Debt: An Inescapable Concept Part 1: Social Debt

Debt is an inescapable concept. It is never a question of debt or no debt. It is always a question of which kind of debt, owed to whom, when.

We enter this world helpless. Our parents owe a debt to us when we are born. They have obligations to us. Every society operates in terms of this principle. Parents who refuse to care for their children are placed under social sanctions. They are encouraged to provide care for their children: positive sanctions. If they refuse, they are punished in one way or another: negative sanctions.

Humans are slow learners. It takes longer for humans to reach maturity as a percentage of their lifetimes than any other species. So, parenthood is a long-term commitment.

Prior to the longer lifespans produced under capitalism, one or more parents died of old age before all of their children reached maturity. Other family members would then step in and care for younger children, usually older siblings. Again, this was a debt relationship.

For parents who reached old age and became incapacitated, their hope lay in their children, usually their sons. The sons were expected to care for their aged parents. This was a form of debt repayment. The parents had honored their debt obligations while the children were young. But once the children reached maturity, they became debtors to their parents.

Conclusion: Families stick together. The nature of this bond rests on debt.

Human society is impossible without debt. We can learn a great deal about a society by examining its most pervasive forms of debt: who owes whom, for how long, under what terms, at what interest rate.


Marriage in the West begins with a public exchange of vows.

This is the familiar pre-nuptial agreement.

I take you to be my (wife/husband), to have and to hold from this day forward, for better or for worse, for richer, for poorer, in sickness and in health, to love and to cherish; from this day forward until death do us part.

It is specific in its details, yet very broad. It is permanent. It is public. It is administered under the authority of an institution, either church or state or both. It would be difficult to devise a legally enforceable contract that is broader in scope in so short a form.

We live in an era in which the rich party in a marriage agreement insists on a longer pre-nuptial agreement, drawn up by a lawyer, signed in private, which limits the scope of the public vow. The marriage ceremony never refers to this debt-limitation contract, let alone requires both parties to recite it. If one of the parties is a celebrity, a tabloid newspaper may reprint brief sections of a leaked copy.

Marriage vows throughout history have been by far the most important form of social insurance. The vows establish legal responsibility for dealing with the vast majority of all crises that threaten individuals. These vows are an application of a foundational principle of production: the division of labor.

Two are better than one; because they have a good reward for their labour. For if they fall, the one will lift up his fellow: but woe to him that is alone when he falleth; for he hath not another to help him up. Again, if two lie together, then they have heat: but how can one be warm alone? (Ecclesiastes 4:9—11)

Without marriage vows, society could not exist. People are too ready to break contracts. But this contract goes beyond conventional business relationships. It is universal. A violation calls forth social pressures to see that the victim receives protection.

Until the twentieth century, most health insurance was provided by families. Home health care was family-provided health care. There have been hospitals for centuries in the West. The hospital was an invention of the West in the late medieval era. But hospitals have always served very few people.

By decentralizing health care to families, and by investing the family with socially enforceable responsibility for performance of this socially crucial service, every society has maintained broad-based health care programs. These services have not been administered by impersonal bureaucrats doing things by the book. They have been administered by close relatives who care deeply about the outcome of the treatment.

We can say the same about life insurance, fire insurance, and all other forms of insurance. Before mathematicians in the West discovered the law of large numbers and then built profit-seeking insurance companies by means of statistical formulas of risk, societies used families as the means of benefitting from the as-yet undiscovered science of risk-management.

Risk-management is a form of debt. People enter into voluntary agreements by which they make present payments, or agree to make future payments under specific conditions. They in turn become beneficiaries of others at a later date under specific conditions. Without debt, society could not exist.


The invention of insurance is one of the most important inventions of all time. It began in the late medieval era in the shipping industry. Investors guaranteed the outcome of individual voyages by receiving a fixed percentage of the profits of multiple voyages. By spreading the risk of a sunk or captured ship among many voyages, investors extended foreign trade.

Fire insurance began in the late 1600’s in England. Life insurance began in the same era. Families could pay a small premium to a company in order to receive a large settlement in the case of an unexpected catastrophic individual event. Insurance policies supplemented the care offered by families.

In the late nineteenth century, Otto von Bismarck, the chancellor of Prussia, was successful in promoting a state-subsidized old age retirement system. That model spread to the West. In 1935, the Social Security Act became law. The U.S. government became the insurer of workers’ old age. Initially, it was promoted as an old age supplemental program, but it soon became the public’s expectation for primary care.

We see here a shift from family responsibility to state responsibility. What every society had always seen as a responsibility of families, based on personal loyalty and mutual benefits, became a responsibility of taxpayers, based on loyalty to the state and impersonal administration by salaried bureaucrats. Old age care became depersonalized and bureaucratized. The element of personal responsibility began to recede in importance.

It is not random that the divorce rate in the West rose alongside the spread of state-funded insurance. When the benefits of an arrangement fall, commitment to the arrangement declines. The economic benefits associated with marriage were removed from the family and handed to the state. Dependence on the state replaces dependence on the family. The state allows individuals to “divorce” the state only by leaving its jurisdiction, which is expensive. In contrast, price-competitive no-fault family divorce is universal.

