Alexander Hamilton and the National Debt

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This country was blessed at its founding to have on the scene a member of the Founding Fathers, Alexander Hamilton, who was a financial genius.  His idea to have the Federal government adopt the Revolutionary War debts of the states in order to establish the credit of the new Federal government was a policy of genius.  At a stroke he restored the credit of the country as a whole, made certain the debt would be paid, made America attractive to foreign investors and laid the basis of future American prosperity.  His ideas on the subject were set forth in his first report to Congress on  public credit, 1789, and which may be read here.

The final paragraph of the report is salient for the time in which we live:

Persuaded as the Secretary is, that the proper funding of the present debt, will render it a national blessing: Yet he is so far from acceding to the position, in the latitude in which it is sometimes laid down, that “public debts are public benefits,” a position inviting to prodigality, and liable to dangerous abuse,—that he ardently wishes to see it incorporated, as a fundamental maxim, in the system of public credit of the United States, that the creation of debt should always be accompanied with the means of extinguishment. This he regards as the true secret for rendering public credit immortal. And he presumes, that it is difficult to conceive a situation, in which there may not be an adherence to the maxim. At least he feels an unfeigned solicitude, that this may be attempted by the United States, and that they may commence their measures for the establishment of credit, with the observance of it.

29 Responses to Alexander Hamilton and the National Debt

  • T. Shaw says:

    ” . . . the creation of debt should always be accompanied with the means of extinguishment.”

    Ah, there’s the rub. The US likely does not have the capacity to repay.

    Adults are trying to set up a means where, at least, the debt will not “eat us alive.”

    Demagogues are kicking the can down the road and cannot agree to cutting the Federal dollars they use to buy political power, er help the poor.

    The name of the president’s secret plan seems to be “demonize, lie, and polarize.”

    FYI: When a corporation applies for a commercial loan, the Board of Directors passes a resolution authorizing the corporation to incur the debt. The bank then looks at the corporation’s collateral, capacity to repay, character, credit, and capital. Then, decides whether or not to extend the loan. The BoD borrowing authority only says the corp. owners want the money. The credit decision is made on the numerous other general credit factors mentioned.

    The US is not a AAA credit, anyway.

  • Greg Mockeridge says:

    This scene portrays rather well the complexities of the balance between states rights and the need for a strong yet not overreaching central government.

    I find Jefferson’s support for the French Revolution so ironic in that it was so contrary to Jeffersonian sense of liberty, especially in regards to the right of the church to tend to its owninternal affairs. Jefferson, despite his views on institutionalized religion, was adamant in defending the rights of church bodies to tend to its own affairs and the need for them to influence political action.

    While I believe Washington was the greatest of the founders overall, I find John Adams the most endearing. He was at times impetuous and thin skinned, but could aspire to greatness despite.

  • “What do you suppose Hamilton would have said about whether we should raise the debt ceiling?”

    I rather suspect that he and many of the other Founding Fathers BA would wonder why the American people hadn’t long ago risen in revolt. What the Founding Fathers intended as the government of our new nation is not what we have now, and the Federal government bears an uncanny resemblance to the government of King George III, in many respects, as set forth in the Declaration of Independence. Governmental intrusion in the daily lives of the citizenry they would have regarded as shocking. Our expenditures and tax rates they would regard as obscene. The number of Federal criminal statutes they would regard as an engine of tyranny. In judging most aspects of modern American life, except for our technological advances, I suspect the views of the Founders would be pungently negative.

  • Alex Binder says:

    ” . . . the creation of debt should always be accompanied with the means of extinguishment.”

    Fortunately, we do have the means to extinguish our debts when those bonds come due. No matter the amount we take out, we have the means to extinguish them as we are the issuer of our own currency. And it’s not simply just printing money, its more accurately changing numbers in bank accounts. The debt is simply the amount of savings in dollars that the private sector holds. Bonds (or debts) are offered so that holders of dollars have an interest-earning option to their dollar holdings. It is a way that the government can keep inflation and interest rates from spiking by “forcing saving” when it needs to spend. Deficits are simply the amount of net injection of dollar reserves into the private sector.

    We cannot go bankrupt, unless we volunatrily declare it, as we are threatening to do.

    To say that our government is too big and should be reduced is one thing and is, I think, up for further debate and should be our polticians’ focus; but to say that we can have so much debt that it cannot be extinguished is simply a misunderstanding of how government finances work in a sovereign nation with its own currency.

