Paying Our Debts

When you run headlong towards a cliff, even a fiscal cliff, you might want to consider turning around and taking a path other than the one that brought you barreling toward the cliff in the first place.  Just a thought.

“If the maintenance of public credit, then, be truly so important, the next enquiry which suggests itself is, by what means it is to be effected? The ready answer to which question is, by good faith, by a punctual performance of contracts. States, like individuals, who observe their engagements, are respected and trusted: while the reverse is the fate of those, who pursue an opposite conduct.

Whether the public debt, by a provision for it on true principles, shall be rendered a substitute for money; or whether, by being left as it is, or by being provided for in such a manner as will wound those principles, and destroy confidence, it shall be suffered to continue, as it is, a pernicious drain of our cash from the channels of productive industry.” ~ Alexander Hamilton, Report on Public Credit, 1790

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Ah, Alexander Hamilton, the first Secretary of the Treasury, the author of the new American government’s economic policies, founding father, and funder of the first national debt.  No really, this founding father actually advocated for the creation of the first national debt.  And he created the now defunct national Bank of the United States, as well as implementing the first true tax (on whiskey, of all things).  Just that and creating an entire economic framework for a country that had never had one before.  You know, small contributions to the formation of our nation (here’s to hoping you remember him).  In any event, this begs the question, why fund a national debt?  For Hamilton (and the founders), it was about establishing good credit for the fledgling nation (sure they could have just not paid any of the colonial war debts since the new United States wasn’t the same government, but that wouldn’t exactly motivate anyone to lend to the new nation ever again).   It was also about giving the new government a firm financial footing, and giving it the chance to establish a real national economy.  Powerful motivations to do something they knew would take work to pay off, but that they also knew they needed to do in order to make public credit and the American economy work.

This brings us to a fundamental difference between the attitude the generation of the founding fathers had to the national debt and the one our politicians have today.  50 years after assuming all the state and war debts (resulting in the first national debt), the federal government had paid the entire debt in full.  In all honesty, they would pay some debt down when the economy was healthy, and contract more in extreme situations, like the War of 1812, but eventually, they did actually pay it off.  And then the economy went sour a year later, and they had to contract a national debt once again.  The point is, they were always trying to actively pay down the debt.  They only added to the debt in very serious circumstances, or as Hamilton put it – “That exigencies are to be expected to occur, in the affairs of nations, in which there will be a necessity for borrowing.  That loans in times of public danger, especially from foreign war, are found an indispensable resource, even to the wealthiest of them.”  Basically, there are times when a national debt is necessary for any nation, but that time is not all the time.  Public credit only has value when we can be trusted to honor (and pay off) the contracts we have made.

Do we honestly believe that our politicians have managed to contract over 16 trillion in debt by operating under the founders’ premise that debt should only be taken on in extreme cases and only with the intention of paying it back as quickly as possible?  If you do believe that, I have an oceanfront property in Arizona to sell you.  Here is what the founding fathers weren’t whining about when they went to pay the first national debt- that sacrifices might have to be made to other programs or that revenue through taxes might need to be raised.  There wasn’t a question about whether one or both of those things might happen because it was obvious that both were needed to pay the debt.  The first Congresses took seriously the need to produce budgets that allowed for the government to run and the debt to be paid.  They didn’t need a fiscal cliff to motivate them or endless sessions to debate whether to leave or take things on and off the table.  They just did it.  Were the American people always happy about it?  Hell no.  Washington, as President, actually rode out with the army to put down a revolt started by the Whiskey Tax.  Some senators and representatives and even Presidents would lose their reelection bids based on the reactions of the people.  The founders believed in a long term vision and the ideal that serving ones country sometimes meant sacrificing ones ambition to the greater good.  But then, why would we expect that our elected officials might actually put the true needs of the nation first when they can instead stay in office by appeasing the masses in the short term?  Alas, Washington is dead, the man and the city both.

Res Publica

Documentation without Representation:

Papers of Alexander Hamilton, Report on Public Credit, 09 January 1790

http://press-pubs.uchicago.edu/founders/documents/a1_8_2s5.html

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