Feds Still Owe the $30 Billion Woodrow Wilson Borrowed for WWI

Who could run a household or a business the way the feds have run the government in the past 100 years?

william couch/Flickr

As if to promise a Christmas present, Congress has just finished approving the finances of the federal government for the next few months. Santa Claus would have done a better job. During early 2016, Congress will pay the government's bills by borrowing money from individual and institutional lenders. Those folks will lend the feds all the money the feds need because the law requires the feds to pay them back.

The "pay them back" ideology is a very curious one. It is true that the full faith and credit of the federal government guarantees the payment of the government's debts. Without that lawfully binding guarantee, who would lend money to an institution that carries a debt of $18.8 trillion? So the investors who have lent money to the feds know that their debts will be repaid in a timely manner.

Because the federal government spends $1.5 trillion more annually than it collects in taxes and other revenue and because its payments of interest alone on the money it has borrowed will soon be about $1 trillion a year, it can only repay its debts by borrowing more money. Since 1911, the federal government has not repaid a debt from tax revenue. It has always borrowed more money to pay its lenders. This is known to economists as rolling over the debt.

President Woodrow Wilson—who gave us a racially segregated military and federal civilian workforce, brought us into the horrific and useless World War I, arrested Americans for singing German beer hall songs in public, campaigned for the federal income tax by promising it would never exceed 3 percent of income, helped to create the cash-printing Federal Reserve, laid the groundwork for Prohibition, and kept Jim Crow going—borrowed $30 billion to pay for World War I. That money was borrowed from investors and from the Federal Reserve, which in those days literally printed the cash that it lent.

The $30 billion that Wilson borrowed was repaid by the feds with borrowed dollars. And the folks who lent the feds those dollars were in turn repaid with borrowed dollars. That inflationary cycle has been repeated countless times since all this borrowing from Peter to pay Paul became the financing method of choice for the feds.

As a result of this, the federal government still owes the $30 billion that Wilson borrowed, but it owes it— obviously—to different lenders from those who originally financed the Great War. It has paid more than $15 billion in interest payments on that $30 billion.

Who could run a household or a business the way the feds have run the government in the past 100 years?

As we approach a presidential election year, the federal financing-by-borrowing scheme is seen as a standard operating procedure by all the Democratic candidates and by all the Republicans, as well, except for Sen. Rand Paul. He and he alone among the major candidates would have the feds live within their means and stop the vicious circle that Wilson began.

He understands that government has limits. Those limits are written down in the Constitution. He recognizes, as his competitors do not, that the government simply cannot morally or constitutionally right any wrong, regulate any behavior, borrow any amount, or tax any event as long as it can politically get away with it. When it does, we end up with war and debt.

Whenever you hear a presidential candidate proclaiming that the first job of the president is to keep America safe, challenge that absurdity. Invite that candidate to read the Constitution, which lays out the jobs of the president—the principal of which is to keep us free and safe. If a president keeps us safe but unfree, he is simply not doing his job. Only Sen. Paul has made that argument.

The world today is a sad place, and those who love freedom sometimes feel we are shoveling against the tide. But for just a moment, at this time of year, we should pause and remember an event that occurred about 2,000 years ago in the Middle East.

The world then was a far worse place, yet a light seared through the darkness. A baby was born in a cave. The Word was made flesh and dwelt among us. The baby came into the world so that we might have life and live it abundantly. The baby came into the world so that we would be set free from our own sins, free from the temptations of the world, and free from the governments that seek to control us.

The baby was the Son of God and the Prince of Peace and the savior of the world. This week we celebrate His birthday.

Merry Christmas.

COPYRIGHT 2015 ANDREW P. NAPOLITANO || DISTRIBUTED BY CREATORS.COM

Comments

[Scarecrow & WoodChipper Repair]

It's disingenious to say the 100 year old $30B was never repaid. It was, in a ponzi scheme of sorts, but the original lenders got their money back, so it was repaid.

[The Hyperbole]

The Judge was pretty clear on that point
The $30 billion that Wilson borrowed was repaid by the feds with borrowed dollars. And the folks who lent the feds those dollars were in turn repaid with borrowed dollars and As a result of this, the federal government still owes the $30 billion that Wilson borrowed, but it owes it? obviously?to different lenders
Repaid but still owed seems a distinction without a difference.

