Chapter VI:
Debt Reduction a Necessary Preliminary to New Financing

SUMMARILY, it may be said that the debt burden must be and will be reduced, and that no reorganization, capitalist, fascist or socialist, is possible which does not include debt reduction. Capitalism, fascism and Russian communism are still demanding savings and offering a premium for their use. Gigantic work providing enterprises, public or private, are among the first imperatives of social order. Financing these enterprises the only financial problem worth mentioning.

Other financial problems merit urgent attention only as their solution will contribute directly to solving the problem of financing the enterprises which will end unemployment. When the depression first began to receive official recognition at Washington, Mr. Hoover’s chief preoccupation, probably, was to preserve the credit structure, as he called it. In the sixth year of the depression, it is beginning to be apparent to a few who are a little ahead of Mr. Hoover in their economic perceptions that the great credit problem is financing new work giving enterprise, and not preserving financial arrangements which provided work and prosperity years ago but do not do so today.

A second point in explanation of the impossibility of saving the present debt structure in its entirety is that these heavy interest charges with which a whole people is saddled are too largely connected with past consumption, including that made on the fields of battle, and past business mistakes. If a person has the means of repudiating a debt, and large numbers will always find the means to do so by political or revolutionary action, he is not going to go on paying interest on money used a long time ago either for an act of consumption or for a bad business venture. It was this consideration, almost alone, which convinced me several years prior to Hitler’s advent to full power that his triumph was ultimately inevitable, and it was a consideration which few of my friends, especially some of my German friends (who were vastly better informed about Germany than I and who are now in exile), could possibly see to have any validity.

It is not in human nature to bear indefinitely the charges of an unproductive debt, and Hitler was the only political leader in Germany whose stand on German reparations payments showed clear recognition of this human attitude towards debt. The German people might have paid, as the liberal economists and bankers argued, given a requisite willingness to make the necessary sacrifices. But people won’t make the necessary sacrifices. They will rather make these sacrifices for war or revolution. For a man to go on meeting a financial obligation, it must be apparent to him that the obligation is connected with an addition to his present productive or debt bearing capacity. And this seems good ethics and good sense. If it is not good law, then so much the worse for the law.

These two points are too much disregarded by statesmen, jurists, and economists who try to defend the integrity and bearability of present debt charges. It is no final argument for the soundness of a debt or debts generally to prove that the people could afford to pay the interest if they made the necessary sacrifices. Suppose they could, but suppose they cannot afford to pay these charges plus the additional charges requisite for new financing to create work for the unemployed, to clear the slums or, quite simply, to carry the depression. That is the rub. Why are new long term loan funds not flowing in adequate volume into new bonds and mortgages for new construction? It is not chiefly because a few score billions of dollars of bonds and mortgages throughout the world have gone into default or repudiation in one way or another. It is mainly because the lenders cannot see that the possible borrower has a chance of meeting present debt charges plus new charges. Possible borrowers, in the main, do not see that they have this chance either, and, consequently, do not apply for loans. These, obviously, are the main reasons why so many railroads are finding it necessary to do their financing with the R.F.C., and why the total of bank loans to non-governmental borrowers is steadily shrinking.

The doctrine that old debts must be swept away to make room for necessary new debts, after all, is but the essential principle behind the biblical year of jubilee, or the logic of the law of geometrical progression applied to a steady growth of debt. A great many people, whose pietism derives from Calvin, the theologian of the 16th century shopkeepers and money lenders (rather than from Jesus, Aristotle or Moses, all three of whom denounced money lending), will say, But the debtors hired the money, didn’t they? And with the posing of that question the whole discussion is thrown right back where the canonists left it over four hundred years ago, when the gold rushes to the new countries and capitalism got their start.

In those pre-capitalistic days the issue as to usury was argued somewhat in these terms: Ought a debtor to pay interest because he needed or wanted money for consumption, or because he miscalculated profits on a business venture and because, in either case, due to his necessity or miscalculation, he promised to pay such interest? To the question so stated, pre-Calvin Christianity, Judaism and Mohammedanism gave the same negative answer that Aristotle gave. For fifteen hundred years Christianity said that money-lending was sin, a fact which seems to be little known or appreciated by many present day Christians who make the payment of debts a high ethical imperative. Christianity has changed in this respect, but the words of Aristotle, the Bible or the theologians of the Christian Church for fifteen hundred years remain unchanged on this issue.

