Boombastic
Essay by review • March 12, 2011 • Essay • 1,194 Words (5 Pages) • 1,229 Views
Or public debt, the sum total of a government's pecuniary obligations. The national debt is the result of a state's borrowing from its population, from foreign governments, or from international institutions such as the International Bank for Reconstruction and Development. Public debts tend to be large-scale credit operations and are contracted on a national scale by central governments and on a lesser scale by provincial, regional, district, and municipal administrative bodies. In the U.S., public debts are also contracted by the states and by local governments, primarily for public works.
Kinds of Debt
National public debts are contracted chiefly through the flotation of interest-paying loans, in the form of bonds, bills, or notes. Historically, these loans have been undertaken to raise money for wars and national defense and to finance public works. More recently, governments have taken loans to meet national budgets or expenditures that are not covered by revenue, or to seek to improve economic conditions by counteracting unemployment or depressions, or both, with deficit budgets. Not all financial authorities agree that nations should carry a high level of public debt, as it can be inflationary. Rather than the level of debt, however, the most important consideration is the capacity of a nation to service its debt.
Some long-term maturing debt is repaid by short-term borrowing that does not add materially to the total indebtedness. The redeeming of public debts includes the repayment of principal on maturity; amortization through periodic payment of part of the principal; and the buying up of government securities on the open market. Many governments have established sinking funds for the purpose of redeeming public debts; debts redeemed in this way are called funded debts. Most government loans fall due at fixed dates, but a number, known as perpetual loans, have no definite expiration dates, and governments floating them have the privilege of redeeming them when convenient or desirable.
Although government loans are for the most part not secured by physical assets, they are regarded in law as contracts carrying an obligation on the part of the debtor to repay. Nevertheless, governments, when hard-pressed during economic crises or as a result of political upheavals, have sometimes repudiated their public debts in whole or in part. In many cases, also, a government to whom another is in debt may agree to forgive the debt or reschedule its payment over a longer period.
History
In earlier times debts contracted by heads of state had the legal status of personal debt; public debt emerged as a systematic element in a country's economy when regular sources of income became available to provide funds to repay loans, a monetary system became fully formed, and an organized money market came into operation. The first examples of public debt surfaced in the late 17th century in Europe and became more prevalent with the rise of the modern state and the banking and credit system that grew out of the Industrial Revolution.
Today, the finances involved in contracting and redeeming the public debt of a country are a sizable proportion of its government budget. As the money for redemption of the public debt is raised principally through taxation, the size of the national debt is a factor in determining taxation rates.
National public debts, taken on a world scale, have almost without exception shown a tendency to increase. The estimated total public indebtedness of the world at the end of the 18th century was about $2.5 billion. During the 19th century, Great Britain was the only world power to reduce its national debt. In 1890 the world total of public indebtedness had risen to an estimated $27.5 billion, an increase in a little less than a century of more than 1000 percent. Thereafter the increase continued until the end of World War I, after which indebtedness declined. Following the onset of the worldwide economic crisis in 1929, public debts rose as governments resorted to public works to provide jobs for the unemployed. The outbreak of World War II caused national indebtedness to soar to astronomical proportions.
Beginning in the 1970s, inflation, high interest rates, and a tenfold rise in the price of oil contributed to the ever-increasing world debt. Developing nations borrowed heavily from international capital markets
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