Government borrowing is a source of many evils, not least of which is that for decades it made big government appear cheaper than it is. Could the federal government spend nearly $4 trillion a year if it had to raise every penny through taxation? Unlikely. A tax revolt would have been ignited. But let the government borrow a trillion dollars a year, more than 40 cents of every dollar spent, and government looks relatively inexpensive—or it did before things got so out of hand that everyone could see the looming danger. Most people pay no attention to how much interest the government must pay each year to its creditors, but interest payments have been running at over $400 billion a year. December’s [2012] payment alone was $95.7 billion.

That money represents resources that were previously diverted from the productive private sector to the government for purposes chosen by politicians looking out for their careers. The interest payment goes back into the private sector, but since government continues to borrow to pay its debts, it’s still taking resources from the productive sector. Also, when the Federal Reserve buys up government debt, it remits the interest (minus overhead) to the Treasury. Such interest-free borrowing might make credit look inexpensive, except for the fact that the Fed creates money when it buys the debt, which threatens potential price inflation, an implicit tax on the people’s cash balances, distorts relative prices,and depresses interest rates, skewing investment decisions.

Borrowing appears to be a voluntary form of funding government, but [Destutt de Tracy (1754-1836) in A Treatise on Political Economy] wrote that “this an illusion [because the lenders] force the government to raise, one day or other, a sum equal to that which they furnish and to the interest which they demand for it. Thus, by their obligingness, they burthen without their consent not only the citizens actually existing, but also future generations….”

Such burdening of people yet to be born offended Tracy, and he proposed that “whatsoever is decreed by any legislature whatsoever, their successors can always modify, change, annul; and that it should be solemnly declared, that in future this salutary principle shall be applied, as it ought to be, to the engagements which a government may make with money lenders. By this the evil would be destroyed in its root: for capitalists, having no longer any guarantee, would no longer lend.”

Against Government Debt