Those Bonded Buy Bonds
January 24, 2011Posted by on
An article by Frank Chodorov with the title Don’t buy Government Bonds is republished by the Ludwig Von Mises Institute. The following is an abridged version of that article, the original having appeared in Out of Step: The Autobiography of an Individualist (1962), which was a collection of essays and the last of Frank Chodorov’s books published during his lifetime. You may, or may not, be relaxed about the Government issuing bonds, as may be your attitude to the issue of Eurobonds. In the latter case it is your government that is buying Eurobonds on your behalf and if you are a taxpayer you are bonded to buy these bonds.
While Chodorov was writing specifically about the US National Debt and advising against the purchase of US Government bonds, his hypothesis is as relevant today and applicable to all government bonds and those states that issue them. Chodorov states that: –
The advice is based on purely moral, not fiscal, grounds. I could point out that when the government issues a bond it is diluting the value of all the money in existence. Every bond is, in effect, money even though it may not enter the market place as money; it does not become monetized for some time. That is, every bond issued by the government is inflationary, and thus robs the savers of the value of their savings. That, of course, is a swindle and is immoral. But, the immorality of bonds runs much deeper.
When the State spends more money than it receives in taxes — a fact indelibly written into the bond — it is deliberately committing an act of bankruptcy. The use of the word investment in connection with a bond issued by the State is a treacherous euphemism. When you buy an industrial bond you lend your money to a corporation so that it can buy a machine with which to increase its output of things wanted by the market. The interest paid you is part of the increased production made possible by your loan. That is an investment. The State does not put your money into production. The State spends it — that is all the State is capable of doing — and your savings disappear. The interest you get comes out of the tax fund, to which you contribute your share, and your share is increased by the cost of servicing your bond. In effect, you are paying yourself.
When the promissory paper of a small nation is held by a powerful one, the economy of the defaulting State is impounded until the debt is liquidated, and sometimes for a longer period. Internal debts, on the other hand, are never liquidated. Since honesty and politics are contradictory terms, the State’s standard method of meeting its debt obligations is inflation. It pays off with engraved paper. To be sure, even as it issues its new IOUs to pay off its defaulted ones, the inflationary process is on. The bond you buy increases the circulatory medium (money), thus depressing its value, and you are really exchanging good money for bad.
An MP3 audio file of this article, read by Steven Ng, is available for download.