    If you think differently, tell me how the government does not have the ability to pay its debt, and I will be glad to debate with you.

  • You are mistaken Alex. Too much conjuring money out of thin air and we all have monopoly money of no value. One can imagine the impact on the value of the dollar :

    http://www.ourfuture.org/blog-entry/2011072922/beyond-debt-ceiling-30-trillion-plan-ending-national-debt

    This type of printing endless paper money to pay for government has been tried twice in American history: The Continentals during the American Revolution and Confederate currency during the Civil War. It is beyond the power of any government to alter economic reality forever.

  • Alex Binder says:

    First of all, I wish you no ill-will or animosity of any kind. Nor do I inted to attack you as a person in any of my comments, so please do not read them in that way. I am just trying to promote truth (and its opposite, demote non-truths) and lively debate about achieving the common good.

    You are correct, we can all “conjure money out of thin air” the problem is its acceptability. The value of the dollar is dependent on its supply and its demand. Taxes are what create a demand for government money. I am not familiar with the continentals of the American Revolution, but I challenge your suggestion that the reason for the Confederacy’s inflation was “printing endless paper money.” In their case it came from their inability to tax their people, they had no reason to hold and accept it.

    What do you think gives money its value? It is no longer backed by gold or any other commodity. Even if it was it does not explain why we all hold and use US govt dollars. We hold them and use them because the government demands them in payment of taxes and if we refuse to pay those taxes, we face some kind of punishment.

    As for reality, there are many institutions who hold economic power and who alter our economic reality. The question is: should the government get involved and if so how? It seems clear you think it shouldn’t, I am merely pointing out that it can get involved without constraint of bankruptcy. I would rather debate what governemnt should do, and not what it supposedly can’t do.

    In regard to the article, I see no reason to retire all or any of our debt. I am more than okay with ignoring the debt constraint through seignorage, but would prefer a payroll tax holiday for both employers and employees so that we can boost demand and end the recession.

  • “What do you think gives money its value?”

    The goods and services produced by a population. That is why Zimbabwe can print trillion dollar bills and they will not receive a trillion dollars in goods in return.

    “In their case it came from their inability to tax their people, they had no reason to hold and accept it”

    Incorrect. The States of the Confederacy also issued state paper money as legal tender and that currency was wiped out by the same inflation that wiped out the Confederate currency. The South simply lacked the economic basis for the paper currency being issued. The North on the other hand had stunning success with the greenbacks issued during the war. The worthlessness of Confederate currency was replicated with the issuance of Continentals during the Revolution by the Continental Congress. Paper money is worthless paper unless a country has the economic strength to assure people that the nation backing it with its full faith and credit can prevent the money from collapsing in value.

  • T. Shaw says:

    “It ain’t what you don’t know that gets you in trouble. It’s what you know that ain’t so.” Will Rogers

    Whose portrait will be on the $10,000,000,000,000 Federal Reserve Note (or platinum or plutonium coin)? Saul Alinsky or Michelle Obama?

    Deficit/national debt problem solved.

    Brilliant!

  • j. christian says:

    We hold them and use them because the government demands them in payment of taxes and if we refuse to pay those taxes, we face some kind of punishment.

    An odd theory of money. The reason I hold dollars is because I’d rather make transactions in small paper notes than in chickens or shirts or martinis. You seem dismissive of the whole medium of exchange/unit of account/store of value definition of money. On what basis do you think seigniorage is not inflationary? Or perhaps you don’t see anything wrong with inflation?

  • Alex Binder says:

    I see I am not making much headway here, so I will defer to an expert on my views of money. I’m not a quack who thinks he knows everything, rather I am a Ph.D. student of economics who believes whole-heartedly in the modern money definition of money that has its roots in Chartalism.

    So if you are interested in my views of money I implore you to read a short and easy book Understanding Modern Money: The Key to Full Employment and Price Stability by L. Randall Wray or “What is Money” an article by A. Mitchell Innes.

    But I stand fully behind the explanation of hyper-inflation given above (by me), that it is more the inability of the government to tax (and therefore its inability to appropriate REAL resources towards it uses, like wars, infrastructure, etc.) rather than its printing of money willy-nilly without it being properly backed by real goods. If it wants to appropriate real resources to itself by printing and issuing its own money it has to be able to enforce a tax in that money. Otherwise, yes, printing money will lead to Zimbabwe, the Confederacy, or the Weimar Republic.

