Great nations pay their bills.
That, I believe, is what this debate boils down to. That is what our founding fathers would tell us if they saw us toying so dangerously with the federal budget and the debt ceiling.
The national debt has always been controversial. The current government shutdown is only the latest episode in a long history of divisive debates over paying the nation’s bills.
Consider, for example, what John Adams’s wife Abigail wrote to her daughter Mary in 1792: “I firmly believe, if I live ten years longer, I shall see a division of the Southern and Northern states, unless more candor and less intrigue, of which I have no hopes, should prevail.”
She wasn’t talking about slavery. She was talking about government debt. And she wasn’t alone.
“With the South filled with debtors and the North creditors,” says the historian Ron Chernow, Thomas “Jefferson feared the country would break apart along sectional lines.”
You have to admit, that really puts things in perspective. Today’s debate may be polarized, but no one seriously expects half the nation to secede because of it. And yet, in the early days of the American experiment, that’s how controversial the national debt was.
After the American Revolution, the new government had a lot of bills to pay. Fighting the mighty British Empire wasn’t cheap. The federal government had racked up $54 million in unpaid bills, and the states owed another $25 million.
There were many in Congress who believed that the government should default on its debt rather than pay the bills. They knew that they’d have to raise taxes to pay the bills, and they believed that taxing and spending were the first steps toward monarchy.
Sounds familiar, no?
George Washington disagreed. During the war, Washington had marveled at the British army’s seemingly inexhaustible supply of money. A great military, he believed, depended on the government’s ability to spend as much as necessary, and that required tax revenue and solid credit — two things that were sorely lacking on the American side.
By the end of the war, investors were fed up with the Americans. The new state governments had refused to collect enough taxes to pay the interest on the debt they had accumulated. The financier Robert Morris warned Washington that investors “who trusted us in the hour of distress are defrauded.” It’s “madness,” he lectured, to “expect that foreigners will trust a government which has no credit with its own citizens.” He begged the federal government to begin collecting taxes to repay their loans.
“With respect to the payment of British debts,” Washington concluded, “I would fain hope…that the good sense of this country will never suffer a violation of a public treaty, nor pass acts of injustice to individuals. Honesty in states, as well as in individuals, will ever be found the soundest policy.”
In other words, when a gentleman gives his word, he honors it. Great nations pay their bills. He did not, however, have an easy time convincing Congress of that.
In his first State of the Union, Washington declared that “an adequate provision for the support of the public Credit is a matter of high importance to the national honor and prosperity.” A few days later, his Treasury Secretary Alexander Hamilton proposed to Congress that the federal government not only raise enough taxes to pay off its debt but also to pay off all the states’ debts as well. Even more controversial, he suggested that they pay the entire face value of the debts, not the low prices that they were currently selling for in the market.
James Madison rose in the House of Representatives to denounce Hamilton’s proposal. It would reward speculators who had purchased the government bonds from hapless war veterans, he argued, and create a dangerously large Treasury bureaucracy.
In the end, Hamilton won, but not before creating many enemies. The investors who stood to gain from his policy lived mostly in the industrial North, while the indebted landowners of the South were suspicious of bankers and their “paper assets.” The debate over Hamilton’s proposal was the beginning of a rift that eventually led to our modern political parties.
Not long after Congress approved Hamilton’s plan, government bonds tripled in value. “The progress of public credit is witnessed by a considerable rise of American stock abroad as well as at home,” boasted Washington.
Still, radical dissenters tried to thwart this goal. In western Pennsylvania, a group of outraged farmers rebelled violently against the new tax the government had placed on whiskey, a product created from their grain. But Washington wouldn’t stand for it. If “a minority…is to dictate to a majority,” he warned, “there is an end put at one stroke to republican government.”
Apropos wisdom for today, wouldn’t you say?
Eventually, the Whiskey Rebellion was quelled, and all the debts were paid off — state and federal — at face value. The American government went on to become the most trusted investment in the world. To this day, it is widely considered the crowning achievement of Hamilton’s career — and one of the most important acts of this new nation.
Our credit is our reputation. It is our word. It is, quite literally, our bond with the investors of the world. To abuse it is not only to invite economic disaster; it is, more importantly, to sever the promise our forefathers made to us and the promise we make to the world. When other nations are in distress, they turn to us. We are the beacon in a sea of uncertainty. We are the deep pockets when all others have gone empty.
We are a great nation. Let’s start acting like it.