Briefly, the old or traditional doctrine of the world’s pre-capitalist exponents of ethics as to interest, stripped of the moulds of thought of Aristotle and medieval scholasticism of the Christian Church, amounts to saying something like this: An income from property or a usufruct of property is permissible — in other words, both land rental and business profits are permissible, but an income for the use of money by another should not be demandable at law unless the use made by the other person of the money has enabled him to pay the return promised.

This principle, the true doctrine of usury, denies legal enforcement to money-lending contracts where the borrowing has been for outright consumption or bad business ventures. Actually, of course, the lender to bad business ventures rarely gets more than the canonist doctrine on usury would allow him as a mere partner, except where, as in the case of the farmer, the lender can for a time collect his interest out of the living standard of the debtor who has made a bad business venture. The evil of fixed obligations consists not so much in what they take as in the mischief they cause for a time by reason of the effort to take what the economic possibilities and welfare imperatives will not allow. The vice of loan or interest contracts is inflexibility. During the period of modification of the canonist doctrine against usury, under the pressure of the emergent banker and merchant interests of medieval Europe, the theologians of the Church worked out subtle contracts and interpretations of Church law to get around the Church ban on money-lending and yet produce the equivalent of loan contracts. The Calvinist countries, of course, after the Reformation, admitted money-lending to full respectability and legality.

Present day experience with debt is demonstrating the basic soundness of the canonist, biblical or Aristotelian views about money-lending, when such views are fairly stated in terms of present day economic problems. These views, if now given enforcement, would make every contributor of capital to a profit seeking venture, whether of a government, a corporation or a private individual, merely a partner in that particular venture to the extent of his contribution. And these views would bar all loans for consumption. War financing would have to be done by tax levies, or else by following the old Roman precedent of selling to capitalists shares in enemy loot, if, when, and as captured, rather than by claims on the home folks’ future income, as capitalist war bond financing does. Under this rule, the working capital for business enterprises would be supplied entirely by partners, active or inactive, and by shareholders, where the enterprise was a corporation — never by money lenders.

It will surely be asked how, under such investment arrangements, insurance companies and trustees could safeguard the principal of funds entrusted to their management. The notion that in a contract or a legal bond there resides a peculiar security is a fallacy that neither Shakespeare’s Merchant of Venice nor the default on the Allied bonds to the United States Government seems to have succeeded in debunking. To this question as to security for trust fund investments, I have only to reply, How do trustees safeguard their investments at present?, and to answer in the same breath, They don’t. Actually, they secure only what the economic possibilities allow — or less sometimes. What of the billions of dollars in railroad and mortgage bonds which were eligible under state laws for trust fund investments and which are now in default, or soon going into default? The investor under any set of conditions can take only what the economic possibilities allow, and any legal contract specifying safeguards to the contrary is just another of the fictions or farces on which our army of superfluous lawyers make a parasitic living.

Legal services in connection with a single corporate bankruptcy, reorganization, or mortgage foreclosure, frequently run up a bill of several million dollars, which usually come out of the pockets of the investors, who have been taught to revere lawyers and their handiwork as the great safeguards of investment and property rights. In practically every instance where the lawyers collect a bill running into millions of dollars, the final settlement or settlements could have been worked out with little expense or difficulty by any small group of honest men, aided only by law clerks, accountants, and other technicians to give practical effect to their agreement. The agreement, if it is to be carried out, should be drawn in terms of economic possibilities which any sensible person properly informed can perceive, and not in terms of legal considerations which only lawyers can understand and which only contrary-to-fact fictions can rationalize. The toll taken by the legal profession from business in the United States in perfectly legitimate ways is one of the least defensible and most anti-social rackets in the country. This vested interest in making economic arrangements in a way to provide work for lawyers is responsible for the propaganda which, in turn, is responsible for the belief of the average American that a legally worded or implemented economic arrangement affords the wayfaring man a protection or an economic advantage not otherwise obtainable. The public has been trained to hanker after the lawyer’s wares or services. The chief need of a stable economic order is flexibility. The chief contribution of liberal law to the economic system is inflexibility.

