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• Foreword
• Preface
• Public Principles of Public Debt
• 1.: The Economists and Vulgar Opinion
• 2.: The New Orthodoxy
• 3.: The Methodology of Debt Theory
• 4.: Concerning Future Generations
• 5.: The Analogy: True Or False?
• 6.: Internal and External Public Loans
• 7.: Consumption Spending, the Rate of Interest, Relative and Absolute Prices
• 8.: A Review of Pre-keynesian Debt Theory
• 9.: Public Debt and Depression
• 10.: War Borrowing
• 11.: Public Debt and Inflation
• 12.: When Should Government Borrow?
• 13.: Should Public Debt Be Retired?
• 14.: Debt Retirement and Economic Stabilization
• Appendixa Suggested Conceptual Revaluation of the National Debt

Preface

Under what conditions is a book conceived? If we knew, I suspect that we could predict with reasonable accuracy the characteristics of the progeny. The pedestrian parade of factual detail which often epitomizes the published doctoral dissertation reflects the forced mating of reluctant author and uninspiring material. The smashing of straw men suggests the rapacious advance of a zealous author determined to defeat his opposition rather than to provide enlightenment.

Because it seems likely that I shall be placed in the second of these categories by some of my professional colleagues, let me explain in some detail just how this little book has come to be written. First of all, I should state that for many years I have accepted what I have called in this book the “new orthodoxy” of the public debt. In my study I have absorbed this doctrine uncritically; in my teaching, I have encouraged others to do the same. If there is no evidence of the “new orthodoxy” in my published papers, this reflects a full and unquestioning integration of the doctrine in my own thinking rather than the reverse.

One great value of considering practical questions of public policy or “political economy” is that the economist is forced to question the validity of so many of the basic elements in his conceptual scheme of things. My re-examination of public debt theory stems directly from my work on a currently important issue in political economy, the national highway problem. In the academic year, 1954-1955, I started working on a manuscript, which remains incomplete, of a book on economic policy in this area of emerging national importance. In the first draft I reached a point at which an appropriate chapter on “Taxes versus Loans” should have appeared. At about this same time, in the spring of 1955, I was serving as a consultant for the Committee for Economic Development. The Committee was attempting to formulate a policy statement on highway modernization, and especially on the methods of financing highway improvement. (The Committee’s views are published in the policy statement, Modernizing the Nation’s Highways, issued in January, 1956.) Central to the highway problem was, and is, the issue of pay-as-we-go versus go-as-we-pay. The Presidential Advisory Committee, under the chairmanship of General Lucius Clay, had proposed a vast new issue of special bonds to finance an accelerated development of an interstate highway network. This financing scheme was given the now-famous lukewarm treatment by the then Secretary of the Treasury Humphrey, and the proposal aroused bitter congressional and public opposition. What was the desirable means of financing highway improvement, admitted to be needed by almost all parties to the discussion? Should taxes be increased sufficiently to cover the full current outlay from currently collected funds, or should public borrowing be accepted as an appropriate means of financing? Surely here was a problem upon which professionally trained economists should be able to shed some light.

Two things became clear very quickly. First, economists seemed to be able to contribute surprisingly little to the solution of this problem, and, secondly, what little they could contribute was based on a “dusting off” and a utilization of “public” or “classical” views on public debt theory and policy. The conception of the public debt which has achieved dominance among economists during the last twenty years and which characterizes economic thought today was useless in the full-employment world of the 1950’s. The chapter on “Taxes versus Loans” remained unwritten. The Highway Revenue Act of 1956 was passed, which incorporated the pay-as-we-go principle of financing, largely reflecting the “vulgar” or “man-on-the-street” opinions about public debt creation.

During the academic year 1955-1956, I was awarded a Fulbright Research Scholarship for study in Italy. In the course of this work I found that the Italian fiscal theorists have devoted a great deal of attention to the Ricardian proposition that taxes and loans exert identical effects upon an economy. This proposition was debated fully in the works of the classical Italian scholars in public finance: Pantaleoni, De Viti De Marco, Griziotti, and Einaudi. In a year largely devoted to reading widely in a foreign language it is extremely difficult to isolate those particular works which specifically affect and modify one’s thinking. But I now believe that an approach to public debt theory employed by Pantaleoni, despite the fact that his conclusions were erroneous, led me first to question a single bulwark of the “new orthodoxy,” namely the sharp conceptual distinction which it makes between the internal and the external debt. This initial questioning was further motivated by a later reading of some of Einaudi’s works. In a specific sense none of the Italian theorists appears to have formulated a fully acceptable theory of public debt and, indeed, the dominant theory in Italy, even prior to the 1930’s, has much in common with that which characterizes the “new economics.” But the Italian approach to the whole problem of public debt was instrumental in shaping my views as they now stand, and I should, therefore, acknowledge this influence.

