Why the national debt might finally matter

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2:02Hello. Hello. That is so serious. I was about to get your energy, man. I know. It was absolutely my fault. I was like, it's like we were about to, like, handshake before a duel maybe or something. Yeah, it was coming. This is Ronald Young Jr. He's an audio producer, a storyteller, host of the podcast Wait For It. He's appeared on Search Engine before, answering a question for us. But now he'd written to us with a question of his own. And so we invited him back to tell us about it. It was a question about the economy.

2:43I am at a place where I think I'm a pretty smart person. I think I understand things. I understand stocks. I listen to Planet Money. You know what I mean? I'm an NPR guy. I read. I understand numbers. And the one thing that I will never understand is the United States national debt. It's something that Congress people run on, that the president runs on, that senators run on, that everyone is always talking about one way or another. We got to cut this wasteful spending, decrease the national debt. We got to decrease it because it's bad for the economy. It'll explode, all that. And I hear that. And when I think about having debt, you know, I pay rent.

3:25I had student loans I have credit card debt like all that there's somebody that I owe money to yeah like you know what I mean like you max out a credit card somebody's coming to say hey you owe us interest and also if you don't pay this we're going to take you to court and then you might get your wages garnished so on and so forth but when I think about the national debt I'm wondering who owns the debt of the United States yeah like when they say we have a national debt who do we owe money to That's so confusing to me. I don't understand what that means. And it feels like I need a new civics lesson here.

4:00And is your question also like, I'm kind of disorganized sometimes and not always great with money. And like, I've had more money and less money different times in my life. So I know what it's like when something goes to collections. I know it's like when you get a phone call. And I don't understand if national debt, we're using the same words that we use for personal debt, but how much am I supposed to be thinking of the country as like me? Like, is it like, does like Donald Trump, is it like, oh, I'm not answering that number because he knows?

4:32That's exactly it.

4:37Ronald first emailed his query in February. Who exactly are we in debt to? What happens when we don't pay those bills? At the time, felt like one of those background questions that bobs to but never quite breaks the surface of my mind. And, you know, every time a budget has to get approved, experts talk about the national debt. Some people get upset. Most people quickly forget about it. Even the Tea Partiers seem to have disappeared. So I was curious, but not urgently curious. But then our new president really started matching buttons on the economy's gamepad, and my curiosity heated up. Working on this story, I started to see how things I didn't know were connected to the national debt.

5:17tariffs, our fight with China, China, all of it actually did connect to the bills we owe. After the break, how it all works and what it all means. We're going back to the very beginnings of American debt.

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8:09Welcome back to the show. Okay, so first things first, can you say your name and what you do? Hi, my name is Brendan Greeley. I am right now a PhD candidate studying the history of money and finance. And for about 20 years, I was a journalist. And for 10 of those, I covered the Federal Reserve. Brendan has never been on mic at Search Engine, but his brain is in the show sometimes. We go to him for help understanding economic concepts, inflation, taxes. Shruti, our show's editor, she knows him because they both worked at The Economist together a long time ago. He's quite sharp. So, okay, before we even get to the question I have, one of the meta questions I've been thinking about for the past couple days is people's curiosity leads them to different places.

8:58I have never been somebody who thinks too much about markets. I definitely have not really ever thought very much about the national debt. But I think for me, part of what's going on as often happens in, say, like the last decade is like there's some reliably somewhat boring part of how the world or the country works. And then you find out it might be breaking and you're like, well, I guess I should understand this. Yeah. But for you, like as somebody who your life has just led you to think about markets and currency and stuff, like was there some signal event early in your life that opened the door of wondering about this?

9:34Do you remember a time before you cared and what made you start to want to know? Oh, that's, yeah. So I was at Bloomberg Businessweek as a features writer, and I was covering the tech industry in 2010. I was writing the same story over and over again about how, you know, the wireless carriers were ruining America and stealing all of our money. And I just, I bored myself. So at the time, the profession of economics was changing because economists didn't really see 2008 coming. Economists have so much sway over the way we see the world. We have a National Economics Council. We have a Council of Economic Advisors.

