Government debt levels in the United States, the European Union and in Japan are at all time historic highs.  After decades of borrowing money to pay for regular annual expenditure and frequent military interventions the economies have been stretched too far by the collapse and subsequent bailouts needed to rescue the financial sector.  Working out what will happen next is a matter of great speculation, but history can provide us with some pointers about what could be done.  Two possible solutions are debt jubilees and hyper-inflation.

Much of the government debt accumulated over time will never be repaid and will be rolled over indefinitely.  However, interest on the debt does need to be repaid.  As governments become increasingly indebted, interest payments as a percentage of government expenditure will increase rapidly.  The US CBO expects that by 2025 US interest payments combined with the costs of Medicare, Medicaid and Social Security will be so large that they will theoretically consume 100% of all federal tax income receipts.

Clearly, this situation would make no sense and you could expect a general tax payer revolt long before this happened.  Citizens are highly unlikely to be willing to pay taxes if they got nothing in return: no schools, no roads, no hospitals, no national defense, no jails and no legal system.

Unfortunately, unlike other government expenditures, such as on defense, education and social security, interest payments need to be repaid.  If they are not, the government will default on its debts, making it harder to borrow more money and to roll over the debt that it already has.

So in a situation where it will be both impossible to pay the interest and impossible not to pay the interest, what will happen?  One answer is to artificially get rid of the debt.   Historically there have been two main ways to achieve this: debt jubilees and hyperinflation.

Debt Jubilee

What is a debt jubilee?  Babylonian kings occasionally issued one off decrees for the cancellation of debts and the release of slaves to their homelands.

The Book of Leviticus in the Bible describes a debt jubilee in Chapter 25:10 as follows:

This fiftieth year is sacred – it is a time of freedom and of celebration when everyone will receive back their original property, and slaves will return home to their families.”

As this was codified, it appears to be an enhancement of the Babylonian practice, which was more subject to the whims of a particular ruler.

The Romans had debt jubilees too.  For the Romans, indebtedness could result in persons selling themselves into slavery in order to pay down the debts.  On a debt jubilee their debts would be forgiven and they would be released from slavery.

What was important about debt jubilees is that they reset the clock on debts that had gone out of control.  This was clearly of great benefit to those who had been indebted and potentially enslaved in order to pay for their debts

Hyper inflation

Hyper inflation is also an ancient method of wiping out accumulated debts and resetting the economic clock.  The Romans started to debase their currency during the crisis of the third century AD.  Gold and silver coins would be issued that had higher and higher percentages of base metals.

This practice caused huge problems to trade. After many years of failed attempts to halt the debasement of the Roman currency the Emperor Diocletian issued an Edict on Maximum Prices (Edictum de pretiis rerum venalium).  The edict stamped down on currency debasement and imposed a maximum price ceiling for over a thousand products and wages of specific trades.

These price controls were almost impossible to enforce and also created parallel black markets to facilitate trade.  By the time of his death, most of the price restrictions had been abandoned.

Hyper inflation became even easier with the introduction of paper currency.  Shifting money off the gold standard meant that there was no direct link between paper money and gold held on deposit.

One of the most famous cases of hyperinflation during recent times was that of the German Weimar Republic after World War One.  This crisis lasted three years, from June 1921 to January 1924 when a new currency, the Rentenmark, was introduced.

France had led the charge for Germany to pay massive war reparations as a punishment for the war, much to the dismay of John Maynard Keynes who explicitly warned that this would lead to economic collapse in Germany and a rise of extremist politics.

Unable to pay the reparations in gold and also pay for services to its citizens, the Weimar Republic printed an excess of bank notes, causing a massive crash in the value of the German Mark. By the 1st November 1923 one pound of bread cost 3 billion Marks, one pound of meat 36 billion Marks and one glass of beer 4 billion Marks.

Household wealth in the form of cash savings and bonds collapsed.  Ownership of hard assets helped to offset some of the chaos, but not sufficiently to stop the rise of Hitler’s National Socialist party.

Hyperinflation, defined as a monthly inflation rate of more than 50% per month, has occurred in many other countries during the 20th century.   Angola, Argentina, Armenia, Austria, Azerbaijan, Belarus, Bolivia, Bosnia, Brazil, Bulgaria, Chile, China, Estonia, france, Georgia, Germany, Greece, Hungary, Kazakhstan, Kyrgyzstan, Krajina, North Korea, Nicaragua, Peru, Philippines, Poland, Russia, Taiwan, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, Yugoslavia, Zaire and Zimbabwe to name but a few.

Hyperinflation works well at wiping out the value of domestically held government debt.  For example, if the UK government owed £100 billion in pound sterling denominated debt it could decide to cause artificial inflation so that say a £1.00 loaf of bread today cost £1,000,000.   This hyperinflation would make the £100 billion pound debt the equivalent of £1,000 in today’s money.

However, for countries in the Eurozone who cannot print their own money, it is almost impossible to inflate their way out of their debts.  If they were to exit the euro they could choose to inflate domestic debts in their national currency to minimise debt, but would still have to pay their euro denominated debt, which would be very painful.

Hyperinflation presents an especially interesting dilemma for the United States today.   The US has the ability to inflate their US denominated domestic debts into oblivion through the printing of massive quantities of money. As most of their foreign debt is also in US dollars, the act of inflating the US dollar would also wipe out US debts owed to foreigners.

There is a general view that this kind of currency manipulation is a bad thing and that the markets punish countries that are fiscally irresponsible. That may be true in the short term, but in the medium term the markets seem to be quite happy to continue lending money to countries that have previously seen both hyperinflation and those that have defaulted on their debts.

Countries that have emerged from periods of hyperinflation, and their currency has become more reflective of its true value, this can help to make their economies more cost effective and competitive than they were previously.

Advocating that a country deliberately go through a period of hyperinflation or to force a debt jubilee appears irresponsible. However, the alternative is arguably not only worse but impossible to achieve: a crushing debt burden on societies and the consequent loss of all services that were previously paid for by taxation.

For conservative Christians this represents a fascinating dilemma – debt jubilees are both fiscally irresponsible but also biblically sanctioned.

This is an important question.