Viewpoint: Default Now!


When I published Man, Economy, and State in 1962 there were two positions that I took, which—though occupying only a few sentences in the book—provided enough of a shock to many conservatives and even libertarians to damn the entire two-volume work. One was my pro-blackmail stand (or rather, anti-anti blackmail), of which more some other time. The other was my call, following the late libertarian theorist Frank Chodorov, for the repudiation of government bonds. Little did I know that that lonely and seemingly absurdly unrealistic stand should now be in the course of coming true—at least for New York City, and possibly for other states and localities as well. Of course, mere default on one or more debt payments is scarcely total repudiation, but it is surely a giant step down that path.

There are two classes of objections to default or repudiation: moral and economic. The moral argument holds that, after all, the government agreed to a contract with the bondholders, and that it is a libertarian truth that contractual obligations ought to be obeyed. That is all very well, but it errs in making a moral absolute out of redeeming any and all contracts, regardless of what kind of contracts they might be. Suppose, for example, that A and B enter into a contract to commit a crime—murder or robbery—against C. Are we to say that both A and B are morally bound to carry out their contract? But this would be nonsense, since the contract is for criminal ends, and is therefore not only immoral but also criminal and invasive of individual rights to begin with. The only moral, noninvasive course for either A or B, then, is to break that contract forthwith, so as to refrain from committing an act of crime.

But I submit that this is precisely what has happened with contracts for government debt. The individual or firm who buys a government bond is buying an anticipated share in the return from criminal loot, i.e. from the massive robbery and expropriation known as taxation. To say, therefore, that the government must be duty-bound to redeem its debt to bondholders is to advocate increasing expropriation of the taxpayers, and hence aggressive violation of their property rights. The bondholders are eager participants and investors in the crime of taxation, and deserve no tears shed about their "expectations." Default, repudiation will teach these people a salutary lesson: never again to participate as voluntary investors in the crime of taxation. Perhaps they will learn some libertarian principles through hard experience.

Economically, it is easy to see that default will have several immediately beneficial effects. First, the absurd process of throwing debt after bad debt into the rathole, of pouring the state's credit down the drain with New York City's, of endangering pension funds, will stop short once default arrives. It is also easy to see that New York City will be forced, at long last, to slash its profligate spending and live within its budget. But the big economic argument is the "domino effect"—that default by New York City will endanger the credit of all states and cities throughout the land. So much the better if it did! What a wonderful thing the domino effect would be; throughout the land, indeed, city after city, state after state, would have to cut their budgets drastically, would have to live within their means, would not be able to turn to the bond and money markets for deficit financing. Those of us who want to desocialize America, should rejoice at the prospect of destroying the credit of state and local governments.

Another bonus from that destruction would be to alleviate the growing "shortage" of private capital in America, a scarcity aggravated by inflation and by the draining off of private funds into the unproductive and parasitic government sector. The forced withdrawal of states and cities from the bond market would free private capital for truly productive private investments, which would add to the standard of living of everyone.

Conservatives have been pretty good about opposing Federal aid to New York City, seeing that the result would be an enormous expansion of Federal expenditures, and a grave impetus to Federal-caused inflation. But they have not seen the moral and economic glories of general default, because, being conservatives rather than "radicals," they are all too content to hold the pass against further statization, rather than opt for a drastic rollback in the State Leviathan. And that is why libertarianism must be radical rather than conservative in order to succeed.

Murray Rothbard is professor of economics at the Polytechnic Institute of New York. Dr. Rothbard's viewpoint appears in this column every third month, alternating with the viewpoints of Tibor Machan and David Brudnoy.