10:13It's actually confusing to people who cover this which organization does what, which body is inside the White House, which body is outside the White House. But they're all economists, right? We don't have a National Sociologist Council advising the White House or a National Historians Council advising the White House. Economists sort of alone among the social sciences get this much pull in our lives. So the way they see the world is massively important. And I began to realize that this is still kind of what I do, that there are holes in the way they see the world. And one of those holes is history.

10:45So Brendan went back to school, to Princeton, to study that history. He's re-examining a story he's spent much of his life with, the Econ 101 story of what money means. I was here just to answer a seemingly simple question. What does the national debt mean, and how worried should I and Ronald Young Jr. be about it? But Brendan's story drew me in. It went back further to how America invented its own notion of debt, and how Americans decided how they should feel about it. Those ideas just have deeper roots than I imagined. Search Engine Before It Ends will tell you the origin story of every single object or concept you've ever encountered.

11:22This week, the origin of money in America. Chapter One, Before the Dollar. Before the revolution, one of the biggest challenges that the colonies had, consistently, people complained about it all the time, was that they didn't have money. And that doesn't mean that they were not wealthy. It meant they literally did not have the substance to hand to somebody else to clear a transaction. America at the time, or at least that part of America, doesn't really have any silver or gold wealth, which means it's got to come in from abroad. And England had done two things to make that even more difficult.

11:57One is they didn't allow the colonies to charter anything like a bank. And the other is the Navigation Act actually meant that it was very difficult to trade with the entire world. And all the silver tended to come up from the Caribbean at the time. And that would come up to the colonies in return for some wheat, some hogs. But it had to come through the English colonies. There was some smuggling. Sometimes literally pirates of the Caribbean would come up to Pennsylvania or sometimes even to Baltimore and sell their silver. So there was this competition among the colonies to see who could get the silver.

12:31The silver was important, again, not just as wealth, but as like ways to make sure that one person can pay another person. So 17th and 18th century textbooks for merchants drew distinctions between what they called at the time real money and imaginary money. Wait, were you reading colonial merchant textbooks? I don't know, man. We all do weird stuff for our professions. Wait, so if I were a colonial merchant selling, I don't know, what were the merchants selling? Depends on which colony you're talking about. I'm Pennsylvania. I'm a Pennsylvanian in every version of my life. Then you're selling wheat and hogs south down the Delaware River to Jamaica and Barbados.

13:13Okay, so in the pre-podcast era, I'm a colonial merchant from Pennsylvania selling hogs down the Delaware River. And I would have thought, mainly I'm passionate about hogs, but I need to understand the financial system I'm transacting in. Podcasts don't yet exist. And so the avenue for my curiosity is that as an adult, I would have bought a financial textbook. And then what would I have found in this financial textbook? What would I have been learning? These textbooks drew a distinction between real money and imaginary money. And so from our perspective now, that sounds like imaginary money is a judgment.

13:47Like it's monopoly money, it doesn't matter. but they took it very seriously. Both kinds of money were equally valuable, but they had different purposes. So real money was a coin. Imaginary money was some kind of a contract. And there were two major kinds of contracts. One was what we call negotiable paper. Negotiable paper. It's just an IOU. We call it a promissory note. It's a piece of paper, and it's roughly the size of a dollar bill today. I think it holds the same function. And you just write down, you know, I will pay you back on this day the following amount. And were these promissory notes, They're pre-paper money.

14:18They're being written. Be very careful about what you say about paper money. They are paper money. Oh. But they're paper money written by private citizens. Okay, but they're pre, like, the green U.S. dollar that is in my pocket. Like, the promissory notes predate that. Yes? Yeah. The promissory note was just a piece of paper that had a promise written on it. You and I don't know each other. I don't know that I could write you a promissory note, but I know your executive producer, Sruti, very well. So if I owed Shruti money, I would write her a promissory note. But Shruti could sign it over to you in the way that we used to sign over checks.