[Sanjuro Tsubaki]

Don't pay it forward, debit forward!

[Jimbo]

For a hamburger today, I will gladly repay you Tuesday, 2115.

[Fairbanks]

So the judge is suggesting that any level of federal debt over $30 billion is too much? By what logic? That's preposterous. What matters is the debt level relative to the ability to pay it off. Apple Inc. alone has over $30 billion in debt. Are they in danger of going bankrupt? And why is continually rolling over debt irresponsible? His supplies no reasons why that is problematic (perhaps because it's not true) other than his unsupported contention that households and businesses can't do it. But they can, and they do. All the time. The judge should stick to the topic of freedom, because he's clearly lost when it comes to economics. (N.B. I am not suggesting our actual level of debt is fine, just the reference to WWI debt)

[B. Woodrow Chippenhaus]

Rolling over one's debt for a century is irresponsible because it wastes dollars on interest payments that could either be spent elsewhere, or (heaven forbid) returned to the People. Yes, households roll over debt, but they don't do so because it's their preferred choice. Being debt-free is a goal for just about everyone, unless you're the federal government.

[The Hyperbole]

It's also generational theft.

[Fairbanks]

The people pay the financing costs either way. Government spending can either be financed by debt or by current taxes. If by debt then the financing cost is the interest on the debt, which accrues, but is eventually paid for by taxpayers. If by current taxes, then taxpayers have less money and they incur the financing costs directly. Those tax payments either reduce investable funds or increase the taxpayers' debt level. For any given level of spending, the net financing cost to the tax payers is essentially the same.

[Fairbanks]

If there's generational theft, it's because of the level and/or type of government spending. How that spending is financed is irrelevant.

[Chip Woodier]

If borrowing money is so good, why not cut taxes to 0% and force the government to borrow all of its operating costs?

[TheZeitgeist]

If by debt then the financing cost is the interest on the debt, which accrues, but is eventually paid for by taxpayers. If by current taxes, then taxpayers have less money and they incur the financing costs directly. Those tax payments either reduce investable funds or increase the taxpayers' debt level.

Compounded interest over time is typically more than costs of real-time outlay. Deferred consumption buying a $20,000 car is $20,000. Financing costs at, say, 4% for same car add up to deferred consumption of ~$25,000 - but spread over years. Financing costs are higher going debt route than straight outlay route.

This is not true in all cases, if one is taking this capital and investing it in something with higher returns than the interest rate, then one wants that loan fast as possible. This is where debt makes perfect sense, and such scenarios are why super-capitalized outfits like Apple and Berkshire have debts at all. This of course assumes said investments are sound, and do generate higher return than the cost of financing them.

However government's investments on net are not profitable; for every DARPA gadget or bridge or whatever that makes money for society there is a boondoggle (usually a 'war' - on Vietnam, on poverty, drugs, terrorism, Iraq, etc.) that costs even more.

Perhaps one should reframe the debt-averse argument into "Take Uncle Sam's margin account away" so it fits your pedantry over finances.

[Fairbanks]

Where does the $20,000 to pay cash for the car come from? If that is invested money then that opportunity cost is the financing cost. If that money would have just sat around idly earning nothing than your example holds true. But for the majority of taxpayer dollars, the added taxes that would be paid if the government didn't borrow would either be borrowed or come out of invested funds, since the majority of tax dollars are paid by people who have investments.

[Jay Dubya]

maybe torture your relatives with this pained reasoning today, instead of us? please?

[Bgoptmst]

Well said.

[Migrant Log Chipper]

I take it you flunked Econ 101`....

[MJBinAL]

I am going to assume, perhaps foolishly, that you truly do not understand vs. just being a socialist troll.

If you borrow $20,000 from Citi to buy a sofa. Use your Capital One credit card to pay off Citi. Then take a loan at your local bank to pay off Capital One, you have paid off Citi and paid off Capital One, but you still owe the $20,000 (plus accrued interest) for the sofa.

