the other ex-communist countries hernhound hy the dehts contracted by theirrnformer communist masters? hi the communistrnsituation, the injustice is clear:rntliat citizens struggHng for freedom andrnfor a free-market economy should berntaxed to pay for debts contracted by thernmonstrous former ruling class. But thisrninjustice only differs by degree from “normal”rnpublic debt. P’or, conversely, whyrnshould the communist government ofrnthe Soviet Union have been bound byrndebts contracted by the czarist governmentrnthe’ hated and overthrew? Andrnwh should we, struggling American citizensrnof today, be bound by debts createdrnb a past ruling elite who contractedrnthese debts at our expense? One of therncogent arguments against paying blacksrn”reparations” for past slavery is that we,rnthe living, were not slaveholders. Similarly,rnwe the living did not contract for eitherrnthe past or the present debts incurredrnby the politicians and bureaucrats inrnWasliington.rnAlthough largely forgotten by historiansrnand by the public, repudiation ofrnpublic debt is a solid part of the Americanrntradition. The first wave of repudiation ofrnstate debt came during the 1840’s, afterrnthe panics of 1837 and 1839. Those panicsrnwere the consequence of a massive inflationaryrnboom fueled by the Wliig-runrnSecond Bank of the United States. Ridingrnthe vave of inflationary credit, numerousrnstate governments, largely thosernrun by the Whigs, floated an enormousrnamount of debt, most of which went intornwasteful public works (euphemisticallyrncalled “internal improvements’) and intornflie crearion of inflationary banks. Outstandingrnpublic debt by state governmentsrnrose from $26 million to $170 millionrnduring the decade of the 1830’s.rnMost of fliese securities were financed byrnBritish and Dutch investors.rnDuring the deflationary 1840’s succeedingrnthe panics, state governmentsrnfaced rcpament of their debt in dollarsrnthat were nov- more valuable than thernones the}’ had borrowed. Many states,rnnow largely in Democratic hands, metrnflie crisis by repudiating these debts, eitherrntotally or partially by scaling downrnthe amount in “readjustments.” . . . As inrnevery debt repudiation, the result was tornlift a great burden from the backs of therntaxpayers in the defaulting and repudiatingrnstates.rnApart from the moral or sanctity-ofcontractrnargument against repudiationrnthat we ha-e already discussed, the standardrneconomic argument is that such repudiationrnis disastrous, because who, inrnhis right mind, would lend again to a repudiatingrngovernment? But the effectiverncounterargument has rarely been considered:rnWliy should more private capital bernpoured down government ratholes? It isrnprecisely the drying up of future publicrncredit that constitutes one of the main argumentsrnfor repudiation, for it meansrnbeneficially drying up a major channelrnfor the wasteful destruction of the savingsrnof the public. Wliat we want is abundantrnsavfrigs and investment in private enterprises,rnand a lean, austere, low-budget,rnminimal government. The people andrnthe economy can only wax fat and ])rosperousrnwhen their government is starvedrnand puny.rnThe next great wave of state debt repudiationrncame in the South after the blightrnof Northern occupation and Reconstructionrnhad been lifted. Eight Southernrnstates . . . proceeded, dining the latern1870’s and early 1880’s under Democraticrnregimes, to repudiate the debt foistedrnupon their taxpayers by the corrupt andrnwasteful carpetbag Radical Republicanrngovernments under Reconstruction.rnSo what can be done now? The currentrnfederal debt is $3.5 trillion. Approximatelyrn$1.4 trillion, or 40 percent, isrnowned by one or another agency of thernfederal government, ft is ridiculous for arncitizen to be taxed by one arm of the federalrngovernment (the IRS), to pay interestrnand principal on debt owned by anotherrnagency of the federal government. Itrnwould save the taxpayer a great deal ofrnmoney, and spare savings from furtherrnwaste, to cancel that debt outright. Thernalleged debt is simply an accounting fictionrnthat provides a mask over realitv andrnfurnishes a convenient means for mulctingrnthe taxpayer. Thus, most peoplernthink fliat the Social Security Administrationrntakes their premium and accumulatesrnit, perhaps by sound investment,rnand then “pays back” the “insured” citizenrnwhen he turns 65. Nothing could bernfurther from the trufli. There is no insurance,rnand there is no “fund,” as there indeedrnmust be in any system o{private insurance.rnI’he federal government simplyrntakes the Social Security “premiums”rn(taxes) of the young person, spends themrnin the general expenditures of the Treasury,rnand then, when the person turns 65,rntaxes someone else to pay the “insurancernbenefit.” Social Security, perhaps thernmost revered institution in the Americanrnpolit-, is also the greatest single racket.rnIt’s simply a giant Ponzi scheme controlledrnby the federal government. Butrnthis reality is masked by the Social SecurityrnAdministration’s purchase of governmentrnbonds, with the Treasury thenrnspending these funds on whatever it wishes.rnBut the fact that the SSA has governmentrnbonds in its portfolio, and collectsrninterest and payment from the Americanrntaxpayer, allows it to masquerade as a legitimaterninsurance business.rnCanceling federal agency-held bonds,rnthen, reduces the federal debt b’ 40 percent.rnI would advocate going on to repudiaternthe entire debt outright, and let thernchips fall where thev may. The gloriousrnresult would be an immediate drop ofrn$200 billion in federal expenditures, withrnat least the fighting chance of an equivalentrncut in taxes.rnBut if this scheme is considered toornDraconian, why not treat the federal governmentrnas any private bankrupt is treatedrn(forgetting about Chapter 11)? Therngovernment is an organization, so whyrnnot liquidate the assets of that organizationrnand pay the creditors (the governmentrnbondholders) a pro-rata share ofrnthose assets? This solution would co.sttherntaxpayer nothing, and, once again, relievernhim of $200 billion in annual interestrnpayments. The United States governmentrnshould be forced to disgorge itsrnassets, sell them at auction, and then payrnoff the creditors accordingly. Wliat governmentrnassets? There are a great deal ofrnassets, from TVA to the national lands tornvarious structures such as the Post Office.rnThe massive CIA headquarters at Langley,rnVirginia, should raise a pretty pennyrnfor enough condominium housing forrnthe entire work force inside the Beltway.rn.. . This combination of repudiation andrnprivatization would go a long way to reducingrnthe tax burden, establishing fiscalrnsoundness, and desocializing the UnitedrnStates.rnIn order to go this route, hov’ever, wernfirst have to rid ourselves of the fallaciousrnmindset that conflates public and private,rnand that treats government debt as if itrnwere a productive contract between Kvornlegitimate properh’ owners.rnThe late Murray N. Rothbard was arnprofessor of economics at the University ofrnNevada, Las Vegas, and vice president forrnacademic affairs at the Ludwig von MisesrnInstitute. A longer version of this articlernfirst appeared in the ]une 1992 issue.rn(MsciacKi)rnJULY 2001/45rnrnrn