    And as I retreat, I still don’t think you’ve given me an answer why people demand government money. Why hold government dollars instead of your own money? What makes them so special? I contend it has to do with taxes and enforceable contracts, you say its because it is an easier medium of exchange?

  • T. Shaw says:

    Pacem. A. Binder: Good for you.

    I’m a mere conservative, tea party hobbit who is constantly enthralled by academics’ and politicians’ detachments from both reality and virtue.

    Only thing that will save the US is stable, strong economic growth.

    The US debt was 117% of GDP at end of WWII. Since, the debt was never paid down. The economy/GDP growth far outpaced debt growth. That reversed in the 1960′s and 1980′s and 2000′s. Spending has expanded at higher rates than both taxes revenues and GDP growth and development. Federal spending was $2 trillion when Clinton left in 2000. It was $3 trillion when Bush left in 2009. It is $4 trillion in 2011. And, will rise each year if the GOP doesn’t stop it.

    There is one rational (completely absent from DCcrats) argument that might support this huge, deathly debt. I have not heard it.

  • Stephanie Kelton says:

    Alex is right. The ISSUER of the currency “cannot become insolvent with respect to obligations denominated in that currency” — a quote from Alan Greenspan, who ought to know! As Ben Bernanke affirmed: the government spends by marking up balances in others’s accounts. It taxes by marking them down. A deficit means a net addition to the non-government sector’s holdings of financial assets. So-called “fiscal responsibility” misses this point completely. Notice that the private sector is now running massive surpluses. Why is that? Anyone who understands balance sheet accounting knows that it is because the government’s deficits have been large enough too push the print sector back into surplus … Where is belongs.

    And it is sheer folly to suggest that the US has “never paid down the debt”. Anytime the government runs a surplus (as under Clinton”) debt is retired (rather than rolled over). And how did that work out for the economy? The Clinton surpluses 1997-2001 were the longest on record since the 1927-1930 surpluses? Coincidence.

    Stephanie Kelton

  • Why is that? Anyone who understands balance sheet accounting knows that it is because the government’s deficits have been large enough too push the print sector back into surplus … Where is belongs.

    Though to the extent that the private sector surplus is representative of people needing pay down excessive debts they’ve built up, or socking away extra savings because they fear more economic instability in the near future, the private sector running at a “surplus” is not necessarily a healthy sign.

    And it is sheer folly to suggest that the US has “never paid down the debt”. Anytime the government runs a surplus (as under Clinton”) debt is retired (rather than rolled over).

    Well, it’s never paid off all the debt. There have been times when the government has run a surplus, thus decreasing the total amount of debt, but there’s certainly never been a period when the US hasn’t had debt. (Not that I would advocate that.)

    And how did that work out for the economy? The Clinton surpluses 1997-2001 were the longest on record since the 1927-1930 surpluses? Coincidence.

    Frankly, I think this is one of the weaker MMT claims, at least if it’s meant to be cause and effect. It seems really hard to argue that the late ’20s stock bubble or the DotCom era stock bubble were caused by the government running a surplus — though perhaps one could argue that part of the reason for the surplus was that the economy was booming and thus the government receipts were growing faster than its expenses (the which booming turned out to be leading up to a bust.)

    Plus, the 27-30 period was entirely different in that back then the US was on the gold standard — we didn’t have a fiat currency.

  • Alex Binder says:

    Darwin–

    Hello again.

    I think you make a good point about private sector surplus. It certainly does matter who takes in that surplus and how they use it. Because of the private sector debt run up prior to the crisis and the subsequent crash, people are needing to pay down large amounts of debt. They desire a larger surplus–more savings. I think it’s important to give it to those most in need through programs like medicaid, TANF, etc., but I also advocate a payroll tax holiday until demand picks up. People will pay down their debt and eventually start spending, and this may mean larger deficits, but demand-pull inflation won’t be an issue as long as their are so many idle resources. So we need more of a surplus in the right hands to see it as a healthy sign.

    About the ‘surpluses lead to recession’…a booming economy certainly can lead to a government surplus of its own accord through increases in revenue. The argument, though, is that gov’t surpluses take away from the private sector who will almost always prefer to take in net savings or a net surplus. So govt surpluses take away the desired savings of the private sector. They also reduce the total income of the private sector. People often will desire to consume at a minimum level that maintains the standard of living they are used to and often times they desire to consume more than that to “keep up with the Joneses”. If the gov’t surplus takes away income and savings from the private sector, when the private sector is trying to increase it, the private sector will respond by taking on more debt to keep up their consumption patterns which is partly what drives a bubble. So I do think, through this reasoning, there is some cause and effect–govt surplus leads to recession.

