How Alexander Hamilton would view the debt ceiling

Alexander Hamilton founded the modern American economy, and there’s been much speculation about how the first treasury secretary would feel about the current debt ceiling and the fiscal cliff issues.

Alexander Hamilton in 1792.

In short, Hamilton wouldn’t probably approve of a debt-ceiling concept, and he would be more than unhappy about any actions that would lower the global rating of the United States’ public credit.

This Friday marks Hamilton’s birthday in 1757 or 1755—historians aren’t sure of the exact year, since Hamilton may have lied about his age to get an apprenticeship.

But there are few doubts about Hamilton’s feelings about the economy, the national debt, banking, and borrowing, all of which are in writings that helped him forge the post-Revolutionary economy.

Ideas about “What Would Hamilton Do” about the debt have been out there for years, picking up in frequency after the congressional standoff in the summer of 2011 that led to the debt-ceiling debate.

For starters, Hamilton faced a much more dire situation in 1789 when President George Washington appointed his former aide to run the biggest agency in the new federal government.

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.

Hamilton presented the first part of his program in his First Report on Public Credit, in January 1790. His radical program suggested that the federal government assume all federal, state, and foreign debt in the United States, including $25 million owed by individual states.

As part of the “assumption,” the federal government would pay more than market value to buy back the debt. In fact, it would pay face value, even though much of the debt had been sold at a deep discount.

The federal government would then issue new debt that it would control in the open market, which would increase its power in relation to the individual states. It would fund the new debt through a combination of taxes and overseas borrowing.

In the process, states like Virginia, which were represented by Jefferson and Madison, would have to pay more money indirectly to finance future federal debt. Virginia had managed its finances better than big-debtor states like Massachusetts and South Carolina, but all 13 states were funding the federal government under Hamilton’s plan.

In 1781, Hamilton wrote to another Founding Father, Robert Morris, about the tactic he would later use to get the country out of its financial fix. “A national debt, if it is not excessive, will be to us a national blessing,” he said.

In the end, Hamilton, Jefferson, and Madison came to a bipartisan agreement finalized at a June 1790 dinner party hosted by Jefferson. The Virginia contingent would back Hamilton’s plan in exchange for the nation’s capital being moved from New York City to present-day Washington (after an interim move to Philadelphia) and some $1 million in debt relief for Virginia.

After another big political fight over the Bank of the United States (the ancestor of the current Federal Reserve System), Hamilton’s system was in place, with public borrowing as a key spoke in its wheel. The banking system spurred internal financial growth, as people could take out short-term loans, and the country now had standard currency units.

Overseas investment flowed back into the United States once European investors realized that the federal government’s new taxing power made its government bonds a much safer investment. The Americans also benefited from a lack of investing options within Europe for speculators, who saw investors in the United States buying the nation’s debt at rising prices.

The public debt, which was 46 times greater than the government’s income in 1790, shrunk to a ratio of 8 to 1 by 1800. And the United States’ global credit was outstanding when Hamilton died in 1804.

So how would Hamilton feel about the whole debt ceiling/fiscal cliff issue?

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In November 2011, the late Thomas McCraw, professor emeritus at Harvard Business School, speculated in The New York Times that Hamilton would be focused on long-term economic growth, including more federal revenue.

“Hamilton’s strategy would markedly increase federal income,” he said, referencing recent growth periods. “In some of these periods, taxes were raised, in others they were cut, and in most they were both raised and cut. But the pie expanded in all of them. Federal revenues expanded along with it, and the national debt never became the problem it was in 1790 — and is today.”

One thing that Hamilton would frown on is any action that would hurt the United States’ credit rating. Standard & Poor’s downgraded the U.S. credit rating for the first time in 2011, and two other major agencies are threatening a similar move this year.

As for the debt ceiling, it would be up to Hamilton to decide if the current debt is “excessive,” in relation to social programs like Social Security, Medicare, and Medicaid that will see huge spikes in the next decade.
