Adam Smith debunks that idea that when it comes to public debt “we owe it to ourselves” (1776)

Adam Smith calls the Keynesian-like argument that a large public debt is not to be feared because “we owe it to ourselves” an example of “the sophistry of the mercantile system” which he had spent so much time debunking in the Wealth of the Nations (1776). He argues this is factually not true as debt may be held by foreign countries (in his case the Dutch) which means that there are international transfer payments to be made when the interest is paid. Even it were true, he believes that there are many problems which must be faced by a nation which goes into debt. He argues that it causes a “perversion” of the economy by diverting resources from peaceful and productive activities, that by moving the burden of payment into the future it deceives the people about the true cost of war and that wars therefore seem to be “cheaper” than they in fact are, that there is a crowding out effect since capital is diverted from private to public uses, and it results in increased taxation which reduces capital accumulation. But even if the public debt was entirely funded by domestic sources “we owe it to ourselves” is wrong in any case. Smith argues that within a society, public debt takes money from the “productive classes” and gives it to support “idle people who are employed in gathering it” and to the military who use it to fight, resulting in the destruction of life and property in the process. We have included the long footnote 52 where Smith makes these arguments more explicit.