External and Internal Public Debt.

A new approach to the public debt arose from the budgetary implications of the great depression and the Keynesian revolution in economic thought. Central to this approach, which remains the current orthodoxy, is a fundamental conceptual distinction between internal and external debt. The internal debt is not burdenless because of the transfer difficulties, but aside from these it places no aggregate pressure on the economy. The fundamental error in accepted debt theory is methodological. It consists in a failure to define properly the alternatives subjected to comparison. A typical way of stating these alternatives is the following: if a given state or community could be confronted with two alternative situations identical in all respects save that in one an internal debt service charge is present while in the other such a charge is absent, the first is obviously to be preferred. The difference in the desirability of the two situations is widened if the debt is held externally rather than internally. It is equally clear that if a debtor community were to be faced with one of two alternative situations identical in all respects save that in one the public debt instruments are externally owned while in the other these instruments are domestically owned, the second of these alternatives is deemed preferable. On this simple logic the external debt would seem more burdensome on the community as a whole than the internal debt of like amount.