Substitute, US Goverment for you, $30,000,000,000 for $20,000 and various lenders for those above, and WWI for sofa, you will understand the point that we still owe $30,000,000,000 plus accrued interest for WWI.

If you borrow money for a business purpose, you expect that the profits from the business will exceed the cost of the accrued interest and the revenue will pay back the loan. This means that the interest on the borrowed money did not "cost" you anything, because it gave you an added opportunity and increased profits that you would not otherwise have had. This type of borrowing is associated with investment, where returns are expected.

On the other hand, the sofa simply depreciates every day, becoming worth less and less until you again replace it. This type of borrowing is associated with Consumption.

This is the distinction between investment and consumption

[MJBinAL]

Military operations are generally consumption. People are paid to kill other people and break things. Other people are paid to make tools that allow killing other people and breaking things to be more efficient. There is no return on the borrowed funds. This is the definition of consumption.

The often made argument for "infastructure" such as roads and bridges is that they have a hidden return by making commerce more efficient. This is why big government types often call these "investment". In some cases there may well be a hidden return, in other cases ("bridge to nowhere"and high speed rail, for example) there is going to be no return and it is disguised consumption.

You will note, that in no case, what the bank might have done with the money if you had not borrowed has anything to do with the wisdom of you borrowing it. This is why your entire post is being derided. It is a complete diversion from the core issue, and makes folks wonder if you lack knowledge (if so, I hope I helped) or are just a HuffPo troll here to be difficult (I hope this is not the case.)

Merry Christmas!

[IceTrey]

But the "people" who pay should be the ones who are actually alive when the money is spent. Why do I have to pay my great grandfathers debts?

[toolkien]

This is fundamentally so flawed. There is no equivalency at all. It's the underlying difference of collective decision making versus individual decision making, the difference between fascism and a free market. They are two completely different things and will operate completely differently. The conflation here is head spinning. But it's not unexpected as not very many seem to understand what fascism is, and if anyone has the sense to bring it up, they are shouted down as Godwinners because the "guys in black and red uniforms" aren't anywhere in sight.

[Cap'n Krunch]

Strange, I live within my means, my only debt is my mortgage and I pay down the principle on that with every payment, and I actually have money in a savings account. Yeah, there's no difference between that and borrowing more money to pay just the interest payment every month while the principle grows. No difference at all.

Our parents lived beyond their means by borrowing money we're still paying back. We're living beyond our means by borrowing money, and our children will have to pay both our parents debt and our own. What do you think it's going to be like for their grandchildren?

[Rebel Scum]

So the judge is suggesting that any level of federal debt over $30 billion is too much?

Um...I think you missed the entire premise of the article. It was not about how much debt is too much. It was about the US gov't lack of ability to pay off old debts as it incurs new ones. I'll assume English is not your strong suit.

[Hank Phillips]

Or math, or history...

[Fairbanks]

Perhaps you should read the article again. The judge never says or implies that the government hasn't had the ability to pay off its debts. In fact, he makes the point that the Feds can borrow all they want because lenders know they'll be paid back. The government has always had the ability to pay off its debts by raising taxes or printing money (which is essentially a tax increase). It's the level of government spending that is the problem. But how that spending is financed is irrelevant, since it all comes out of taxpayers' pockets eventually. I hope the premise of the article was that the government has spent too much money over the years. But the judge makes it a little difficult to tell because he gets bogged down with the non-germane fact that $30 billion from WWI was never repaid. If since WWI the government had always spent exactly what had been raised in taxes over those years that $30 billion would still never have been repaid and the total level of federal debt today would be $30 billion. And no one would care.

[MJBinAL]

Actually, he IS saying that the government has no intention of ever paying back the debts. That is the entire point of his example. He points out that the government has not, since the end of WWI EVER paid off a debt other than by refinancing it. He is using the money borrowed to fight WWI as an example.

[IceTrey]

It's 720 billion in todays dollars.

[Migrant Log Chipper]

Dumbass, Apple has a couple hundred billion in CASH, unlike the government.

[Lorenzo Zoil]

The Judge missed one of the progressive talking points about debt and why to them it is an irrelevant topic except to dumb redneck gun totin' pubs.

