by HENRY C. WALLICH Research Department, Federal Reserve Bank of New York
For the first time in our history we are faced with a national debt so large that, in all probability, we cannot count on being able to pay it off within any foreseeable period of time. Like it or not, the debt will be with us for a long while, and its magnitude is bound to make it an important factor in our economic life.
The effects of the debt upon the size and distribution of national income, with which this study will be concerned, are of several kinds. One of them is the slowing up of the income stream which is likely to result from the payment, from tax receipts, of large amounts of interest to debt holders who may respend only a small fraction of it. In the first section of this study an attempt will be made to measure this quantitative effect within rough limits. More important perhaps, though not quantitatively measurable, are certain changes in the psychological attitude of investors and consumers which may result from the increased tax burden on one hand and from the increase in holdings of Government securities and cash balances on the other. These will be taken up later on. Various other aspects, such as the unstabilizing influence of the debt under inflationary conditions, its restrictive effect upon the freedom of monetary policy, and certain problems raised by a further growth in the debt, are dealt with in other parts of this pamphlet.
An existing public debt, as later pages will show, is not exclusively a factor making for contraction of the economy. In some of its aspects, particularly because of the increasing liquidity and financial security which it gives to investors, it probably will prove to have stimulating effects upon new investment and consumption. In an extreme case, this stimulus may degenerate into dangerous inflation. Taken all in all, however, it is probably true that the large postwar debt will constitute a burden for the economy.
It is very important to note, however, that many of the effects flowing from the debt are not attributable specifically to its public character but would in some measure be produced also by the private creation of a