Echoes Dispatches From Economic History
Advertisement for Liberty Loans, 1917. Source: Library of Congress Prints and Photographs Division
When Americans Celebrated the Federal Debt
Addressing a meeting convened by the Peter G. Peterson Foundation in Washington this week, Speaker of the House John Boehner vowed to fight any proposal to raise the U.S.'s statutory borrowing limit this fall, unless any increase is offset by spending cuts.
With Election Day approaching, last summer’s fracas over the federal government’s debt limit has returned. Republicans will demand cutting, freezing or privatizing federal programs to rein in spending. Democrats will propose narrowing the deficit by instituting "tax fairness" reforms such as the Buffett rule or by allowing portions of the Bush tax cuts to expire.
No one will defend a large outstanding federal debt as a benefit to the nation. That hasn't always been the case.
Alexander Hamilton, the first U.S. Treasury secretary, defended the national debt early. If the new federal government assumed the debts that states had incurred during the Revolutionary War, he argued, wealthy investors would commit to the success of the American experiment as they acquired the new federal bonds. But Hamilton never imagined that average citizens would own such bonds.
During World War I, policy makers and citizens alike celebrated an unprecedented increase in the national debt -- which tripled as a share of gross domestic product -- for reasons that the elitist Hamilton could have never conceived. The War Loan programs aimed to parcel out small-denomination war bonds to every U.S. citizen. The goal was to cultivate support for an unpopular war, unify a heterogeneous population and ensure a more prosperous future for those who invested in war debt. Architects of these programs believed that universal investment would give all Americans a "stake" in the nation, whether or not they could vote.
The Treasury Department determined the goals, terms and quotas for the War Loan drives. But on the ground, Americans mobilized themselves through the broad array of associations that organized public life -- women's clubs, ethnic associations, labor unions, churches, trade associations and more. As these groups rallied their members to buy war bonds, they touted a wide range of political and economic benefits that universal ownership of federal bonds would bring.
Women’s suffragists seized on the War Loan campaigns to demonstrate their patriotic devotion and fitness for the vote. African-American groups saw hope for the destruction of the Jim Crow system. The editor of the Savannah Tribune envisioned that "the great War Savings and Bond Campaigns" would deliver "vast wealth and improved economic and industrial status" to blacks, reordering "the hierarchy of groups in America" and putting an end to racial "troubles and friction and oppression."
Such groups earned mixed returns on their investments in the nation. After almost 1 million women volunteered as War Loan sales agents, a grateful Congress rewarded them in 1919 by passing the 19th Amendment, conferring the right to vote. But that same year, race riots in more than 25 U. S. cities dealt a blow to racial equality and justice.
In the years after the war, Americans engaged in crucial debates about how the birth of an investors' democracy might alter the course of capitalism in the U.S. The success of the War Loan campaigns convinced many that mass bond drives -- rather than taxation -- could finance government projects, including soldiers’ bonuses, farm mortgages, infrastructure improvements, even a federal buyout of the nation’s railroads.
Although voters elected presidents who promised a "return to normalcy" in the 1920s, the federal debt never did revert to its prewar size. Neither did the government retreat from the economic realm. By 1929, net per-capita federal expenditures stood at four times prewar levels. And the social benefits provided by federal and state governments -- including workers' compensation and pensions for soldiers, mothers and the elderly -- kept expanding.
Perhaps if the majority of U.S. households today owned federal bonds directly, as they did in World War I and World War II, citizens might regain a sense of investment in their government and its financial obligations -- and feel that they hold a direct stake in the projects it funds, such as education and infrastructure investments.
In any case, we should recognize that given our extensive indirect investments in the federal debt through Social Security and private retirement plans, any default caused by a failure to raise the debt limit would harm the country considerably. As the campaign season kicks into gear, Americans should consider not only how much our government may borrow, but also what kind of future we wish to buy.
(Julia C. Ott is an assistant professor in the history of capitalism at the New School. The opinions expressed are her own.)
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