The Value of Debt
Charles W. King
Recent sovereign debt crises in Europe, the Trump Administration’s vociferous objections to trade deficits have, and the growing American national debt have many in Congress and the public increasingly concerned about debt as an instrument of national policy. More and more American states are passing balanced budget amendments forcing them to pass revenue neutral budgets each fiscal year, and some are pushing for the adoption of a federal balanced budget amendment. While this sounds like fiscal responsibility, the issuance of debt by governments is a tremendously important tool of domestic and foreign policy. The former is illustrated by the importance of bond programs to the New Deal and World War 2, the latter is less obvious.
The First Bank of the United States, established by Alexander Hamilton, the first U.S. Secretary of the Treasury, in 1791 was created not only to raise revenue for the new federal government and standardize currency across the new country, but also as an important tool of foreign policy. During the course of the American Revolution the Colonies built up a significant amount of debt to European creditors, France among others. The First Bank of the United States took ownership of these debts, meaning that if the new government failed, those European creditors would never recieve payment. This gave France and other European nations a reason to continue to support the fledgeling United States, and to permit the open trading relationships that the United States needed to prosper in order to service the debt. The nationalization of the colonies war debts made those creditors invested in the success of the United States, an effect that the issuance of government debt continues to have today.
Debt forgiveness is also an important foreign policy tool. After World War Two the United States owned a considerable amount of European debt that the post-war European nations were incapable of paying back. The State Department’s Office of Foreign Building Operations (now the Bureau of Overseas Buildings Operations) convinced Congress to turn the debt over to them. The F.B.O. would write off the foreign debt in exchange for goods and services from the debtor countries. The F.B.O. purchased the historical palaces that are now the U.S. Ambassador’s residences in Paris and Rome with this debt. It filled American embassies all over the world with cutting edge Knoll furniture made in Europe by paying for the furniture with debt write offs. European countries were ecstatic to write off their war debts in this way because it put money into their national economies and industries rather than sending it abroad to the United States. The F.B.O.’s creative use of debt facilitated a blossoming of American diplomacy around the world and helped the European economic recovery.
The United States and other major backers of the Bretton Woods system that includes the World Bank and International Monetary Fund regularly use access to credit, as well as debt forgiveness and restructuring as leverage to get developing nations to implement specific economic or political policies. Japan and China both own large stockpiles of American national debt in the form of Treasury Bonds. These stockpiles make Japan and China investors in American prosperity. While the Chinese owned debt is considered to be a danger, they also provide an early warning system, as China would have to either call those debts in—damaging both the Chinese and American economies—or write them off in a conflict. American and European sanctions regimes against the Russian Federation do not currently include Russian sovereign bonds, but they could and this would be a significant increase in the pressure on the Russian State. National debt is only a millstone when other policies put a nation’s ability to service that debt in danger, the ability to issue debt is an important strategic policy tool for the United States and all national governments.