Debt And Destruction?

From April 1917 to November 1919, when Woodrow Wilson borrowed $30 billion to fight 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 trebled it.

In reality, it was not the full faith and credit of the federal government that promised to repay; it was not the credit worthiness 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 credit worthiness 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. But the IRS 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 so that 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.

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