From April 1917 to November 1919, when President Woodrow Wilson borrowed $30 billion to pay for World War I, he was able to do so because of the promise he made to lenders that the commitment to repay them would be backed by the full faith and credit of the United States government.
At the time, the government’s total debt was about $14 billion, so Wilson’s painful gambit tripled it.
In reality, it was not the full faith and credit of the federal government that promised to repay; it was not the creditworthiness of the federal government at stake; it was not the federal government that paid back the money that was borrowed. That’s because the government has no credit or creditworthiness or disposable wealth. Only the taxpayers have that.
This is not an academic difference. Wilson knew his creditors could not seize government buildings if he or a successor could not repay the loans in a timely manner. However, the Internal Revenue Service could seize private wealth if taxpayers didn’t cough up.
At the time, the federal income tax was new. In order to get it passed in Congress, Wilson promised that the tax rate on personal incomes would never exceed 3 percent of adjusted gross income, and that it would only be assessed on adjusted gross incomes north of $10,000 a year — the rough equivalent of $250,000 today.
Wilson also had a brand-new bank with its own legal printing press at his disposal: the Federal Reserve. With its power, the Federal Reserve could print and lend all the cash it wanted, flood the economy with money and cheapen the value of the dollar. When Wilson’s $30 billion debt was repaid, it would be done with dollars worth far less — and thus less painful to extract from taxpayers — than those he borrowed.
This is, of course, government-induced inflation. It was relatively new in Wilson’s era, but it has been practiced by the Fed and accepted by every president from Wilson to Barack Obama. It can be done without the consent of Congress because Congress already gave the Fed the unlimited power to print cash and lend it. Today this is done without ink and paper; rather, by pressing a few computer keys.
Now when the president wants to borrow more than the law allows, the Fed can provide the cash, but the president needs a change in the law so as to have the legal authority to commit as-yet-unborn taxpayers to repay the government’s additional debt. While in office, President Obama has borrowed about $1.2 trillion a year with the approval of Democrats as well as Republicans in Congress.
The lenders are quick to make their loans, because the feds have never failed to extract the cash from taxpayers or borrow more in their names to pay the debt service. Presidents and Congresses don’t worry about paying back the principal or paying the debt service as long as they can continue to borrow more in order to do so.
As absurd as it sounds, the federal government borrows money in order to pay the debt service on money it has already borrowed and spent. Is it any wonder that today the government’s debt has reached $17 trillion?
In his zeal to persuade Congress to let the government borrow another trillion dollars over the next nine months, Mr. Obama has stated that raising the debt ceiling will not add to the nation’s debt. He is either willfully ignorant or Clintonesque in his use of misleading words.
He knows the feds never have declined to borrow whatever they want, whenever they want it, up to the limit of their legal borrowing authority. They have done so with their eyes on only immediate political needs, with disdain for the economic consequences and with contempt for the future.
However, the future cannot sustain this much longer. The half-trillion dollars a year the feds now pay in debt service on current and ancient debt is equivalent to one-fifth of all the yearly revenue collected in taxes. The $1.2 trillion the feds borrow and spend each year is the equivalent of half of all the yearly revenue collected in taxes.
If the mindset of “borrow and spend and damn the future” persists, American society as we know it will collapse as taxpayers reach the tipping point beyond which it will no longer make sense to earn income.
Do you think this sounds apocalyptic? Think again. Nearly half of the taxpayers in America are there already. Why should they work, they no doubt reason, when the feds will continue to tax and borrow and transfer wealth to them?
The president and all congressional Democrats, and most Senate Republicans and about half of the House Republicans support this descent into an economic maelstrom, and they have demonized those brave House and Senate Republicans who have had enough of it.
Many courageous congressional Republicans understand the harm the feds have done to the dollar, believe the government must stay within the confines of the Constitution, recognize that borrowing money in order to pay the interest on money already borrowed will lead to perdition — and they are resisting it.
Mr. Obama says they are trying to hold the Treasury hostage and demanding a ransom. He is wrong again. They are defending the dollar and the Constitution.
He is saddling future generations with debt they will not be able to afford. He will turn the IRS into debt collectors for the Chinese government, which is the federal government’s largest foreign creditor.
The courageous House and Senate Republicans stand athwart the progressive tidal wave saying, “Stop!” They have stood firm, and they will be history’s heroes.
As for Mr. Obama, I suspect he doesn’t realize that since the principal of Wilson’s $30 billion loan has yet to be repaid, the Treasury is still paying interest on it. Do you know anyone who consented to that?
Andrew P. Napolitano, a former judge of the Superior Court of New Jersey, is the author of seven books on the U.S. Constitution, including his most recent, “Theodore and Woodrow: How Two American Presidents Destroyed Constitutional Freedom” (Thomas Nelson, 2012).