When the federal debt reached a staggering $79 million, something had to be done.
That was the crisis — today, barely a blip on the spreadsheet — facing the new United States in 1789. The first secretary of the Treasury, young Alexander Hamilton, told Congress the debts had to be consolidated and backed by revenue of the still-younger government.
The disarray in the former colonies had resulted in no payments on the continental debt, trading in Europe at fractions of its face values.
It was a crisis. And the newly installed Congress directed Hamilton to report on the situation — and with characteristic energy, he wrote almost 40,000 words in a couple of months.
Many of those words can be taken today as literal and good advice in the debate over raising the debt ceiling for the U.S. government.
It is absurd, for example, for those opposing the ceiling’s increase to say it is only a matter of appearances, that nothing is truly harmed if payments are delayed on government debts.
“In nothing are appearances of greater moment than in whatever regards credit,” Hamilton noted. “Opinion is the soul of it and this is affected by appearances as well as realities.”
Hamilton’s “Report on the Public Credit” probably belongs up there with the Declaration of Independence and the Constitution in the founding papers of this country. It was that important in setting up the machinery of the new government, but also in elaborating on the obligations of the national government.
Among tough issues, it advocated consolidating the debts of the states and the Continental Congress that had been run up during the war for independence. That prevented states from defaults that would have impaired the credibility of the new nation in the world.
Hamilton also provided the moral underpinnings for American-style capitalism, even as he borrowed freely from the actions of French finance ministers and ideas of English political theorists.
Victim of a famous duel, Hamilton did not live to hear Napoleon Bonaparte deliver his dictum, that “in war the moral is to the material as ten is to one.” But Hamilton presaged the vital moral importance of the credibility of the United States. “States, like individuals, who observe their engagements are respected and trusted, while the reverse is the fate of those who pursue an opposite conduct,” Hamilton wrote.
The new structure also was intended to bind the 13 quarrelsome states of the new union more closely together, as well as create a constituency of debt holders that would have a self-interested reason to back the new government, as pointed out by Hamilton biographer Ron Chernow.
The famous phrase that the debt would be a “national blessing” was rightly regretted by Hamilton, not on its merits but because his many political enemies would latch on to it as a call for indebtedness.
That is why, once the debt ceiling is raised as it should be this summer, advocates of reducing the federal deficit also will find a firm friend in Alexander Hamilton.
In the report to Congress, he declared that a “fundamental maxim” is that debt should be accompanied by “the means of extinguishment.”
Easier said than done, as experience of the U.S. government demonstrated over time.
As Hamilton was later to observe, the accumulation of debt “is perhaps the natural disease of all governments.” That certainly is a legitimate concern, and one that should guide a debate over gradually — by a combination of budget cuts and new revenue — righting America’s financial fortunes.
That will be difficult, but no more than the vast difficulties that Alexander Hamilton and his peers faced in the first Washington administration.
At the root of today’s debate is whether Hamilton would see defaulting on current U.S. debts as a responsible path toward the “extinguishment” of what America owes.
We doubt it.