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Reply #116: Adam Smith pointed out that NO GOVERNMENT had ever paid its debts [View All]

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happyslug Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-03-10 01:51 PM
Response to Reply #69
116. Adam Smith pointed out that NO GOVERNMENT had ever paid its debts
Smith mentioned some governments went through the motion of paying off their debts, but most just roll them over till a time when the debts are inflated away. The problem with Germany in the 1920s was it could NOT inflate its debts away, the debt were in Dollars, Pounds and Francs NOT Marks. Thus the inflation quickly got out of hand, until the US worked out a compromise spreading out the payments (and those payments lead to Hitler's rise to power and his embrace of inflation to inflate the debt away, the subsequent reduction in the German standard of living lead to unrest in Germany by the late 1930s and his decision to cut off that growing resentment by his taking over of Austria, then Czechoslovakia and then WWII, at which the German Mark had no value until the US and Soviet Forces issued new Marks for the Western and Eastern Zones of Occupied Germany(.

The same happens in the third world today, third world countries borrow in Dollars which must be paid back in Dollars. Thus they can NOT inflate away their debt. What they can inflate away (Domestic Debts) they do by adopting hyperinflation (which is what Germany did in the 1920s). Thus only foreign debts are left. Since these third world countries are NOT as rich as Germany was in the 1920s (We are talking in relative terms to the US i.e. Germany and US in the 1920s, Third world countries and the US today) no one is willing to step in and work out a deal where they can inflate even the foreign debts away.

My points, and the point Adam Smith made, is countries do NOT pay their debts and never have. The US may be the sole exception to that rule, but it took a President Jackson (and a huge amount of revenue from selling land in the Mississippi drainage system, which was incurring at that time) to do so AND it resulted in the worse economic situation between the 1790s and the 1870s (The US has suffered four severe "Depressions", not including the present one, in its history, the late 1780s till about 1800, the 1830s, the 1870s and 1880s, and the Great depression from 1929-1938, please note the years given are guidelines not actual years, for example farming went into its Depression by 1927 and parts of the US did NOT recover till 1942 when the US entered WWII). Ever since Jackson the tendency has been to turn over the debt even in years when the US balanced its budget. The main reason for this is the reason Government borrow money is they did NOT want to raise taxes for some project (Which can include a war). At the end of the project Politicians still do not want to raise taxes so they just turn over the debt and hope its get paid some time in the future. The problem is at no time is they really any excess money going into the GOvernment to pay off the debt so the debt keeps being rolled over.

Now, Florence is the only Government I have ever heard that ran a deficient every year for decades let alone centuries. Sooner or later most Government balance budgets. The problem is the balance budgets are balance only as to adding no more debts, as oppose to paying off past debts. You can have balance budgets for decades as such long terms debts are just rolled over year to year. Thus Adam Smith's observation that no Government ever paid off its debts. Governments, when they borrow in their own currency, has no reason to pay off such debts AND when things get tight Governments then fall into (as oppose to actually planning to do so) one of two actions, either refuse to pay the debts OR goes through the motions of paying them off with inflated money (i.e. inflate the debt away so that a Million Dollar Debt is equal to the amount of money needed to buy a small candy bar).

Lets us NOT forget that you can have inflation even with Gold based money. For example, the Silver movement in the US in the late 1800s was to inflate the value of the Dollar so that farmers debts would FALL as opposed to having increased as the US Government returned the Dollar to its Gold Standard of $20 to an ounce of gold after the Civil War. The Silver movement died out as Australian and South African Gold Mines opened in the late 1890s and bring with it the inflation the Silver Movement had wanted. The huge expansion of the US in the 1850s can be contributed to the huge increase in the amount of Gold in World Circulation from the California Gold Rush of 1869 (Something like 1/3 of all gold in circulation after 1850 was from California, a huge inflation of gold based money). The Roman Empire Stood strong from the time of Julius Caesar till the troubles of the Third Century AD. The reason for the Trouble? The silver mines of Spain watered out and thus the inflation do to new silver entering the economy ended.

Remember the problem is Fiat money is NOT that it can be subject to inflation (so can Silver and Gold based Money AND a low rate of inflation has been found to be GOOD for the economy) but that it is easier to inflate it 100% away then Gold or Silver base money. Debts are just promises to pay, just like Fiat Money is promises to pay (and that is true of Silver and Gold Coins which tend to be minted with values MORE then the value of the Gold or Silver in the Coin, Gold and Silver coins VALUE are promises to pay, if the value is more then the value of the Gold and Silver in the Coins). As a promise to pay, sooner or later the Government will have to make a Decision, to pay the debt OR not. In almost all cases it will decide NOT to pay the debt, be the debt in the form of Paper, Gold or Silver. Given that choice, increase taxes, confiscate property of Citizens or just not pay the debt, the Government will do the later every time. In most years the cost to do so are to high, so the debts are rolled over, but over time the government will just give up going through the motion and just stop payments (Or inflate it away if it wants to go through the motion of actually paying the debt off).

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