Stimulated indirectly by the work of Pantaleoni, I prepared a note on the distinction between the internal and the external public debt in which I tried to show that the currently accepted views must be modified. A version of this note appeared in the American Economic Review for December, 1957. A somewhat different version appears as Chapter 6 of this book, and I gratefully acknowledge permission of the editors in allowing me to reprint those portions of the argument which are identical. So firmly anchored in my own thinking were the other two bulwarks of the new orthodoxy that, even in writing the early versions of this critical note, I accepted these two without question. The note was completed in early 1957, after which I returned to the highway manuscript with a view toward finally writing the chapter on “Taxes versus Loans.” It was only in the process of writing this chapter that I came to the full realization that the two remaining bulwarks of the “new orthodoxy” are also untenable. I came to realize that the analogy between the public economy and the private economy is applicable to most of the problems of the public debt and that public debt creation does involve a shifting of the real burden to future generations of taxpayers.

Somewhat to my surprise, therefore, I now find myself in the camp of the much-maligned man on the street, the holder of the allegedly vulgar and unsophisticated ideas about the public finances. This heresy places upon me a somewhat greater obligation to spell out the ideas involved in my proposed overthrow of the ruling orthodoxy carefully and precisely. In the chapters which follow I shall not be tilting at windmills nor shall I be attacking straw men. I hope that economists will accept my discussion of the ruling theory of public debt as a fair one. I shall try to show the weaknesses in the orthodox approach and to suggest an alternative one.

The discussion will contain little that is completely new or different. Many parts of it will be readily accepted by those who have been instrumental in shaping the “new orthodoxy” in its current form. Some elements of the argument are to be found in the qualifications which the more careful expositors have used to frame their analyses. And almost all of the ideas developed in this book may be found in “classical” public debt theory. The book will essentially re-establish this theory as the general one. Traces of this “correct” theory are to be found alongside traces of the opposing views throughout the history of the subject.

It is understandable that the now-prevalent theory only gained and held its position of dominance in the decade of the 1930’s and its aftermath, the 1940’s, although the theory had, of course, been advanced frequently during earlier periods. The approach was directly tied to, and indeed could scarcely have been divorced from, the “new economics.” But just as other elements of the “new economics” have been found wanting in the 1950’s, so with the public debt theory which it espouses. The time for a shift in emphasis, a synthesis, has arrived.

The book will be limited to a discussion of principles. There would be little usefulness in parading factual details which are either familiar or readily available to the reader, the recounting of which would represent a chore for the writer and a cost to the publisher. I shall first describe the new orthodoxy. Following a brief methodological chapter, I shall then examine each of the three basic propositions of the new orthodoxy. I shall then review the pre-Keynesian literature. This will be followed by an extension of the analysis to the nonclassical cases of depression, war, and inflation. Only in the latter part of the book will I face the issue of “taxes versus loans,” and, finally, I shall examine the question of debt retirement. Following the main text there is an Appendix which suggests a conceptual revaluation of the national debt. This Appendix represents an application of the theory developed in the book to the measurement problem. The analysis of the Appendix should be considered exploratory rather than definitive, and the nonspecialist reader may omit the entire Appendix without damage to his understanding of the essential argument of the book.

Colleagues have been helpful in two ways. First, they have made valuable critical comments on earlier drafts of the manuscript, comments which have caused me to remove errors, to modify style, and to shift emphasis. But perhaps more importantly, they have encouraged me to proceed with the publishing of this little book, to believe that its belaboring of a few basic notions may serve some useful purpose. Among these colleagues I should especially mention: Marshall R. Colberg, G. Warren Nutter, James R. Schlesinger, Tipton R. Snaveley, and Leland B. Yeager.

The Institute for Research in the Social Sciences of the University of Virginia provided me with financial aid during the summer of 1957 when the basic writing of the book was completed. In the final putting of black on white, I am indebted to Mrs. Gladys Batson, who typed the manuscript, and to my wife, who has provided editorial assistance. For Mrs. Batson’s services, I am indebted to the recently established Thomas Jefferson Center for Studies in Political Economy of the University of Virginia.

James M. Buchanan

• Charlottesville, Virginia

December, 1957