14:50And she would assign it to you. And now I owe you money. You've got to come back to me. That's my note that you've got to collect on from me. So these promissory notes, they're not literal dollar bills. The government's not printing them. But Brendan says they're serving the same function. Promissory notes are money. They're as much money as the cash you get from an ATM today. And back then, debt and credit were tracked another way that also feels like a primitive version of something we'd recognize. The same way we lend our friends money or pay them back with Venmo and PayPal, businesses in the colonies kept these physical books, big public ledgers that tracked credits and debts.

15:27It's easier to think about on a bar. So I've looked at colonial bar ledgers because they're so much fun because they tell a real story. And what's a bar? You mean like literally like the money that had been spent and owed at a drinking tavern, like a bar like bar? Absolutely. Got it. And so there was a big bound ledger. It was about, you know, sort of a foot and a half by two feet. It was a big thing. And my theory is they would actually haul it out on the bar and like call out the debts so that everybody understood what was happening because debt is also the social thing that everybody's got to understand and agree with because there are all sorts of stains on the covers of these books.

16:01They're a mess. I think that like people were spilling drinks on them and stuff. But nobody ever paid cash. So there are some coins coming in. Again, there's trade with the Caribbean. That trade tends to bring silver Spanish mill dollars into the economy, but there's just not enough of them to base the entire money economy on them. So America had this tradition very early on before anything that we think of like our current bank bills of people understanding that you could sign a piece of paper and move it around the economy and it had value and you could buy things with it. People have to get used to this idea.

16:35It takes a long time. It's a weird thing. But it's funny. It's like what I hear you saying, which is like the history of money. There's different stories of like how we got here. Yeah. And the one that I've gotten from like really like pop economic journalism that you are like not as friendly with is money starts out and it's very physical and it's like metal and coins. And at some point, we become more comfortable with the way things look today, which is that money is much more an idea. And that idea is kept as like, you know, like most of the money to my name is not dollar bills in a bank. It's like numbers on a ledger kept by my bank.

17:15And what you're saying is, no, no, no, even at the very beginning of American history, money was much more about promises made, promises kept, debt as a thing written down. And the idea of a pocket full of coins was more the exception than the rule. The same way most of our money is like, quote unquote, imaginary now, much of our money was quote unquote, imaginary then. Yeah, congratulations. You just wrote the introduction to my book.

17:44Brendan didn't pay me to do that. He's now in debt to me. According to Brendan, in colonial America, debt itself was not inherently viewed as bad. There's a Shakespeare line, neither a borrower nor a lender be. but in our country, when there wasn't enough currency to go around. Everyone had to be both. We ran on a system of IOUs that worked pretty well. Your promissory note was valuable because I trusted you to pay it, and you paid it because if you didn't, your future IOUs would no longer be honored. But that ad hoc system begins to evolve. Chapter 2, The Birth of the American Bond So back in colonial times, the colonists themselves are writing these promissory notes, trading IOUs.

18:28Money is being created out of thin air by just anybody. That changes. States start issuing promissory notes because states want to borrow money too sometimes. And then during the Revolutionary War, the government suddenly needs a lot of money. So it prints it. The Continental Congress printed paper currency, basically IOUs. These IOUs were as valuable as your faith that the country would win the war and be able to pay those IOUs back. America did win. And the idea of the government printing money stuck around. The new federal government would now create money by creating debt. Creating IOUs the government promised to pay back later.

19:09After the war, Alexander Hamilton took that idea and scaled it. He consolidated all the war debt, federal and state, into a national debt. He did this while wrapping. The new federal government issued bonds, American IOUs, that anyone could buy. And because the government guaranteed bonds would be repaid with interest, a market formed for these bonds, a market that still exists today. Americans buying the bonds were helping to fund their own new country. In the beginning, these U.S. government bonds were held by citizens. They were also held by banks. And so increasingly over the course of the 19th century, you see federal debt becoming a bigger and bigger part of the banking system and a bigger and bigger part of the bank notes that we traded around.