This taste for litigation and complicated legal arrangements, of course, constitutes our cult of the law and the Constitution and, also, the psychological basis of our lawlessness as a people. This cult of the law is exactly the same cult of the law that Shylock had. It is the cult of law either as a means of making living by its practice, or as a means of getting the better of the other fellow in an economic way. This cult of the law must be smashed in order that a new cult of national interest and social discipline, the only true scheme of law, may develop.

Money-lending, with the idea of a bond being given to furnish a degree of security which the economic results would not afford, is a large element in the American or any liberal cult of the law. Anglo-Saxon liberalism was born in greed and conceived in usury. Since the rise of money-lending to respect ability in the 16th century and later, the money-lenders have relied heavily on the law as their instrument of coercion and exploitation. There comes a time, however, when economic events and human revolt prove mightier than the money-lender’s law. Then debtors take law into their own hands and repudiate, or the law becomes nullified by economic forces which the courts cannot enjoin.

It is not a lawless thing but a truism to say that contractual stipulation and legal action to enforce it in defiance of economic realities or human needs is anarchy, not law. Facts or economic possibilities are the highest law. Law, the attempted enforcement of which defies facts or realities, is not law but futile nonsense. Making this generalization a little more concrete, it is not a lawless thing to say that most of the law connected with money-lending, when its application is attempted in a period of economic adversity, or after the frontier era, is productive of conditions of economic and social anarchy.

Coming back to the discussion of usury (from which we have digressed slightly to point out the connection between legalism and the notion that a loan contract provides a security for a trust fund not to be had otherwise) it is here also to be observed that most of the theories and sales-talk of the insurance companies and institutional trustees of savings are the purest moonshine, wholly unsupported by historical evidence. That is to say, we can see innumerable examples of large fortunes being conserved for over fifty years in land, as evidenced by the estates of the Astors and thousands of landed families the world over, or in a family-run business like that of the Rothschilds, the Morgans, the Krupps, the Duponts, or the Rockefellers. But it remains for the insurance companies and banks offering the world their services as trustee custodians of investment funds to show a single large private fortune which has ever been conserved for fifty years by an insurance company or bank trustee through continuous investment in bonds or fixed obligations. Let the advertising insurance companies and trust companies cite but one of their clients whose fortune was preserved intact for fifty years through trustee investment in good bonds. We know what has happened to the purchasing power of investors in fixed obligations and insurance in the European countries which have experienced devaluation. We know also that great industrial fortunes in going enterprises have been, for the most part, conserved and many have ever increased during this period. The Krupps beat inflation, but the investor throughout the world who sought the protection of a legal contract with a borrower has been expropriated in varying degrees running all the way to zero.

The doctrine of the canonists or Aristotle about usury is coming back into its own in the world-wide collapse of credit, repudiation and devaluation. This doctrine is not opposed to property ownership or business enterprise, but it is incompatible with the spirit and technique of modern finance capitalism. It is a doctrine which fascism everywhere must adopt and allow as rapidly as possible. For the benefit of the professional economists who may be inclined to sneer at any one who reasserts doctrines which they have thought they had disposed of during the past hundred years of rationalization of modern capitalism, I may say that I have read most of the leading theoretical explanations and defenses of interest. I might add that I could, had I time, demolish each of these theories of interest, one by one, with the arguments of another. But what is the use of demolishing with theoretical analysis the academic theories of interest when defaults, repudiation, bankruptcies and successive currency devaluations the world over are doing so much more devastating a job of confuting classical theories of money-lending and interest?

