July 9, 2011 – 8:54 a.m.
Political Economy: Debt and Taxes
By John Cranford, CQ Columnist
Maybe it doesn’t tell us much about the evolution of the American political system — or maybe it says quite a lot — but the current debate over federal fiscal policy, and in particular over the size of the national debt, is a distinct echo from the earliest days of the republic.
You could take the words of George Washington, Thomas Jefferson and Alexander Hamilton (and a host of others from their time), put them in the mouths of the latter-day denizens of Capitol Hill, and they would sound appropriate for our time, even if the language has become somewhat less stiff.
They argued and fought then, as now, over the need for spending, the desirability of debt and the inevitability of taxes. And they were about as capable of resolving their differences as are our own political leaders. Which is to say, almost not at all. We are our forefathers’ children, it seems. (Interactive Graphics: Raising the Debt Limit, 1980-2011 | Who Holds the Debt)
On Jan. 1, 1790, the first day of the fledgling nation’s second fiscal year, the federal government was in debt to the tune of almost $53 million — money borrowed mostly from France, Holland and Spain to fight the revolution, including the unpaid interest on those loans. That sum, plus the roughly $25 million in state debts that Congress agreed to assume under pressure from Treasury Secretary Hamilton, amounted to almost 30 percent of the country’s gross domestic product, according to calculations by the Congressional Budget Office.
Hamilton, of course, believed in debt. He was a banker, after all. Jefferson was the opposite. His preference for small government and his aversion to borrowing — except in his own life, where his debts were crippling — are legend.
Tea party blogs are replete with Jeffersonian wisdom about the need to avoid saddling posterity with government excess and his scathing denunciations of Hamilton. Those same modern-day revolutionaries, though, seem to ignore Jefferson’s personal life hypocrisy, or his willingness to borrow $13 million for the Louisiana Purchase — an extraordinary sum for what in hindsight was a brilliant move but at the time may not have appeared so clearly to be the case. And to be fair to the third president, the government did find a way to reduce the debt by about a fifth while he was in office.
The records of that time are filled with debates over the merit of spending money the Treasury did not actually hold in its vaults to accomplish some seemingly worthy purpose. And not just for big deals such as the Louisiana Purchase, either. From the very beginning, ordinary, run-of-the-mill government purchases sometimes had to be financed with borrowed money.
A fascinating and deeply detailed account of the nation’s earliest experiences with debt, prepared in 1881 by Rafael A. Bayley, a Treasury Department bureaucrat, contains numerous tales of the difficulty of decision-making on fiscal matters.
In the mid-1790s, for instance, the Revolutionary Navy had been disbanded, and trouble with the Barbary pirates persuaded Congress to authorize the purchase of a dozen warships. But there were no shipyards then, and no money either. So construction languished until the Barbary episode had been resolved. The order was canceled and then reinstated after France began seizing American merchant ships. In June 1798, Congress authorized the payment of $711,700 in stock that paid 6 percent interest to finance the purchase. Bayley notes parenthetically that the idea of issuing stock came from Hamilton.
A Father’s Advice
Most telling may be a 223-word passage toward the end of Washington’s famous farewell address to the American people. In it, the first president succinctly connects the views of Hamilton and Jefferson, advising those who came after him to “cherish public credit,” mostly by choosing “to use it as sparingly as possible,” but not to avoid timely spending when it proved necessary.
Washington counseled that sometimes the federal government might find that it needs to spend money now to avoid some crisis that would require it to spend much more later. His reference was to war making, but then that was what the general knew best.
Political Economy: Debt and Taxes
He was also keenly aware that in a representative democracy, the decisions lie with the elected officials, “but it is necessary that public opinion should co-operate.” And to that point, Washington told the people to understand that they would need to pay taxes to finance the affairs of government and to keep borrowing in check.
He wrote: “It is essential that you should practically bear in mind that towards the payment of debts there must be revenue; that to have revenue there must be taxes; that no taxes can be devised which are not more or less inconvenient and unpleasant.”
That, in a nutshell, is where we stand today, as lawmakers haggle and quibble and posture over raising the limit on government borrowing and over how to throw a rope around federal finances.
Our representatives put us in this position, with our blessing. Washington foresaw that, at the same time recognizing both that moderation is paramount and there is essentially no free lunch. In that spirit, he called for “acquiescence in the measures for obtaining revenue which the public exigencies may at any time dictate.”