19:52We're going to fast forward a bunch here. Fast forward the Civil War, bank failures, federal deposit insurance, the invention of the Fed. Because I think all you need to know this week is that American federal debt will, over time, become not only the way that the U.S. government will start to pay for stuff, those IOUs will become so reliable, so valuable, that the rest of the world starts to use American IOUs like money. In the sense that investors can trade bonds or they can hold on to them, knowing that a U.S. bond's value is stable. It won't swing in wild ways. And that's sort of what our modern system looks like today.

20:29When the federal government wants to borrow money, wants to sell debt, investors line up to buy it. In the form of government bonds, treasuries, U.S. government IOUs, which other investors treat like money. And other investors love using these IOUs and always have. Because what makes them so unique is that for a century, the United States has mostly seemed like an immensely safe bet relative to most other places you might park your cash. We will get to what it means this month, now that that has begun to change. Right now, we're still in the history.

21:07Chapter 3. Things begin to get out of hand. One thing I was very surprised to learn this week is that in America, for many decades, even though the government could take on lots of debt for cheap, borrow on metaphorical credit card after metaphorical credit card, we were actually, for a very long time, shockingly responsible about all this. For years, no matter who was in power. Until very recently, until like late 70s, early 80s, every new debt issue had to be approved for a reason. Okay. The Treasury went to Congress and said, we're going to fight a war or we're going to build things. Usually it was fighting a war.

21:46And Congress said, yep, we agree. That is important. You may borrow money to do that. So there wasn't a regular, liquid, massive market of Treasuries the way there is today until very recently. So before the 1970s, what you're saying is, like, assuming that I was a person who thought a lot about the national debt, like in 1932 or 1951 or 1965, it would have been more possible to say, like, this year the national debt is X. And like, you can go through the government's like credit card bill and kind of see where we spend it. What happens after the 1970s that changes that? In the early 80s, there was a paper called Some Unpleasant Monetarist Arithmetic, which basically said we're not seeing necessarily the rise in risk premiums for American debt.

22:33So it may be that, and this is an important asterisk, so long as the debt is buying something productive, that you can issue much more of it than we thought. Brendan's interpretation, looking back, is that over time, America's view of its own national debt slowly shifted. The new logic went, maybe we could actually borrow more, like way more than we used to. And maybe paying it back matters less than we thought. So long as the world believed that we were spending money in a way that would make even more money, be productive, then why wouldn't everyone keep lending money to us at a low interest rate?

23:12and it kept working. People just bought American debt because it's a safe asset. And it turns out that as people were becoming wealthy all over the world, in particular oil producing countries, eventually China as well, you know, if you don't plan on spending that wealth domestically, you got to do something with it. Like it has to be in some form. And so the form it took was very often treasuries. So there turned out to be this seemingly inexhaustible demand for treasuries as a safe asset all over the world. So it turns out that one way of thinking of us right now is that we're the Saudi Arabia of money.

23:50Meaning what? Like they make all the oil, we make all the money? Yeah. To the rest of the world, treasuries are money, or at least until very recently. And so we have the luxury of producing as many of them as we care to. We just sort of kept on spending. We sort of quietly began selling more treasuries and then more treasuries and then more treasuries and more treasuries. So if you think of it as from sometime in the 80s until around now, while obviously there's exceptions and there's interruptions and we go through a recession, for the most part, America was a flush person who like Amex and Visa and Chase in the form of like Japan and China and lots of other countries and like American banks are all just like, please, please, please, we want to sell you credit.

24:33We want to take your debt. What are we spending all this money on? Like, what did we buy? Yeah, I think that's the most important question. So, you know, we could have decided we have this unbelievable ability to sell safe assets to the world. We're going to make sure that we have an incredibly well capitalized hospital system with endowments for every hospital, or we're going to, you know, run cable and then eventually broadband to every house in America. We're going to pay for electrical transmission lines so we can move energy across the country. We could have decided to pay for assets that are productive, that actually generate new income and therefore guarantee that we're going to be able to collect new taxes in the future.