As we’ve seen in the last two issues, Destutt de Tracy, writing in early nineteenth-century France, had solid insights about the market process and government spending as a form of consumption not investment. In light of that, no one will be surprised that Tracy opposed government borrowing. In this day of trillion-dollar-plus federal deficits, his critique is especially relevant.
Tracy begins by noting that government debt is “a subject on which the general good sense has greatly preceded the science of the pretended adepts. Simple men have always known, that they impoverished themselves by spending more than their income, and that in no case is it good to be in debt. . . .” On the other hand, “men of genius believed and even wrote, not long since that the loans of government are a cause of prosperity, and that a public debt is new wealth created in the bosom of society.” (All emphasis has been added.)
In his sarcasm about “men of genius,” Tracy was clearly rejecting the idea that government borrowing creates wealth. He had already disposed of the claim that government spending could stimulate productive economic activity. Rather than adding to “the general mass of circulation,” he said, government expenditures “only change its course and in a manner most often disadvantageous.” Here is Bastiat’s “broken window” a few decades early.
Still, he takes up this question: “When expenses are very considerable, ought we to felicitate ourselves on being able to meet them by loans, rather than taxes?”
Politicians and pundits say yes, believing that borrowing brings good economic times, provides money in emergencies, and “thus . . . is the true palladium of society.”
“Yet,” Tracy responds, “I think I have good reasons for combating their opinion.”
Here Tracy pauses, cagily, to state he “will say nothing of the grievous effects of loans on the social organization, of the enormous power they give to the governors[,] of the facility they afford them of doing whatsoever they please, of drawing everything to themselves, of enriching their creatures, of dispensing with the assembling and consulting the citizens; which operates rapidly the overthrow of every constitution.”
“The first thing said in favour of loans,” he wrote, “is, that the funds procured by these means are not taken involuntarily, from any one.” Tracy didn’t buy the argument: “I think this an illusion. In effect it is very true, that when government borrows it forces no one to lend; . . . When, therefore, the lenders carry their money to the public treasury it is freely and voluntarily; but the operation does not end there. These capitalists have lent, not given: and they certainly intend to lose neither principal nor interest. Consequently, they force the government to raise, one day or other, a sum equal to that which they furnish and to the interest which they demand for it. Thus, by their obligingness, they burthen without their consent not only the citizens actually existing, but also future generations. . . .”
Borrowing doesn’t dispense with taxes; it merely shifts them to the future, except that they must be raised high enough to pay the interest as well as the principal. “Thus, sooner or later, it [borrowing] affects industry as much and in the same manner as if it had been levied at first.”
But this raises a question “which I am astonished to have seen no where discussed”: Does government have “a right thus to burden men not yet in existence, and to compel them to pay in future times [its] present expenses?”
No, Tracy answered. “One generation does not receive from another, as an inheritance, the right of living in society; and of living therein under such laws as it pleases. The first has no right to say to the second, if you wish to succeed me, it is thus you must live and thus you must conduct yourself. For from such a right it would follow that a law once made could never be changed.”
Here he offered a proposal:
[W]hatsoever is decreed by any legislature whatsoever, their successors can always modify, change, annul; and that it should be solemnly declared, that in future this salutary principle shall be applied, as it ought to be, to the engagements which a government may make with money lenders. By this the evil would be destroyed in its root: for capitalists, having no longer any guarantee, would no longer lend; many misfortunes would be prevented, and this would be a new proof that the evils of humanity proceed always from some error, and that truth cures them.
He was calling for future generations to repudiate the government debt of past generations and predicting, sensibly, that no one would lend money to the government if that principle is in effect! Laissez-fare advocates were true radicals in those days.
Tracy also debunked the claim that money lent to the government has no opportunity cost:
“The second advantage which is found in loans, is that the sums which they furnish are not taken from productive consumption: since it is not undertakers of industry who place their funds in the hands of the state; but idle capitalists only living on their revenue, who choose this kind of annuity rather than another. . . .[E]ven admitting that all were equally idle if the state had not borrowed, it is certain that if they had not lent it their money they would have lent it to industrious men. From that time these industrious men would have had greater capitals to work on, and, by the effect of the concurrence of lenders, they would have procured them at a lower interest.”
Well, then, how about this justification for borrowing: Loans “furnish in a moment enormous sums, which could only have been very slowly procured by means of taxes, even the most overwhelming.”
Tracy rejects this too. “Now I do not hesitate to declare that I regard this pretended advantage as the greatest of all evils.”
Use Is Abuse
Some might contend this is an abuse rather than a use of credit, but not Tracy. “I answer, first, that the abuse is inseparable from the use, and experience proves it.
“But I go farther. I maintain that the evil is not in the abuse; but in the use itself of loans, that is to say that the abuse and the use are one and the same thing; and that every time a government borrows it takes a step towards its ruin. The reason of this is simple: A loan may be a good operation for an industrious man, whose consumption reproduces with profit. By means of the sums which he borrows, he augments this productive consumption; and with it his profits. But a government which is a consumer of the class of those whose consumption is sterile and destructive, dissipates what it borrows, it is so much lost for ever [sic]; and it remains burdened with a debt, which is so much taken from its future means. This cannot be otherwise.”
I think you’ll agree that they’re not making many economists like that anymore.