What is Government Bond (Federal Debt) ?
Every country needs money for its development in buildings, infrastructure and etc. However, they couldn’t just print their money absurdly. That would cause inflation, economic crisis… To get the money, a country can choose to distribute “Government Bond” as in debt form. Individuals or any financial organization can choose to buy this bond and get a certain amount of interest. This bond distributor is the federal government that has stable income recourses such as tax and so on. These make the bond has very high credibility, value and a low risk to be invested (unless the whole government is having a bankruptcy, the bond value will still be valid, which seems impossible).
Conclusion: The more government bond is distributed, the more debt one country is having.
The reason why the U.S. can be the strongest nation is intimately related to its debt. We can say that the whole history of the U.S. related to its debt. We can also say that there won’t be U.S. today if there is no federal debt.
At the end of the series, you will understand:
- How the U.S. built its nation through government debt?
- How government debt affects the first and second world war?
- How government debt shapes the world today?
- Why people said the U.S. does not decide to pay back all the debts?
American Revolutionary War starts from April 1775 until September 1783. As the war finished, all parties that borrow money to the U.S. for war purposes (war creditor) came to ask the U.S. to pay back the money. At that time, the federal government hasn’t be formed. Continental Congress was formed temporarily to solves the debt they borrow (usually from France and Netherland) around 75,000,000 USD (0.075 Billion). This amount is the same as the one-year government income of France at that time. Also, the U.S. main income sector is still plantation, it seems impossible for them to pay back the debt. We can say that the U.S. is a country that has big debt at the very beginning it reached independence.
1789 September 13, 34 years old Alexander Hamilton, (the person printed on 10 U.S. dollars now) was being asked to solve the government debt from American Revolutionary War. His first attempt was to collect money through tax. However, the amount of tax government collected at that time was so small compared to the debt. Inspired by the British, he chooses to distribute bonds in the name of the U.S. The bond is specifically sold to rich people at that time, which means he tried to ties the wealth of country and rich people together.
This idea gets the agreement of all the politicians from all states and the federal government at that time. Therefore, the parliament includes the rights of tax and bonds into the constitution of the country. At here, the main purpose of the tax is to clear out the debt, then to improve other sectors of the country. However, this main purpose is inverted in the future.
In 1790, the U.S. officially announce the amount of government of 71,000,000 USD (0.071 Billion), which is 38% of GDP. In the future, the comparison of the percentage of federal debt and GDP will directly affect the change of government policy in the U.S. This huge amount of debt successfully bought by those rich capitalists through government bonds. Now, both the U.S. and those rich capitalists are on the same boat. Therefore, we can also say that those capitalists are the ones who controlling the U.S. at the back.
Now, people will say. Isn’t China bought a lot of U.S. government bonds too? Let’s see. Until 2020 June 13th, the amount of bond China bought is around 1,080,000,000,000 USD (1080 Billion), placed 2nd largest buyer in the world. The percentage China bought is only consists of 4.1% of the total debt. The largest buyer of the debt is still the Federal Reserve System, which is 3,300,000,000,000 USD (3300 Billion).
This government bond system invented by Hamilton formed a new norm in the U.S. where their first option is to distribute government bonds instead of tax collection when having a shortage of money. This norm is totally inverted with the financial system of other countries. This is also related to the election of U.S. Their back is supported by those big capitalist and financial group. To win in elections, they have to gain support from people. To gain support from people, they choose to reduce the percentage of tax collection. Now, we have a problem. When tax is reduced, how they get the money to maintain the infrastructure and invest in the military. So, all of them put their target on a government bond. As long as they pay the interest on time to the buyer and maintain the credibility of the bond. The U.S. can keep on distributing the bond.
Let’s have a look at where the U.S. spends the money collected through the bond. At 1803, U.S. spent 15,000,000 (0.015 Billion) to buy Louisiana from Napoleon. This incident is known as the Louisiana Purchase. This money comes from the distribution of a 5% interest government bond into the European market.
Although the U.S. is still poor at that time, they understand that once the government bond distributed, they have to pay the interest no matter what to keep on the credibility. This is because once the U.S. doesn’t pay the interest on time, the credibility is lost. All the buyers will sell out the bond. This makes the distribution of government bonds in the future become impossible (there will be no buyer in the future since everyone wants to sell it). Therefore, the U.S. never broke their credit in paying interest in the past 200 years.
Get to know what happens next in Part 2.
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