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Why the Founding Fathers Loved the National Debt

By William Hogeland
January 25, 2013 11:00 AM EST 1 Comments
President George W. Washington signed this bond worth $185.98 of assumed debt in 1792.
Source: Collection of the Museum of American Finance
President George W. Washington signed this bond worth $185.98 of assumed debt in 1792.

Although Republicans in Congress agreed this week to suspend the U.S. debt limit for three months and forestalled another budgetary showdown, most commentators think the peace won’t last.

There’s sure to be a fight over automatic spending cuts scheduled to kick in March 1 (part of last year’s debt-ceiling deal), followed by a looming deadline for funding the government that could lead to a shutdown. And House Speaker John Boehner has vowed to block any long-term increase in the debt ceiling without corresponding spending cuts -- in effect, holding out the possibility of default as a means of controlling the country’s debt.

As Republicans engage in this brinkmanship, they claim to be defending principles enshrined in the Constitution: low federal taxes, little spending, no public debt.

In fact, however, the Founding Fathers were deeply committed to -- some might say obsessed with -- supporting a national debt. And during the founding period, the threat of default came not from conservatives but from what the founders, at least, saw as a radical left.

It’s a fact so little-understood as to remain startling that the Constitution, far from trying to limit federal borrowing and shrink government, was specifically intended to create a large and mighty government capable of taxing all Americans for the purpose of funding a large federal debt.

Domestic Debt

Although many historians today focus on the Revolutionary War debt to foreign countries, the kind of debt that captivated the founders themselves, and served as one of the main prods to forming a nation, was domestic. It involved multiple tiers of bonds, issued by the wartime Congress and bought by wealthy American investors, who hoped to finance the war in return for tax-free interest payments of 6 percent. The first American financiers, in other words, were also the first American nationalists.

Both the young Alexander Hamilton (savviest of the founders regarding finance) and his mentor Robert Morris (the wartime Congress’s superintendent of finance and America’s first central banker) believed that a domestic debt, supported by federal taxes collected from all the states, would unify the country. It would concentrate wealth, and yoke that wealth to a consolidated government. The goal was a nation capable of grand projects -- ultimately an economic empire to compete with England’s.

Other famous founders worked with Morris and Hamilton in building nationhood around the public debt. James Madison, who became Hamilton’s political enemy in the 1790s, was among his closest allies for nationalism in the 1780s. Madison’s famous “Federalist No. 10” conveys a horror of default on the domestic debt as deep as anything ever expressed by Hamilton.

In letters written before the Constitutional Convention to George Washington, another supporter of sustaining federal debt via taxes, Madison made clear the nationalists’ shared desire to shore up public credit by throwing out the Articles of Confederation and forming a nation. Edmund Randolph opened the convention by charging the delegates to redress the country’s failure to fund -- not pay off, fund -- the public debt by creating a national government with the power to do so.

Economic Radicals

Still, there’s a problem for today’s liberals who might hope to cite the real U.S. fiscal history in opposing a “constitutional conservative” rationale for threatening national default. The founding alliance that made federal debt a supporter of nationhood, and nationhood a supporter of federal debt, came about in direct opposition to a radically egalitarian, communitarian movement that is in many ways the intellectual antecedent of modern social-contract liberalism.

The radicals of that movement -- evinced in episodes such as Shays’ Rebellion -- wanted to devalue the merchant class’s crushing loans to ordinary people; disconnect bondholders and bankers from government; prevent widespread foreclosures; more tightly regulate business; and disseminate, rather than concentrate, American wealth.

Default on the national debt was a horrifying prospect to the founders, but not because they thought it would damage ordinary people’s economic conditions. They knew default would demolish the political alliance between wealth and government that the nation’s founding had depended on. It was those early economic radicals the nation was formed to suppress.

To debate today’s fiscal issues usefully might entail both sides’ acknowledging the less edifying elements of our founding period -- and moving beyond fantasies about what the founders supposedly would have wanted.

(William Hogeland’s most recent book is “Founding Finance: How Debt, Speculation, Foreclosures, Protests, and Crackdowns Made Us a Nation.” The opinions expressed are his own.)

Read more from Echoes online.

To contact the writer of this post: William Hogeland at hogeland.william@gmail.com

To contact the editor responsible for this post: Timothy Lavin at tlavin1@bloomberg.net

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