Take, for instance, Böhm-Bawerk’s subjective theory of interest, and the many refinements or elaborations of it, which explain so beautifully why people promise to pay interest but do not show how they can pay it, or why it so often happens that they fail to pay it when they have the misfortune to be borrowing in an age and country not enjoying an expansion boom and rising prices. Does any intelligent person need he heavy Teutonic reasoning of the Austrian economists to understand why a prodigal government or individual promises to pay interest, or why a man playing the stock market for a rise promises to pay ten or fifteen percent on call money? The reason, undoubtedly, is largely subjective, as Böhm-Bawerk points out. The borrower feels the money now is worth a lot more than it will be a year hence, because between now and then he expects to make a killing. But does this subjective theory of interest explain why the market finally beats the traders? Was it ever much of a contribution to useful knowledge to tell us why people borrow money and assume obligations they can’t meet?

There has never been propounded a satisfactory theory of interest, or one that can be read without seeming absurd in he light of post-war experience. The productive theory of interest, of course, is the purest romanticizing. For much borrowing has always been done for uses that had no chance of producing the money of repayment, as we have already seen in the preceding chapter to have been the case in financing railroad betterments in this country. Government borrowing for instance, has been the keystone of credit and lending, and has never, in any substantial amounts, been done for uses which produced the means of repayment. The fundamental thought of the pre-capitalistic exponents of ethics with regard to money-lending, like Aristotle or the Bible, stands far better the test of analysis in the light of present day experience than the economic theories about interest spun during the 19th century, when most borrowers were taken care of by the increasing land values of rapidly expanding colonies and of nations undergoing industrialization and rapid population growth.

While we are on the subject of theories of interest it is not amiss to remark that the professional economists and publicists of liberal and conservative tendencies, with few exceptions, have been favoring either complete cancellation, or considerable scaling down, of War debt, but have had little to say about scaling down private debts. Of course, our professors and publicists who went about making propaganda for war debt cancellation or reduction until the War debtor nations closed the discussion by the fait accompli of unabashed default, will, with an air of learned and pained superiority, defend their treatment of War debts differently from privately owed internal debts, on the ground that a transfer problem aggravated by our high tariff interposed peculiar obstacles in the way of War debt payment by foreign countries to our government. They will then express regret that it has proved so hard to make the American people understand that European debtors cannot pay their debts to us if they are unable to sell us the requisite amount of goods.

Strangely enough, it has never occurred to the advocates of foreign War debt cancellation that every debt presents a transfer problem, and that this problem is fundamentally the same every case. The debtor, in order to be able to pay the debt, must find a market at a right price for his product or services in the money of payment of the debts. The Iowa farmer, or the home-purchaser-on-the-mortgage-plan anywhere, has the problem of converting Iowa corn or personal services into New York dollars, quite as much as the British Government has the problem of converting British goods into New York dollars. A high tariff may hinder a British debtor from selling British goods for New York dollars to pay a British debt to an American creditor, but a high tariff does not hinder the sale of goods or services produced by the American debtor to the American creditor.

The fact is, of course, that the advocates of War debt cancellation have been furthering the propaganda of the financial community of New York, which would have been glad to have had the War debt slate wiped clean, provided the American internal debts were respected. It is not strange that the American people have received with manifest resentment the propaganda of eastern seaboard capitalists, and their endowed propagandists in the academic world, in favor of War debt cancellation while practically nothing was being said by the same financial or intellectual communities about the debt difficulties of Americans.

Obviously War debts had to be cancelled and, fortunately, the debtors have disposed of this matter for us. It is most unfortunate that the British ever broke the allied front against the American insistence on War debt funding. But if the imperial and royal government of Great Britain cannot keep its agreement and pay its debt because of economic adversity, why should Farmer Brown be held to his agreement when crippled by even greater economic adversity? If one important body of debts, like War debts, must be cancelled or drastically reduced, a similar measure of relief must, sooner or later, be accorded all debtors. The credit and debt structure of any country is an integrated whole. If the taxpayer of the United Kingdom is given a respite of some five dollars a year through non-payment of the American War debt, why should the American taxpayer be held to pay the interest and principal of the fifteen billions of outstanding War debt owed to American holders of our War debt? The only good argument against further repudiations of public debts must be based on political and social convenience. It would be more convenient and equitable to eliminate our public debt burden by means of a capital levy than by means of repudiation or cancellation through further currency devaluation. But reduce this burden, we must.