The 30B in WWI debt didn't have to be paid, because with the way the Fed and Treasury are run the currency is being devalued at such a rate the debt becomes essentially worthless. This goes back to Hamilton's original notion of managing the nations economy. Through controlled inflation the country could devalue to the current debt and increase revenue at the same time, therefore pay back the interest on the debt at essentially zero or negative actual cost.

Unfortunately they are right to a degree, however, to advocate for that process is to ignore the 200 or more years of unintended consequences that have resulted. Not the least of which is a government that finds itself unable to restrain itself fiscally. But, the worst result is that the poorest among us have their income and assets devalued.

[Bill Dalasio]

Through controlled inflation the country could devalue to the current debt and increase revenue at the same time, therefore pay back the interest on the debt at essentially zero or negative actual cost.

A couple of observations:

1. "Controlled" inflation is sort of like a unicorn. It doesn't exist. It's damned near impossible to consistently target and achieve some desired rate of inflation. People's behaviors adjust in ways that are unpredictable and variant over time.
2. Inflation amounts to a wealth transfer from (generally poor) people on fixed incomes to (generally rich) people with real assets. So much for progressive concern for the poor.

[Lorenzo Zoil]

That is correct. Fortunately for them they haven't accidentally triggered deflation, which of course, would foil their cute little game. But yes, the progressive game doesn't typically benefit the poor for more than a few weeks or months. That's what happens when your Nobel winning economists are nothing more that propagandists for the cause rather than scientists.

[MJBinAL]

That is the problem they are having at the moment though isn't it? Printing money like mad and just barely staving off deflation.

[bassjoe]

Our country is drowning on debt on every level -- individuals, municipalities, states, corporations, federal. It's shocking this isn't seen as an enormous issue. If everybody's assets are simply some other person's debts, then does anybody actually own anything? How is this sustainable?

[toolkien]

It's not.

There's still so many people who think that "we've had downturns before, and we've come out of them" that it will/has worked for the 2008 collapse. The reality is, in the past, downturns have been countered with manufacturing future "defined benefits" (the 30's), debasing the currency, playing around with the interest rates, borrowing more money (starting in the 80's). The reality is there is little ability to debase anymore, borrow much more, reduce interest anymore, or tax much more. The end of all the smoke and mirrors and ponzi's is upon us. We're squeezing the last out of the credit cards before they are cut up. And then the world will find a different "gold standard" and we swirl down the drain in very short order.

[MJBinAL]

Unfortunately, I can find no fundamental flaw with your conclusion.

[LoneWaco]

President Woodrow Wilson?who gave us a racially segregated military and federal civilian workforce, brought us into the horrific and useless World War I, arrested Americans for singing German beer hall songs in public, campaigned for the federal income tax by promising it would never exceed 3 percent of income, helped to create the cash-printing Federal Reserve, laid the groundwork for Prohibition, and kept Jim Crow going

Edith Keeler Woodrow Wilson Must Die

whoever went back and used the stroke ray botched the chronometer settings

[SIV]

The baby was the Son of God and the Prince of Peace and the savior of the world. This week we celebrate His birthday.

Merry Christmas.

Merry Christmas!

[Hank Phillips]

Hizonner evidently hasn't read "Nailed: Ten Christian Myths That Show Jesus Never Existed at All" by David Fitzgerald

[MJBinAL]

I fail to see why you needed to go there. It is not germaine to the topic and it is rude. The religious views of the Judge, or me, are causing you no harm. If he wishes you Merry Christmas, he is wishing good things for you. I fail to understand why you feel the need to insult those around you unprovoked.

That said, I too wish peace, goodwill, and a Merry Christmas to you.

[San Diego]

That's just so wrong!

[Hank Phillips]

At 4% interest that's only $1,515,148,445,528.09 at 4% interest compounded annually--a small price to pay for bailing out the banks that loaned to the opium-producing and morphine-refining principals on the First World War. The British were quick to welsh on their loans; in fact, all of the European belligerents wanted Uncle Sam to take that money out of our grandparents' hides, then shifted to Germany's hide. One writer saw all this coming, Garet Garett, and published what the Europeans would try. Men with guns walked into where he usually dined, shot him and fled. He went on to publish, and the Europeans did exactly as he predicted. His first book was about a capitalist named Galt who ran a successful railroad.

