Table Of ContentAN ECONOMIC ANALYSIS OP THE BURDEN OP THE PUBLIC DEBT
A Dissertation
Presented to
the Faculty of the Graduate School
The University of Southern California
In Partial Fulfillment
of the Requirements for the Degree
Doctor of Philosophy
Nien Min Sun
June 1950
UMI Number: DP23245
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INTRODUCTION
The total gross federal debt of the United States
had reached a new high of ^279.2 "billion on February 28,
1946, -- approximately 6.5 times greater than it was when
the war started. It has increased 28 times in thirty
years. The federal debt at present is not only greater
than the total state and local debt, but has also risen
to a height even greater than total private debt-corpor
ate, individual and non-corporate debts combined.^" The
possibility of rapid reduction of this large federal debt
in the postwar period seems remote, though some scaling
down has occurred between 1946 and 1949. With a large
federal budget proposed for military expenditure, foreign
aid programs, and other governmental expenditures at the
present time, the federal debt is now again on an upward
trend. The problems of establishing a proper fiscal
policy and sound principles of debt management will be at
the heart of many fiscal and financial questions for de
cades to come.
In 1916, federal debt was only about one-fcurth of
the total debt of state and local governments. After World
War I, federal debt exceeded by five times the total state
and local government debt. At the end of 1948, the total
federal debt was 8257.9 billion and the private debt was
p216.6 billion. Federal debt was 16.4 per cent higher than
the total private debt. (Debt figures are based upon those
given in Survey of Current Business, October 1949, p. 8.)
iii
It is beyond the scope of this paper to analyze in-
detail all aspects of the intricate problem of public debt.
In this dissertation, the author will analyze one of the
basic questions in all public debt considerations--the
economic burden of public debt.
Although the problem of debt burden has been the
subject of much discussion among economists, the concept
of the burden of public debt as expressed by various
authorities is not a clear-cut one. It varies with each
individual authority, each one placing different emphasis
on various aspects of the debt, because of basic differ
ences in philosophies of public debt. On the one hand,
2
the "traditional" philosophy of public debt views the
debt as a sign of unsound finance. It believes that a
large public debt will increase the tax burden upon citi
zens of future generations, and that it may also lead to
Inflation and bankruptcy of the government, discourage
private investments, and eventually endanger the system
of private enterprise and capitalistic economy. On the
other hand, the "new" philosophy of public debt emphasizes
the "constructive" economic effects of public debt upon
2 The terms, "traditional" philosophy and "new"
philosophy of public debt were introduced by Dr. Harold G.
Moulton in the book, The Hew Philosophy of Public Debt—^ ;
(The Brookings Institution, Washington, D. C., 1943).
iv
the whole economy. It believes that public debt internally
held does not necessarily constitute a burden, for debt
service is essentially a transfer payment and, therefore,
it is not a drain on the purchasing power and a lowering
of national income of the country. On the contrary,
public debt, if properly used, may raise the level of
national income and maintain full employment of resources,
and thus keep our system of free enterprise functioning,
according to this school of thought.
In this study the author takes into consideration
all points of view, and weighs the relative merits of the
different approaches. He attempts (1) to clarify the
concepts of public debt burden and to classify them into
three main types--psychclogical, financial and "real"
economic,--and to show the inter-relationship of the
different types of burden; (2) to analyze the process of
debt financing and its effects upon the debt burden;
(3) to discuss the factors that determine the burden of
public debt and to make some measurements and analyses of
’’weight15 of the burden; and (4) finally to synthesize the
theoretical discussions into some "universal principles”
affecting the debt burden, and to apply such principles
to the analysis of the U. S. government debt.
The study may be divided into three parts. The
first part, Chapter I of the dissertation, is a survey of
V
the causes of growth of public debt and the present signi
ficance of the economic burden of public debt.
Part II, which covers Chapter II through Chapter VIII,
is devoted to the discussion of the nature of the various
types of burden and the related problems in connection with
the specific type of burden. Chapter II analyzes the
nature and determinants of the psychological burden.
Chapters III, IV, and V discuss the financial burden of
public debt and its relationship to the distribution of
ownership of government securities and the structure of
taxation. Chapters VI, VII, and VIII analyze the ’’real"
economic burden of public debt. In these chapters, the
effects of public debt upon production, national income,
employment, prices and financial institutions are pointed
out and possibilities are shown for the elimination of
some adverse effects of the public debt, through better
distribution of ownership of the debt, revision in the
tax structure, proper timing of the use of public borrow
ing and debt redemption, and sound management of the public
debt.
Part III is the final chapter, which is a synthesis
of the findings and conclusions of the thesis, the forma
tion of the "theory of minimum net economic burden through
time," and its application to the management of the existing
debt and to debt in the various phases of the business
vi
cycle.
Limitations have been imposed upon the 3tudy because
of several considerations. First, since the purpose of
this dissertation is chiefly the presentation of a theore
tical treatise on the burden of public debt, the statisti
cal ana historical analyses of the federal debt of the
United States and other countries, though significant, can
only be considered as illustrations and applications of
the theory, and, therefore, they are not exhaustive.
Second, the study is limited to the analysis of the
economic burden of public debt. Other aspects of public
debt, such as administrative problems and political impli
cations, though touched upon, are not of chief concern.
Thirdly, each economic system has its unique debt problems.
The present study is limited to a consideration of the
problem, of the burden of public debt only as it exists in
a highly industrialized and capitalistic economic system
like that of the United States. The present study would
not pertain in any sense to a socialist or communistic
economy where the financial and economic systems are
directly controlled by the government.
I would like to acknowledge my gratitude directly
to Professor William H. Anderson, who has guided this
study and who has given valuable criticism and encourage
ment at all stages. I owe a great deal also to Professors
vii
Joy L. Leonard, Robert B. Pettingill, Roy L. Garis, Clyde
W. Phelps, and E. Bryant Phillips, for their helpful sugges
tions and comments. My gratitude also goes to all those
to whom I owe training in economics both at Yenching
University, Peking, China, and the University of Southern
California, Los Angeles.
TABLE OP CONTENTS
CHAPTER PAGE
I. THE GROWTH OP PUBLIC D E B T ..................... I
The origin of public debt...................... 1
The causes of growth of public debt........... 6
War as a chief cause oft he public debt . . . 6
Expansion of governmental functions as
a cause of growth of public debt........ 16
Development of the constitutional
democracy ........................ 17
The growth and concentration of
population................. 18
The growth of industrial economy........ 19
Changing fiscal policy and the growth of
public debt................................ 20
Growth of public debt in the United States. . . 22
Summary and conclusion....................... 32
II. THE PSYCHOLOGICAL BURDEN OP PUBLIC DEBT..... 35
Nature of psychological burden of public debt . 35
Conflicting philosophies of public debt . . . . 37
The traditional philosophy of public debt . . 39
Analogy of public and private debt........ 39
Public debt is a sign of unsound finance. . 40
Public debt will lead to default and
repudiation........................... 41
