meaningless unless hooked to things or ideas. A pile of hay might be too much for a horse, too little for an elephant. Five pieces of candy are too many for you, too few for your birthday party."

This is childish talk, but no more childish than debates in Congress on setting a fixed-dollar limit to the national debt, rather than a limit based on a percentage of GNP, national income, or some other composite frame of reference.

Why is the public kept in ignorance of the comparative statistics which would enable it to judge for itself the financial state of the nation? I have already mentioned one reason. Our communications are controlled by wealthy ultraconservatives who are congenitally allergic to government spending. Another reason is that our articulators, the columnists who write so entertainingly, the commentators who talk so glibly, are, generally speaking, weak on figures. They avoid statistics and percentages. Their excuse is that the public would not understand or be interested. I have long felt that they do not give their audience credit for the intelligence with which it is endowed.

But the chief fault lies with the present Administration, which has done little to counteract conservative propaganda. In one address, President Kennedy did compare the national debt to the gross national product, but he neglected to explain GNP, a technical term familiar to less than a tenth of his audience. Nor, as far as I have been able to discover, has any other spokesman for the Administration discussed the relative size of the national debt against any frame of reference.

Under these circumstances it is easy for Micawber's ghost to rouse the rabble by denouncing federal spending and debt, which imply more taxes. Even though the present proposal is to borrow to lower taxes, conservatives growl their disapproval just as Pavlov's dogs responded with conditioned reflexes. And why does this difficult ghost haunt the United States instead of his native land where the debt burden is proportionately double the amount in this country and yet is not a political issue?

The ghost is also helped by the awesome words "billion dollars," a frightening sum of money to the individual. For Uncle Sam, $l billion is the equivalent of $100 for a family with an income of $8550--slightly more than one percent of the income. To counteract the billion-dollar scare propaganda, the Administration must drive home lessons in proportion and take the bigness out of "billion" by homely contrast of government finance with everyday transactions. To give an example: a country dentist, with an income of $10,000, asks his bank for a $1000 loan.

"What for?" asks the village banker, not like big-city bankers, who nowadays lend without asking. Besides, he is suffering from a toothache, which makes him momentarily disinclined to grant a loan, even to a Rockefeller.

"To modernize my office," the dentist replies.

"Why go heavier into debt?" the banker snarls. "You still owe on your home and car."

"With better equipment I could increase my practice," the dentist explains. "I could treat patients more quickly and with less pain." The phrase "with less pain" gets the banker where it hurts, and the loan is granted.

The proposal to borrow $11 billion to stimulate business by lowering taxes is in about the same proportion to government income as the dentist's loan to his income. And the Administration's plan is designed to alleviate some of the pains with which the body politic is presently afflicted--unemployment, depressed areas, racial tensions. Only in a period of full employment can we hope to make any real progress in upgrading the employment of minority groups, which is one of the essentials in solving the racial problem.

Even a banker, grouchy with a toothache, would not denounce the dentist's loan as spending "into decadence and peril." But those are the words Micawber s ghost, speaking through Eisenhower, used to describe President Kennedy's plan. And nowhere in the many attacks do I find mention, let alone consideration, of the ills and injustices which the plan is designed to cure.

Most men of wealth, particularly those who started poor and acquired affluence late in life, are emotional about money. It is hard for them to think objectively about the magic force which changed their lives. This King Midas syndrome explains their aversion to John Maynard Keynes, greatest economist of the twentieth century. Keynes defined money as a no-par share in the purchasing power of a nation, an abstraction, an entry on a bank ledger. Such a concept is anathema to Midas, who harbors the subconscious desire to possess money he can bite. Keynes held that a nation in depression should borrow and spend more than its income. President Franklin D. Roosevelt took his advice. He incurred deficits for unemployment relief and public works, which were factors in curing the Depression.

Many a business has gone into debt to rescue itself from decline. In 1933, at the height of the Depression, my competitors stopped all circulation promotion. I borrowed $250,000 to put a couple of hundred unemployed to work soliciting subscriptions for the Philadelphia Record. To borrow wisely, at the right time, is the key to many a business success. Commodore Vanderbilt said, "A millionaire isn't the man who has a million but the man who can borrow a million."

President Eisenhower writes, "I know that the economic theorists [have] convinced themselves that what...counts is the relationship between the debt and the gross national product....As long as the debt doesn't grow out of proportion to the gross national product, they believe, the country will remain in sound financial condition. But what they don't point out is that nobody really knows where this theoretical peril point might be."

There is a peril point in nearly everything we do, but if that were to keep us from doing, we would be a backward nation. There is a peril point in pioneering, and some of our Founding Fathers got mighty close to it. There is a peril point in drinking, so we were persuaded to try prohibition. There is a peril point in swimming out into the ocean. If you haven't strength to return, you drown.

Because we sent General Eisenhower what he needed to win the war, the national debt rose to 110 percent of GNP. Perhaps we were approaching the "peril point." But no one suggested cutting down our shipments of ammunition.

Now the national debt is 55 percent of GNP, so we are far from the peril point. The real peril is that federal, state, and local taxes take too large a percentage of national income and thus retard economic growth. The President's Council of Economic Advisers figures that we are approaching that peril point. It wants to avoid it by lowering taxes. If this tactic stimulates the economy, reduces unemployment, absorbs the teen-agers entering the labor field in greater numbers each year, the GNP will soar well over $600 billion, and the government's income will exceed its budget. That should make everybody happy, including Micawber's ghost.

The debate as to which comes first, balancing the budget according to Micawber or balancing the economy according to Keynes, is not an abstract controversy. It is fundamental to the immediate problems which vex the nation today. If President Eisenhower is looking for peril points, he can find them in a growing population with a static economy.

If your only excuse for shouting "fire" in a theater is that you do not like the actors, you are going to spend a long time in jail. Shout "ruin and disaster" about the state of the nation and the First Amendment will protect you, even if you have as little reason to cry your alarm as when you cried "fire" because you disapproved of the actors.

The peril point is not in the budget but in the minds of reactionaries. As Senator Joseph S. Clark of Pennsylvania has said, "Perhaps no topic [national debt] in our time has been the victim of so much nonsense."

Our nation is growing faster than its debt. Those words are the magic formula to lay Micawber's ghost.


Copyright © 1964 by J. David Stern. All rights reserved.
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