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Debt is something owed. Anyone having borrowed money or goods from another owes a debt and is under obligation to return the goods or repay the money, usually with interest. For governments, the need to borrow in order to finance a deficit budget has led to the development of various forms of national debt, also known as public debt.[1]

Productive debt[]

The distinction between "productive" and "consumptive" debt is not always be clear and exact and, therefore, may give rise to much controversy, it is significant as to motive and effect. A debt incurred for productive purposes, e.g., a commercial or industrial investment designed to earn future incomes, may cover its interest costs and even yield entrepreneurial profits.

In contrast, new debt in the form of a second mortgage on a home may finance the purchase of a vacation home, new furniture or another automobile, or even a luxury cruise around the world. The debtor may call it "productive," but it surely does not create capital, i.e., build shops or factories or manufacture tools and dies that enhance the productivity of human labor. It actually may consume capital and thereby depress standards of living.[2]

Public debt[]

Main article: Public debt

In 1720s has the Prime Minister Sir Robert Walpole introduced the sinking fund, a funding system designed to pay down England's public debt. Taxes, which had before been laid on for limited periods, were rendered perpetual, and the fund should not be used for any other purpose. The government obtained a reduction on the interest of the public debt. The savings were added to the fund and it was for some time regularly applied to the discharge of debt. But soon, the principle of an inviolable sinking fund was abandoned. During the wars which were waged while it subsisted, the whole of its produce was applied to the expense of the war; and even in time of peace, large sums were abstracted from it for current services. The sinking fund has greatly increased debt instead of diminishing it.[3]

From then on, government debt never needed be repaid. It was enough to create a regular and dependable source of revenue and use it to pay the annual interest and the principal of maturing bonds. Then for every retired bond would be sold a new one. In this way, a national debt could be made perpetual. Walpole's system proved its worth in financing British overseas expansion and imperial wars in the eighteenth and nineteenth centuries. The government could now maintain a huge peacetime naval and military establishment, readily fund new wars, and need not retrench afterward. The British Empire was built on more than the blood of its soldiers and sailors; it was built on debt. The ever-growing debt had the ancillary benefit of attaching the interests of wealthy creditors to the government. This example was not lost on some leaders of the infant American Republic, Alexander Hamilton for one.[4]


  1. Encyclopædia Britannica. "debt", Encyclopædia Britannica Online, referenced 2010-06-05.
  2. Hans F. Sennholz. "Deep in Debt", The Free Market, Volume 24, Number 1, January 2004. Referenced 2010-06-06.
  3. David Ricardo. "Funding System An Article in the Supplement to the Fourth, Fifth and Sixth Edition of the Encyclopaedia Britannica 1820, Part of: The Works and Correspondence of David Ricardo, Vol. 4 Pamphlets and Papers 1815-1823; 11 vols (Sraffa ed.). Referenced 2010-06-24.
  4. H.A. Scott Trask. "Perpetual Debt: From the British Empire to the American Hegemon", Mises Daily, January 2004. Referenced 2010-06-24.

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