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Alexander Hamilton and the public debt

I have not yet seen Lin-Manuel Miranda’s hit Broadway show Hamilton. I feel badly about this for three reasons. First, Miranda is a 2002 Wesleyan graduate, a loyal and generous alumnus who gave a great commencement speech in 2015 and remains solidly committed to the university. Second, the music and lyrics are, quite simply, amazing. Third, as an economic historian, it is heartening to see one of America’s economic heroes make it to Broadway. When Miranda presented a song from Hamilton at the White House in 2009 and said that the nation’s first Treasury secretary was the very embodiment of hip-hop, everyone laughed. No one is laughing now!

Although Hamilton’s personal life and death in a duel with Aaron Burr suggest that his judgement was not infallible, he was a brilliant thinker, a prolific writer, and a visionary economic policy maker. Hamilton’s influence upon American economic policy was so broad and deep that it is better captured in a book or scholarly article than a blog post. Nonetheless, it is worth discussing one element of Hamilton’s economic policy that is relevant to current-day policy makers—and a would-be policy maker named Donald Trump.

As odd as it may sound to the modern ear, one of Hamilton’s major achievements was being the father of the US public debt. When Hamilton became Treasury secretary in September 1789, the financial affairs of the United States were a mess. During the Revolution, the Continental Congress had no reliable way of raising money, so war expenditures were paid by issuing “Continental dollars.” Because the fiscal needs of the revolutionary government were great, too many of these dollars were issued and their value fell dramatically, which explains why the phrase “not worth a Continental” was commonly used to describe anything worthless.

Continental Currency 1/3-Dollar, Obverse by Benjamin Franklin (1706-1790). Public domain via Wikimedia Commons.
Continental Currency 1/3-Dollar, Obverse by Benjamin Franklin (1706-1790). Public domain via Wikimedia Commons.

Under the Articles of Confederation, which governed the United States between the Revolution and the enactment of the Constitution, the federal government had no taxing authority, and so had to beg the states for funds. This turned out not to be a particularly effective means of raising money, since the states were also heavily indebted and were often reluctant to contribute. Hence, when Hamilton took office after the Constitution was enacted, both the states and the federal government were deeply in debt. Opinions differed as to what the new federal government should do to solve the impending debt crisis. Some argued that the new government should partially or completely repudiate the debt incurred by its predecessor, in other words, default. Others argued that the government should use its new taxing powers to pay off the debt as quickly as possible.

Hamilton’s First Report on Public Credit, transmitted to Congress in January 1790, argued instead that the federal government ought to expand its debt by assuming the outstanding obligations of the states, and that the government should service its debts (i.e., pay what it owed in interest and principal) promptly in order to build up its reputation, rather than aim to pay them off quickly. His reasons for this were straightforward and brilliantly articulated. He argued that in times of emergency the government would need to borrow; in times of war the need would be even greater. Given that the United States was a new country which could not count on the fortunes of a few rich people to provide funds when needed, he further argued that it was necessary to have a money-raising mechanism in place, so that when emergencies arose money could be raised quickly. Finally, he argued that for the government to be able to borrow money on good terms (i.e., at low interest rates), it must establish its creditworthiness by maintaining and servicing its national debt. Hamilton’s debt assumption plan, which was the subject of a great deal of opposition–and political horse-trading—received Congressional approval six months after it was proposed.

The US government’s debt has waxed and waned since Hamilton’s time.

hamilton figure grossman
US federal government debt as a percentage of gross domestic product by Richard Grossman. Used with permission,

When the Constitution was adopted, the federal government’s debt was equivalent to about 40% of the country’s gross domestic product (i.e., total economic output)—a level it would not again reach until the Great Depression. During World War II and following the eruption of the subprime financial crisis, the US government debt soared to unprecedented levels. Whatever one thinks of the size of the federal government’s debt—and I would argue that increasing the debt to fight World War II and the Great Recession was the height of responsible policy—it is clear that without the US’s capacity to borrow, addressing these existential military and economic perils would have been far more difficult.

Hamilton has been proven right by more than 200 years of history. The United States has an unmatched record of debt service and, as a result, is able to borrow more cheaply and in greater quantities than any other government on the face of the earth. This is why economists shuddered when in 2013 Senator Ted Cruz threatened to shut down the government and force a default if Obamacare was not repealed. Similarly, Donald Trump sent shivers through the financial community in May when he suggested that the United States might try to “renegotiate” its outstanding debt if the economy crashed.

The United States has built up an unparalleled reputation as a debtor, thanks in large part to the insight of Founding Father Alexander Hamilton. Trump’s loose talk must have Hamilton spinning in his grave.

Featured image credit: The US 10 bill (front) Series 2004A by United States Treasury Bureau of Engraving and Printing. Public domain via Wikimedia Commons.

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