Debt and America’s Decline

MILAN – Italians and other Europeans have serious problems addressing their own national debts, public and private, so it may seem immodest for a European to discuss America’s growing and grave debt problem. But the fiscal realities on both sides of the Atlantic nowadays are very similar, and only lingering trust in the promise of America keeps alive the expectation among some Europeans that some grand American coup de théâtrewill resolve the country’s dire debt situation.

Of course, many Americans recognize the scale of the country’s debt burden. Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff and thus America’s highest ranking military officer, recently said, “The greatest danger to American security comes from the national debt.” Four Americans out of ten agree with him, whereas less than three in ten deem terrorism or Iran more dangerous.

America’s Great Power status has always been tied to its level of debt. Indeed, it was the absence of debt that marked the United States’ emergence as a world power between 1914 and 1917. The US went from owing $3 billion (mostly to Great Britain) to being a net creditor for about the same amount, thanks to $6 billion in war credits given to the Western Allies. A further $3 billion in credits for European post-war reconstruction cemented America’s status as the world’s premier creditor nation, with its surplus equal to roughly 8% of GNP at the time.

This shift meant that the US had essentially replaced Britain as the heart of the world’s financial and monetary system. Previously, thanks to the gold standard and Britain’s political stability, the City of London had been the world’s key source of capital and financial guarantees for more than a century.