[blondrealist]

My Christmas (or Festivus, or whatever) wish for you, Andrew Napolitano -- and for the rest of the folks at Reason, is to learn how our monetary system actually works. Then perhaps you'll stop comparing currency users -- households and businesses, to currency issuers - our federal government.

We have a fiat currency system. That's not to say our system does not have risks related to the federal debt and federal deficit spending. It's just that until Andrew gets a better grasp on the operational realities of our fiat currency system, he will keep making erroneous comparisons to households and businesses regarding debt.

If you don't understand the operational components, how can you make the correct policy recommendations?

The U.S. federal government does not face solvency risk - it faces inflation risks, the most serious of which would be hyperinflation.

We live in a credit based economy. Over time, there can be no economic growth without aggregate credit growth. Less government debt is fine, but understand that means more private sector debt - unless the goal is zero economic growth.

[Sevo]

"...Less government debt is fine, but understand that means more private sector debt - unless the goal is zero economic growth."

Less government debt is preferable; those borrowing for their own use tend to be better judges of the matter.

[contrarian]

Exactly, which is why a large public debt burden kills economic growth by reducing private debt, i.e. investment.

[SteveDDD]

Sure, trod out the old crowding out nonsense. Public or private investment is NEVER limited to a set amount of funds. Real resources, not some arbitrary "pot of gold," dictates the amount of dollars available for both public and private investment. Try to keep up. We left the gold standard in 1971. (As I told 'Sevo' above, federal debt is savings accounts at the Federal Reserve Bank. Bank deposits burden no one.)

In 1939, the federal debt was $48 billion.
In 1972, the year the U.S. government became Monetarily Sovereign, the federal debt was $436 billion ? a 9-fold increase in 33 years.
Last year, the federal debt was $18 trillion ? a 41-fold increase in 43 years!
ref: St. Louis Fed "FRED" database

The federal government has no difficulty paying its debts (phony "debt ceiling" notwithstanding).

Despite debt-nuts' incessant warnings about hyper-inflation, our inflation rate is as low as it's ever been.

With today's federal tax rates at relatively low levels, nobody's children are paying for past federal debts.

(Federal debt is paid for by transferring already existing dollars from debt holders' securities accounts back to their reserve accounts with interest.) Want to know how much the Fed paid off in fiscal 2015? $60,448,876,000,000.00 (That's TRILLIONS, son) ref: Daily Treasury Statement, Sept. 30, 2015

[BakedPenguin]

And they usually produce real wealth with which to repay the debt.

[SteveDDD]

Yes, exactly right. Does 2008 ring a bell? Private debt levels domestically topped out at a staggering 250% of GDP. Result? Economic collapse. Gee, what entity did not collapse? Huh? Which entity is that? Maybe the one that still "owes" 30 billion from WWI? Do you even know what federal government debt is? It's savings accounts at the Federal Reserve Bank. Bank deposits burden no one.

[Heroic Mulatto]

I like how you attempted to criticize an article on astronomy through use of arguments derived from astrology.

[Migrant Log Chipper]

Don't pick on blondes HM, (wags finger).....lacist.

[IceTrey]

If its debtors refuse to accept dollars because they are worthless due to hyperinflation the US absolutely faces solvency issues.

[Vampire]

"If you don't understand the operational components, how can you make the correct policy recommendations?"

Correct policy recommendations? The only correct one would be to abolish the fed. The result of this "fiat money system" is nothing but disastrous. Why in the hell did gold have a 6,000 year history as money? Because individuals eventually chose it, freely, to be their preferred media of exchange (along with silver too).

This monetary system is forced upon individuals, and forces an exchange partner to accept said media against their will. Such a system has robbed individuals of their liberty and property. This has happened throughout history. From the Denarius, to the dollar, to the quarter, the Papiermark, the Reichsmark, the Crown, the Double Rose, and so on; all have been debased. The central banks, and governments wind up with the precious metals, and the people wind up with worthless coins and paper.

