Debt Can Do No Wrong?

The newfangled notion that public debt can go on growing forever without doing any harm got a sock on the chin last week. The blow was aimed primarily at Assistant Secretary of State Adolf A. Berle Jr. and Professor Alvin H. Hansen, special economic adviser to Federal Reserve System, whose articles have appeared in FORTUNE. Peripheral victim: the National Resources Planning Board.

Wielder of the haymaker was able Harold Glenn Moulton, head of the Brookings Institution (famed for its economic studies), who wrote a 93-page pamphlet, The New Philosophy of Public Debt, to prove that deficit spending and boundless public debt lead either to totalitarianism or to debt repudiation; that without "a stable system of public finance ... in the U.S., and also in other countries, the foundation stone for international reconstruction will rest on quicksand."

Undermining the Underpinning. Economist Moulton takes to pieces the assumptions of Messrs. Berle, Hansen, et al, that: 1) U.S. economy has been built, is now mature and can provide little or no opportunity for new capital investment; 2) the country's annual savings cannot be profitably invested in new production equipment; 3) business now finances expansion with its own reserves, without recourse to the capital markets; 4) the 1937 recession resulted from cessation of deficit spending.

But Moulton does his most important job on the now well-known theory that home-owned public debt can do no harm because, unlike private debt, it is owed by the people to themselves and merely recirculates money within the economic system. He points out that those who pay taxes to support the debt are not identical with those who receive 1) the interest on the debt, 2) the government bounties which the debt makes possible. Moreover, he asks, if Federal debt merely recirculates money, cannot the same be said under like circumstances of state debt? of municipal debt? of corporation debt? Yet these debts, when overextended, cause plenty of economic difficulties and get the debtors into financial trouble. National governments have been known to get into just such trouble.

Blasting the Superstructure. Moulton ridicules the theory that public spending can so increase the national income that taxes will increase to the point where the budget can be balanced. How come, asks Moulton, that this is just what does not happen in war, where national income rises sharply but taxes lag far behind? The war, thinks Moulton, proves not the benefits of public spending (as Hansen argues) but all its inflationary difficulties and collectivist consequences.

Harold Moulton's pamphlet attacks only the theory of deficits without limits, does not attack all government deficit spending. He does not try to prove that government debt is bad; he does insist that it must be controlled. In doing so he has given enthusiastic spenders plenty to think about, plenty to answer for.

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