Hamilton and the Fiscal Cliff

On Friday, Scott Bomboy at Constitution Daily published an interesting piece on how Alexander Hamilton would view the debt ceiling.  He generally describes the financial crisis that Hamilton faced when he took over the Treasury Department and how he accomplished his almost impossible mission to pull the new republic out of financial oblivion, create a national debt, and ensure that the new nation develop good credit.

Bomboy describes the odds stacked against Hamilton and America’s economic success:

In 1789, when President Washington took office, the United States was broke; it had about $75 million to $80 million in public debt; and it wasn’t in a position to trade well in a global economy.

The United States’ economic problems after the Revolution were a direct impetus to call the Constitutional Convention of 1787, where delegates from 12 states met in Philadelphia to overhaul the Articles of Confederation and give the new nation a sound political and economic footing.

In addition, Hamilton single-handedly faced two powerful political opponents from Virginia who were opposed to his policies: future presidents Thomas Jefferson and James Madison.

So in comparison to the current financial situation in Washington, Hamilton seems to have been in a much tougher spot in 1789.

Hamilton’s approach to fixing these epic problems was that the government of the United States had to possess excellent credit, before anything else could happen. Getting there would be a monumental task, since the nation had virtually no credit in 1789, despite its abundant resources.

Simon Johnson and James Kwak published an interesting analysis of Hamilton’s success and how it compared to the debt ceiling debate in the Vanity Fair article Debt and Dumb

In just five years, Hamilton—with Washington’s support—had laid the foundation of American fiscal policy. The federal government would always honor its debt. After the War of 1812, the Civil War, World War I, and World War II, this principle remained unquestioned. By the late 19th century, the government could raise large amounts of money on short notice—which made possible, among other things, rapid mobilizations to fight two World Wars.

Government bonds also became a crucial part of the financial system—the paradigmatic global risk-free asset, the universally accepted collateral on which everything else depends. What makes those bonds as good as cash is that the federal government has the power to levy and collect taxes in order to pay them off.

Hamilton’s scheme has succeeded at a scale unimaginable in 1790. Elsewhere, we have questioned Hamilton’s affection for large, powerful banks, but his contribution to American fiscal policy is undisputed. The good credit of the federal government has allowed us to amass trillions of dollars of debt, run the largest peacetime deficits in history, and still borrow money at historically low interest rates. But that has not made everyone happy.

Several authors have recently written about Hamilton and the debt ceiling, including the New York Times

Here are some of Hamilton’s words in Federalist No. 30, about the need for a country to demonstrate that it could credibly return loans:

In the modern system of war, nations the most wealthy are obliged to have recourse to large loans. A country so little opulent as ours must feel this necessity in a much stronger degree. But who would lend to a government that prefaced its overtures for borrowing by an act which demonstrated that no reliance could be placed on the steadiness of its measures for paying? The loans it might be able to procure would be as limited in their extent as burdensome in their conditions. They would be made upon the same principles that usurers commonly lend to bankrupt and fraudulent debtors, with a sparing hand and at enormous premiums.

At the same time, Hamilton was a firm believer that we needed some form of a national debt in order to grow as a nation, as he stated in his April 30, 1781 letter to James Duane.

A national debt, if it is not excessive, will be to us a national blessing. It will be a powerful cement of our Union. It will also create a necessity for keeping up taxation to a degree which, without being oppressive, will be a spur to industry, remote as we are from Europe, and shall be from danger. It were otherwise to be feared our popular maxims would incline us to too great parsimony and indulgence. We labor less now than any civilized nation of Europe; and a habit of labor in the people is as essential to the health and vigor of their minds and bodies, as it is conducive to the welfare of the state. We ought not to suffer our self-love to deceive us in a comparison upon these points.

All Things Hamilton has a more comprehensive list of Hamilton’s quotes on the national debt.  I feel that the issue is a key one for our time, but is also one in which interpretation of Hamiltonian philosophy can take us in different directions.

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