Gov't runs around unrestrained, as they engage in protracted conflict, and unlimited spending. This all at the expense of current and future generations. Everyone who is forced to hold the money looses. Those who earn low and middle incomes are hurt the most.

[Vampire]

Suppose the quarters (along with everything else) would never have been debased. 4 quarters pre 1965 would be worth $10.3876 based upon the 6.25 grams of silver. So a salary today of $30,000, would mean someone would have a purchasing power of $311,628. If one cannot see the blatant theft that has occurred, and even supports currency debauchery, they are nothing but a sheep and a slave. Sadly, the mainstream of economic thinkers parrot such a bullshit system, which the gov't & central banks force upon individuals.

[MJBinAL]

There is almost nothing about this post that is factual. When you get the rest of the way down the rabbit hole, say hello to the Red Queen for us.

[SteveDDD]

Sorry blond, you've been flamed. On "Reason" (now that's irony for you) ideology ALWAYS trumps fact. You gave it a good shot, though. Especially the ending explaining about mandatory credit growth to grow GDP. (By equation: GDP=federal spending+non-federal spending+net exports.) As you know, public debt is the "safest" form of debt, for obvious reasons. (Think 2008.) Seems no one else here wants to remember when the private sector became utter toast with a meltdown and asset losses approaching $4 trillion. Why not the federal government going belly up in '08? You know! They don't , or don't want to, but for their ideological "reasons."

[Detroit58]

Though seasonally fitting, the ending paragraphs belie the site name - reason.com.

[David_B]

How beautiful that so many are remembering and celebrating the birth a little Jewish boy in Israel. That's beautiful.

[Rockabilly]

Woodrow Wilson, the racist prog, whose war mongering legacy lives on.

[Anastasia Beaverhausen]

The judge's article went off the rails when he started with the religious-mystical mumbo-jumbo about some miracle baby born thousands of years ago.

[MJBinAL]

By his lights, he is wishing good things for you. Say "thank you", even though you do not share his faith, and go on.

[CleverAcronym]

This article is moronic. If the author doesn't understand finance-- and he clearly does not-- then he shouldn't make arguments with finance.

General Electric has had debt on its books, continuously, since the late 19th century. Is it considered fiscally irresponsible?

The federal government IS fiscally irresponsible. But this column completely, totally, tragically, very disappointingly misses the real reasons why.

[Migrant Log Chipper]

Yo, GE's stock price hasn't moved in a decade....so to shareholders they are fiscally irresponsible. Unfortunately I was one for a short period 10 years ago.

So as one who purports to understand "finance"probably STFU.

[MJBinAL]

Further, it is to be supposed that GE borrows for INVESTMENT in equipment and processes that would yield increased profits that in turn pay the loans. Government spending, is predominately consumption, not investment.

[Cranky Critter]

Napolitano offers no actual evidence to support the headline claim.

There's plenty worthwhile to say against gov't spending practices. Polluting very good points on the subject with unsupportable idiocies is a dumb practice. Why? Because It gives folks an easy excuse to be dismissive.

Napolitano is a regular offender on that count. Reason should stick to making good points and sound claims backed by evidence. And leave the clownish carnival barking to other outfits. I expect Reason to care about persuading folks less inclined to agree, instead of preaching to its choir.

[Migrant Log Chipper]

Where is the beef, chumly. The CBO predicts with rising interest rates servicing the debt will soon be a trillion bucks a year. In a budget of 3.5 trillion and change one could assume that is not insignificant. Unless you a prog retard who thinks money grows on trees.

[Tom P.]

"Who could run a household or a business the way the feds have run the government in the past 100 years?"

Has Exxon ever been debt free? Many business operate with permanent debt funding as a strategic choice. People lend them money because they believe they will be repaid and the company rolls over maturing debt rather than permanently retire it. So the answer to the question is, some businesses do. My household has had debt for most of its existence, short term going to long term as we progressed. So what. Credit cards, auto loans, mortgages and occasionally margin loans for aggressive investing. We have never been debt free. So the answer is, households can run their lifetimes without being debt free yet prosper.

Ultimately the analogy is poor because governments are not households or businesses and do not behave the same way nor should they be expected to.