Evening star., 1936-08-03
The Cost of Debt.

Speaking OF the public oebt ana the
tax burden which it foreshadows, Gov
ernor Landon referred in his acceptance
address to the fact that I'VE and our
grandchildren have got to pay the bill.
For every single dollar We spend we will
have to pay back two dollars" Was he
speaking fguratively or literally? Is
the public debt, which stands on the
Treasury books today at about thirty
three and a half billion dollars, in reality
q debt Of sixty-six billion? With the
Government paying the very low average
interest rate of 2.562 per cent is it going
to cost the American people two dollars
for every dollar borrowed?
Such q calculation requires some
theorizing, for there are unknown factors
in connection with the public debt, such
as future rate of amortization, future
borrowing, future cost of money. ETC.,
which prevent any exact computation.
But, for Illustration, suppose a man
has assumed a debt which he plans
to pay off at the end of ten years
and finds it necessary to borrow an
additional $4,000. He assumes this
second debt with the understanding that
during the first ten years-while liqui-
dating the original debt-he will merely
meet interest payments at three per
cent; at the end of that time he will
commence annual three per cent cur
tailment of the principal. He would
repay the $4,000 at the end of forty
three and a third years, and his total
outlay would be about S18,OO0 or s1.8O
for every dollar borrowed
Similarly, the public debt might be
conceived as two debts, the first incurred
before the New Deal; the second after
inauguration of the New Deal. The
figures would be approximately twenty
two billion and eleven billion, respec-
lively. Before the liquidation of the
New Deal debt could begin the old debt
would have to be repaid. And during
that period interest alone would be paid
on the New Deal debt.
The actual public debt, of course. is
represented in a variety of obligations,
about half Of which are short-term
Treasury bills and notes, the rest being
bonds, with maturity dates stretching
past 1860. If the Government met its
obligations as they matured and bor-
roved no more, Governor Landons
statement would be an exaggeration.
But the Government does not do that.
It has been meeting obligations at matur-
ity from sinking fund, by refunding and
the assumption of new debt. 1t appro-
pirates an indefinite amount each year
to sinking fund, for payments on prin-
cipal, and an additional amount for in
terest. In the past fiscal year this debt
service amounted to Sl,252, ,635, ,45l, OF
which STAG 1896, ,8O1 represented interest.
Now, suppose instead of dividing the
debt into two parts, it is treated as
whole, and the assumption is made that
at the beginning of the next fiscal year
the Government is to undertake debt
amortization at the rate of about $780,
dlAo AAAVCASoe' -
the debt at that time is $4,000, 600, ,000-
which is probable-it would require nifty
years to pay it off at two and half per
cent interest, and the approximate cost
would be $176 for every dollar borrowed.
If one assumes, as Governor Landon
apparently did, that the interest will
average nearer two and quarters
per cent, it would require sixty-two years
to repay the debt and the cost would
be about $500 for every dollar borrowed.
If the interest should be three per cent,
the cost would be 1921 over about the
same period.
The point that Governor Landon
meant to emphasize, regardless of the
accuracy of his estimates. is that unless
borrowing is halted and there is policy
that brings the budget into balance, with
consistent debt retirement, reputation
of the national debt is the probable
neutrality-suspicious. through inf1a-
ton or outright reputation. Either
would be disastrous, far more burden
some to our grandchildren than the stu
pendous tax load which we. and they,
must inevitably be prepared otherwise to
assume