Articles of Confederation

Hamilton and the Fiscal Cliff

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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.

Hamilton and the Filibuster

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Changing the rules of the filibuster has again come front and center, with various prominent Democratic senators calling for a change in the Senate procedural rules to make it more difficult for Senators to invoke the filibuster. Of course, the filibuster as we know it today, was not part of the structure of the early constitutional government. However, some of Hamilton’s work seems to anticipate the current use of the filibuster as a purely partisan tool to increase gridlock. In Federalist No. 22, Hamilton addressed what he saw as a fundamental problem of the government under the Articles of Confederation- that smaller states had the ability to block legislation.

But this is not all: what at first sight may seem a remedy, is, in reality, a poison. To give a minority a negative upon the majority (which is always the case where more than a majority is requisite to a decision), is, in its tendency, to subject the sense of the greater number to that of the lesser. Congress, from the nonattendance of a few States, have been frequently in the situation of a Polish diet, where a single veto has been sufficient to put a stop to all their movements. A sixtieth part of the Union, which is about the proportion of Delaware and Rhode Island, has several times been able to oppose an entire bar to its operations. This is one of those refinements which, in practice, has an effect the reverse of what is expected from it in theory. The necessity of unanimity in public bodies, or of something approaching towards it, has been founded upon a supposition that it would contribute to security. But its real operation is to embarrass the administration, to destroy the energy of the government, and to substitute the pleasure, caprice, or artifices of an insignificant, turbulent, or corrupt junto, to the regular deliberations and decisions of a respectable majority. In those emergencies of a nation, in which the goodness or badness, the weakness or strength of its government, is of the greatest importance, there is commonly a necessity for action. The public business must, in some way or other, go forward. If a pertinacious minority can control the opinion of a majority, respecting the best mode of conducting it, the majority, in order that something may be done, must conform to the views of the minority; and thus the sense of the smaller number will overrule that of the greater, and give a tone to the national proceedings. Hence, tedious delays; continual negotiation and intrigue; contemptible compromises of the public good. And yet, in such a system, it is even happy when such compromises can take place: for upon some occasions things will not admit of accommodation; and then the measures of government must be injuriously suspended, or fatally defeated. It is often, by the impracticability of obtaining the concurrence of the necessary number of votes, kept in a state of inaction. Its situation must always savor of weakness, sometimes border upon anarchy.

It is not difficult to discover, that a principle of this kind gives greater scope to foreign corruption, as well as to domestic faction, than that which permits the sense of the majority to decide; though the contrary of this has been presumed. The mistake has proceeded from not attending with due care to the mischiefs that may be occasioned by obstructing the progress of government at certain critical seasons. When the concurrence of a large number is required by the Constitution to the doing of any national act, we are apt to rest satisfied that all is safe, because nothing improper will be likely to be done, but we forget how much good may be prevented, and how much ill may be produced, by the power of hindering the doing what may be necessary, and of keeping affairs in the same unfavorable posture in which they may happen to stand at particular periods.

Hamilton was a dedicated supporter of protecting minority rights, even when his causes were deeply unpopular, as with his protection of Tories after the Revolution. However, he understood that a system that essentially gave a small fraction of the population the ability to block important decisions was unsustainable. Abuse of the filibuster by either party to gridlock government reduces our system to “a state of inaction” that Hamilton warned was unsustainable.

And, if you needed more reasons to dislike the filibuster…Aaron Burr laid the foundations for it before it became part of Senate strategy in the 1830s and 1840s.

For further reading on Hamilton and the filibuster, check out Hendrik Hertzberg’s 2011 piece in the New Yorker.