Recent editorials and columns have noted that Republicans can now focus on debating the debt ceiling to get more spending cuts and improve their 2012 electoral chances.
The Panics of 1893 and 1907, however, show how dangerous even the threat of U.S. Treasury bond defaults can be. J.P. Morgan and President Cleveland had to bail out the U.S. Treasury in 1895 with foreign gold. J.P. Morgan had to personally resolve the 1907 bank crisis while taking a (in today's dollars) 500 million dollar loss himself. While commended for saving the U:S. banking system and treasury, Morgan's actions created much more regulation and ultimately the Federal Reserve System in 1913.
Americans did not want the resolution of currency and banking crises "privatized", recognizing the danger of a few wealthy private citizens having too much power. It is somewhat ironic that J.P. Morgan's bank was, in the current crisis, the one to buy out other troubled banks though being in some trouble itself.
Personalizing the national debt, which is unquestionably too high, can also lead us astray on the debt ceiling issue. Unlike personal debt, the U.S. government doesn't get old or die and, if pushed into a corner, can print money to pay the debt off. This will cause inflation, but that is exactly how the U.S. government paid for the Revolutionary and Civil wars, with the latter giving us the "greenback" money we still have today. Now the government borrows instead of printing, meaning $3 trillion is needed for the Iraq war alone.
The U.S. government is doing much of its borrowing at extremely low cost, as a quick glance at the interest rate on your bank statement will show you. Indeed, the fear was so great in 2008-2009 that the U.S. government was able to borrow at negative real interest rates, meaning foreign and domestic borrowers were actually donating their money to the U.S. government just to have the privilege of a safe haven. If we can get foreigners to simply hand over money to our government, should we not welcome this?
The fear that if foreigners own too many of our government bonds they will somehow control us is misplaced. They want their money back and therefore need a vibrant U.S. economy so their interest and principle is returned. We should do nothing to discourage this belief. The panics and uncertainty of a century ago also resulted in another new law, The Revenue Act of 1913, which gave us a federal income tax.
Dr. Gregory Brock
Georgia Southern University