    Also, MMT is still applicapable to gold standard regimes, the implications are what change.

  • Blackadder says:

    The argument, though, is that gov’t surpluses take away from the private sector who will almost always prefer to take in net savings or a net surplus. So govt surpluses take away the desired savings of the private sector.

    I think you are overlooking the role the Federal Reserves plays in a fiat system.

  • Blackadder says:

    In case my last comment was too obscure, the problem with the argument is that it (implicitly) assumes the Fed does not alter its policy based on what the government is doing. That is an implausible assumption for modern fiat based monetary systems. If government starts sucking more money out of the economy via taxes than it puts in through government spending, for example, that will exert a downward pressure on inflation. If the Fed is targeting inflation, however, it will respond to this pressure by loosening its own policy a corresponding amount, and the net effect overall will be approximately zero. A similar line of reasoning applies if the Fed is targeting interest rates, NGDP, etc.

  • DarwinCatholic said:

    “Well, it’s never paid off all the debt. There have been times when the government has run a surplus, thus decreasing the total amount of debt, but there’s certainly never been a period when the US hasn’t had debt. (Not that I would advocate that.)
    with one brief exception the federal government has been in debt every year since 1776.”

    Again, not so.

    From http://www.levyinstitute.org/pubs/ppb_111.pdf

    “For the first and only time in U.S. history, the public debt was retired in January 1835 and a budget surplus maintained for the next two years, in order to accu- mulate what President Jackson’s Treasury secretary, Levi Woodbury, called “a fund to meet future deficits.” In 1837, the economy collapsed into a deep depression and drove the budget into deficit, and the federal government has been in debt ever since.

    There have been seven periods of substantial budget sur- pluses and debt reductions since 1776. The national debt fell by 29 percent from 1817 to 1821, and was eliminated in 1835 (under President Jackson); it fell by 59 percent from 1852 to 1857, by 27 percent from 1867 to 1873, by more than 50 percent from 1880 to 1893, and by about a third from 1920 to 1930. Of course, the last time we ran a budget surplus was during President Clinton’s second term.”

  • Alex Binder says:

    Blackadder,

    You make a good point, thank you for clarifying. I do not think I overlooked the Fed, however. I believe that the Fed, or monetary policy in general, has less control over inflation than fiscal policy. The Fed primarily targets over night interest rates, or the price of money, which affect the quantity of money much less directly. Monetary policy has more to do with interest rate management than inflation management. The purpose of the Fed’s actions, as long as they are targeting overnight interest rates, is to avoid undue impacts on reserves from Treasury actions, in order to maintain interest rates at target levels.

    The only exogenous variable they set is the overnight rate, which I believe has very little impact on how much banks loan out to borrowers and therefore on the quantity of money (note that despite very low rates at the moment there is very little borrowing because there is no demand for loans because there is no demand for the goods and services those loans would provide), and the rest of their actions are defensive, that is, meant to maintain the rate they set.

    If I didn’t explain myself well enough I direct you to Understanding Modern Money by L. Randall Wray, particularly Chapter 5. Or perhaps this post regarding inflation and an alternative theory of prices will suffice: http://neweconomicperspectives.blogspot.com/2011/07/two-theories-of-prices.html

  • Blackadder says:

    I believe that the Fed, or monetary policy in general, has less control over inflation than fiscal policy.

    In 1980 the inflation rate in the United States was 13.5%. In 1983 it was 3.2% (I could cite dozens of other similar cases, but let’s look at this one). This coincided with aggressive action by the Fed to get inflation down. It did not coincide with any significant contractionary fiscal policy. On the contrary, the federal government cut taxes during this period while simultaneously increasing spending.

    If you think monetary policy doesn’t have much effect on inflation, how do you explain the fall in inflation rates from 1980-83?

  • Mike Petrik says:

    The idea that fiscal policy has a greater influence on inflation than monetary policy is pretty unorthodox. In any case, I think the evidence, as well as mainstream economic thinking, supports Blackladder’s assertions.

  • Alex Binder says:

    Blackadder,

    First, I’m not sure what you mean by “aggressive action.” Volcker tried targetting monetary aggregates for the first time ever from 1979 – 1982 to control inflation and it didn’t go so well, meaning he didnt (couldnt) hit his targets.