The debt relationship has been shifted from the family to the state. This has made old-age payments a matter of pressure group politics. The same process of depersonalization and bureaucratization began with Medicare in 1965.

Society has not done away with debt. It has merely shifted the locus of responsibility.


The vast extension of private debt in the United States has paralleled the extension of state-insured debt. State-insured debt, unlike family debt and private debt, is unfunded. No capital has been created that can pay off debt through productivity. There is no unfunded debt on earth larger than Social Security/Medicare, which is now in the range of $70 trillion.

The state has substituted promises to pay for capital to pay. “Let them eat promises” is the underlying lie of all state-funded insurance contracts. The state extracts present purchasing power — which could have funded capital creation — and issues IOU’s based on future state revenues. These future revenues are not guaranteed, for there is no agency capable of guaranteeing them. They must be collected: through (1) taxes, (2) issuing IOU’s, and (3) money created by the central bank.

We have therefore witnessed a massive creation of unfunded debt in the West. The magnitude of this unfunded liability is so large that the end is sure: default. The only question is the form this default will take.

I began with a statement: “Debt is an inescapable concept.” To this, I now add a corollary: “Default is an inescapable concept.”

By shifting the inescapable debt obligations of families to the state, voters have undermined their safety in the name of increasing their safety. They sought supplemental protection from the burdens of old age. They imagined that by voting themselves safety through coercion, they could increase their safety. But the opposite is now inescapable: increased risk because of inescapable default. This default will come in people’s old age, when they are least able to defend themselves. It has come at the expense of family-owned capital or insurance company-owned capital that could have supported oldsters through production.


For those taxpayers who understand the low discounted present value of a long-term government promise, the cost of purchasing safety has risen. They must find ways to purchase future security with after-tax income.

The general public does not understand that a great default is coming. This is why the American household savings rate has fallen to zero in recent years and has even gone negative in some periods: the sale of assets to fund consumption. What had been promised in 1935 as a supplemental program for old age security has become the primary source of most Americans’ security. But the system is statistically unsound.

On March 4, 2007, the Comptroller General of the United States government, David Walker, appeared on “60 Minutes.” He is the government’s senior accountant. His message is grim.

Walker says we have promised almost unlimited health care to senior citizens who never see the bills, and the government already is borrowing money to pay them. He says the system is unsustainable.

“It’s the number one fiscal challenge for the federal government, it’s the number one fiscal challenge for state governments and it’s the number one competitive challenge for American business. We’re gonna have to dramatically and fundamentally reform our health care system in installments over the next 20 years,” Walker tells Kroft.

And if we don’t?

“And if we don’t, it could bankrupt America. . . .”

We are watching a slow-motion train crash. Most voters know nothing of this. A minority nod their heads: “We understand.” But they don’t understand. Their thrift habits reveal the degree to which they don’t understand.


The easiest way for any national government to conceal the looming default is through inflation. It will sell its debt to its central bank, which will create money out of nothing to purchase these debt certificates. Then the government will spend the newly created money. Prices will rise.

This will raise the cost-of-living escalator in the Social Security payments. This will in turn raise payments. But the budget-killing program is Medicare, says Walker: five times the burden of Social Security. With inflation, hospitals will feel the pinch. They will face rising prices. They will not receive comparable rising payments from the government. The result will be rationed medical care, just as we find in every system of socialized medicine.

I look at the future and see a falling dollar. What can you buy with a falling dollar? Less.

One strategy I have adopted to defend myself is to buy a home with a fixed-rate mortgage. I will pay off this debt with depreciating dollars.

I will begin drawing Social Security in a few months. I will buy a larger home when the payments begin. I want the income from Social Security to pay off my mortgage. Because the mortgage is fixed-rate, I lock in the monthly payment. This lets me find something useful to do with the depreciating value of the dollars I will receive from the government. I can deduct the mortgage interest payment from my gross income. Given the fact that I am still in the labor market, I can use this deduction.

Without the promise of Social Security income, it would not make financial sense for a man age 65 to buy a home with a 30-year mortgage. But it does make sense in a nation in which the Federal government’s bankruptcy is statistically guaranteed, and in which the easiest way to default is through inflation.

Default through inflation will affect all forms of long-term fixed interest debt. Thus default will not be confined to the United States government and its bonds.


If you believe that my analysis of social debt is accurate, you should take active and costly steps to reduce your dependence on political promises.

You should take steps to generate a stream of future income that will increase with the fall in the dollar’s value.

You should take steps to increase your health, because health-care rationing is a sure thing. You don’t want to wait at age 75 or 80 for a life-changing operation in a world of health-care rationing. The rationers will say, “Too old.” You will not get to the front of the line.

Debt is inescapable. The question is this: Who owes you what, under which conditions? Find out now, before the debt comes due. Default is your enemy.

May14, 2007

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 19-volume series, An Economic Commentary on the Bible.

Copyright © 2007