You can’t have great wealth without great debt

If you go on the web-page of our local Congressman, you will see a long number that is growing – rapidly, it looks like on the right end. That, we are informed, is the national debt, which is (we are supposed to believe) out of control. But we need to understand what debt is. It is in fact the back side of wealth, and it must precede wealth, as I will try to explain. Wealth and debt are rather like protons and electrons. They are opposite charges, but you can’t have one without the other. They are held apart by basic forces, and if they came together they would cancel each other out and that much matter would vanish destroyed. We are warned that someday our grandchildren will have to pay off the national debt, but in fact they never will. If they tried to, they would just be eliminating the wealth on which our economy is based.

In the early years of civilization, some societies were wealthier than others, but what wealth they had made life easy for the people on top, but ordinary people did not benefit much. Then in our Middle Ages, some people accidentally invented an institution that would eventually change all that – banks.

Banks were first invented by goldsmiths, who had gold on hand to make things with. In order to protect their gold from thieves, they built strong-rooms or safes. Since they had safe places to keep their gold, other people who had gold or other valuables would ask them to keep their valuables. So they had a lot of gold lying around that wasn’t doing anything. Now imagine that they had a friend who was going to France and wanted to bring back silk cloth which he knew he could sell for a good profit, but didn’t have money to buy it. So he asked the goldsmith if he could borrow some of that gold to buy the silk. So the goldsmith lent it, and when the friend came back and sold the silk, he paid back the gold and a bit extra to pay for the use of the gold. This was a good thing, so the goldsmith began lending out gold on a regular basis to people who could use it. Now instead of charging people rent to keep their valuables, he began encouraging more people to deposit their valuables with him by sharing what he was earning with them. So everybody was happy.

The lender knew that things happened, and some people would not be able to pay him back, but he also found that if you lent to ten people, odds were that nine would pay you back, so he figured his fee for lending on the basis that a certain number of ventures would succeed and some would fail. So he was getting rich, and the people he lent gold to were getting rich, and the people who left gold with him to lend out were getting richer than they had been.

At first our banker lent the gold he had, but since he knew what the odds were and he could depend on the odds, he began lending money he didn’t have. That is, when someone wanted to borrow money, he wouldn’t give them gold; he would give them a piece of paper saying he would give that amount of gold to anyone who presented him with that paper. Now he had more paper out than he had gold in his safe, but experience had shown that enough paper would be out working for him that he would always have enough gold on hand to give to those who presented the paper – most of the time. So he was creating money out of thin air, but he was also creating wealth out of thin air, because people were using that paper to pay for transactions that created wealth.

Now the Industrial Revolution could not have come about if those banks had not existed, because an entrepreneur would have to build a factory, buy raw materials, and hire workers to make the goods before he had anything to sell. So he had to borrow a lot of money. If he already had the money, he wouldn’t have bothered, because he and his family could already live well. So he borrowed and built, and bought, and hired, and in good time he would be making money. He would pay the interest on the money, but the banker knew he was a good risk, so instead of paying the money back, he would pay the interest and use his profits to expand his business. And if he wanted to expend even more, he would borrow more, and people would be glad to lend to him because he was a good risk.

Our country is like that. We borrowed to create the wealth that has paid for our roads and ports and schools, and we don’t pay it all back because our creditors know we are good for it. So we use the profits on the loans (the wealth we generate) to keep on expanding our economy. In our recent recession, the housing bubble burst, and a trillion and a half dollars disappeared from our economy. Those were dollars that went to pay wages, so we had to lay a lot of people off. We could generate new wealth from the labor of the people still working, but that is a slow process, because we do not have the labor of those not working, but we still have to provide for them. The sensible thing would be to create enough money to put those people back to work, and they could help us pay our bills. But our policy is to reduce public spending until we are no longer generating debt. But that means putting more people out of work and losing the taxes they are paying. Keep doing that and we never will catch up.

The sensible solution? Create the money (out of thin air) to put the unemployed to work so that they will be adding enough wealth to the economy to pay the bills. The national debt is not the problem, unemployment is. We need to generate enough deficit the put all the people to work who want to work but can’t find jobs. Only when that point is reached is the national debt a problem. At that point we can and probably should be paying down the national debt. But I already explained that debt is the other side of wealth, and if you eliminate debt, you eliminate the money that that debt represents. So we want to reduce our debt only enough to soak up the excess money in our economy, not the money that causes our economy to grow.

Richard Davis