    Second, I think that contractionary monetary policy can have an effect on inflation through its effect on aggregate demand. If pushing interest rates up (which is what happened when the Fed let the FFR float in its attempt to target reserves) causes demand to fall, then inflation will fall accordingly.

    Third, I think that people calling his actions a success is a mistake. He did lower inflation through contractionary monetary policy, but in the process helped bring about a painful recession. Under my policy proposals, that wouldn’t have to happen for inflation to be reduced.

    My contention is that inflation is affected more by aggregate demand and aggregate supply and less by monetary policy. Monetary policy can certainly have an effect on inflation if it’s policies have an effect on aggregate demand or aggregate supply.

    As it says in the link I posted:
    “Thus, overall, there are two sources of inflation in this approach, a cost-push source (here summarized by the unit labor cost) and a demand-pull source (here summarized by the aggregate demand gap). Note that the money supply is absent from this equation. Money does not directly affect prices.”

  • Alex Binder says:

    Mike,

    I believe that fiscal policy has a greater effect on aggregate demand and therefore on prices and inflation than does monetary policy. I’m not sure what evidence you are referring to or how much economics you have had. I’m quite aware my views are unorthodox as are my Catholic Social Teaching views on economics in general.

    I realize that I have a major uphill battle against the mainstream, but I am choosing to debate others and defend/promote my views in any way I can for the common good of all people. I truly believe that this is right and that understanding it will help us achieve greater economic propserity and stability and thus enable us to focus on a more equitable and just distribution of wealth as well as on social issues that deserve our attention more so than bad economics such as abortion, death penalty, etc.

    I did not come up with these ideas on my own and encourage you to look into it for yourself so that you can decide what you think is right/wrong rather than just trusting the mainstream and the talking heads on television.

    I do not wish to persuade anyone, but rather to help them come to the right conclusions themselves for I, too, was once a mainstream thinker before I pursued the topics further.

    If you want to know more, visit my blog: Christian Economics where you can find in my opinion a wealth of resources on Catholic Social Teaching and heterodox views of economics including the ones I mention in my comments.

  • Blackadder says:

    My contention is that inflation is affected more by aggregate demand and aggregate supply and less by monetary policy.

    This is kind of like saying ‘I believe that deaths from gunshot wounds are caused less by bullets than they are by a lack of oxygen to the brain.’ Both monetary and fiscal policy operate through certain mechanisms. The question, though, was which of the two was more powerful.

    Suppose you have a monetary authority (the Fed) that wants to increase aggregate demand and a fiscal authority (Congress) that wants to decrease it. Who wins? The fiscal authority controls around a quarter of GDP. The monetary authority controls the money supply. The fiscal authority acts infrequently and with a fair amount of notice as to what they will do. The monetary authority is constantly adjusting its activities to meet its objectives. The fiscal authority is made up of people most of whom have little to no idea how the monetary authority works or whether it might be pursuing a contrary policy. The monetary authority is very aware of what the fiscal authority is doing and how it may affect its own goals.

    It’s not even a close call.

    I think that people calling his actions a success is a mistake. He did lower inflation through contractionary monetary policy, but in the process helped bring about a painful recession. Under my policy proposals, that wouldn’t have to happen for inflation to be reduced.

    What is the policy proposal you would have suggested to bring down inflation without a recession?

  • Alex Binder says:

    Right, I contend that fiscal is more powerful. I also contend that the monetary authority doesn’t control the money supply (that’s perhaps my main point).

    I agree with your statements starting “The fiscal authority acts infrequently…how it may affect its own goals.” I still think that whether congress knows it or not their policies have more affect on our economy (and money supply) than monetary policy.

    I’m not sure what you’re saying is not a close call. Monetary authorities being aware of their policies and fiscal authorities unaware does not make monetary policy more powerful.

    The policy I suggest (but to be clear its not my own idea; I didn’t come up with it) for both full employment and price stability is a buffer stock job guarantee program. To explain the policy would take a lot of time and I am currently working on such paper incorporating CST principles and will also be engaging in debate with DarwinCatholic over the policy in the near future. But if you’d rather not wait you can read all about it in Understanding Modern Money: The key to full employment and price stability by L. Randall Wray. Wray is a very learned economist and the greatest pupil of the late great Hyman Minsky. You can purchase the short, easy to read, and relatively cheap book at Amazon.

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