On the last day of the constitutional convention in September 1787, a lady asked of Benjamin Franklin “Well Doctor what have we got a republic or a monarchy?”
“A republic,” replied Franklin, “if you can keep it.”
Those are words that I am reminded of when my attention is drawn to members of both houses of Congress going about their business in ways that make you wonder if they have the best interests of that republic in mind.
Such was the case during the recent annual debt limit crises. Soon after a deal between Speaker Kevin McCarthy and President Joe Biden was announced members of the conservative Republican “Freedom Caucus” made their way to the House floor or to the area in the Capitol rotunda where the news networks have their cameras and reporters stationed to rail in no uncertain terms their contempt for the plan or scold Janet Yellen for seemingly making up dates when the nation would run out of money.
In reality the debt deal was a win for the Speaker who finally convinced Biden to negotiate while holding enough of his own fractious members to assure passage of the debt package. He did all this in a Washington where Democrats control both the presidency, and the Senate and Republicans hold the House with only a nine-vote majority.
After all this Washington insanity I came away thinking that this would be a good time to find out more about the national debt and its impact on our nation, the world, how do we manage to accumulate so much debt, and does it threaten our future? I also wondered what would happen if one the main holders of our debt like China called in their debt.
To begin I want to point out that except for one period in 1831 during the presidency of Andrew Jackson when all the interest-bearing debt was paid off, the United States has always had a national debt. In fact, the U.S. started out with a debt of $75,463,476.52 incurred fighting the Revolution.
So, a national debt is a constant in our history as a nation and not always a bad thing because it allowed us to fight and largely subsidize our allies in winning World War II. Borrowing and adding to the debt has fostered our recovery from economic recessions and also saw the nation through the COVID-19 pandemic.
Something that I didn’t realize was that while U.S. government debt is perhaps the most widely held class of security in the world, 21.8% of the public debt, or $6.87 trillion, is owned by other departments of the federal government itself. These include Medicare; specialized trust funds, such as those for highways and bank deposit insurance, civil service, and military retirement programs. But the biggest chunk of those “intra-governmental holdings” belongs to Social Security.
Japan is the top international holder of U.S. debt at $1.1 trillion followed by China which holds $980.8 billion of U.S. Treasury notes. Many Americans wonder why China holds so much of our debt. Is China cooking up some dastardly trick?
Actually, economists tell us that there are two main reasons for China buying so much of our debt. The first and most important is that China wants its currency, the yuan, pegged to the dollar. The yuan pegged to the dollar makes Chinese goods cheaper on world markets.
Dollar-pegging adds stability to the yuan since the dollar is still seen as one of the safest currencies in the world. Thus, the second reason the Chinese want Treasury notes is that they are essentially redeemable in dollars.
So, while its common for many politicians and others so say that “China owns us,” that really isn’t true. If China called in all of its U.S. holdings tomorrow, the U.S. dollar would depreciate, whereas the yuan would appreciate, making Chinese goods more expensive on world markets seriously hurting her trade with the U.S. and making life difficult for Chinas growing middle class.
Finally, how we view the national debt has changed over the years. During the years of the “great depression” and after, many followers of economist John Maynard Keynes agreed with his theory that in down economic times government should borrow and spend money to encourage production and foster job creation and not to worry about our national debt.
It was only later in the 20th century and now in the 21st with the National Debt growing at a high rate that it has become a political issue with the party in power usually saying that the debt is no problem while the party out of power claims that increasing the debt will be a millstone around the necks of our children and their children. I guess that’s politics.
Thomas Kirkpatrick Sr. is a Silver Creek resident. Send comments to editorial@observertoday.com
