The Revolutionary Debt Bomb - And How the Founders Fixed It!

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By Larry Schweikart

Is there anyone out there who doesn’t think our fiscal house is about to slide into the ocean?

Whether one accepts the government’s estimates of a national debt that nears $10 trillion, or whether one thinks the numbers provided by Richard Fisher of the Federal Reserve Bank of Dallas, which includes all the “unfunded” parts of Medicare (A, B, and D) at another $85.6 trillion, for a total of $95.6 trillion, the United States faces a staggering level of debt.[i] And Fisher’s numbers do not include Social Security, which now, for the first time, has seen its out-flows exceed its income, and which adds another $10 trillion (at least) to the totals. The Medicare debt alone would stick each American family of four with a bill of $1.3 million, or about 25 times the average household’s income. Taken together, these levels of debt exceed the Gross National Product of probably half the nations in the world put together.

But history offers some hope. The young republic of the United States of America faced an equally daunting debt bomb in 1788, and, perhaps given the new nation’s utter lack of credit history, an even greater challenge than we face today. But the Founders dug their way out to the point of fiscal solvency fairly quickly, and within a decade the nation was viewed as a sterling credit risk. How was this possible?

It began with Treasury Secretary Alexander Hamilton—often a punching bag for some conservatives because of his big-government proclivities. But Hamilton knew that the only way to establish credit was to pay your bills. The situation confronting the United States, coming out of the Revolutionary War and the Articles of Confederation, was this: states had issued their own debt—some more, some less than others—and the United States, through the Continental Congress had also accumulated debts. Hamilton insisted the nation had to pay them all, and that a policy of “assumption” was the only sure way to convince foreign investors that we were an honorable Republic and not a banana republic! Despite fierce battles, he carried the day in Congress: the U.S. would pay all debts accumulated by the national and state governments. But how? Hamilton’s genius showed in his next maneuver, as he knew he needed to attract the “monied men,” as he called them. He structured a “menu” of new bond/debt options, in which longer-term debts received higher returns. Thus, if an investor had little confidence in the United States, he took short-term bonds which paid off less; and if an investor thought the nation would survive and prosper, he bought long-term bonds with their higher payoff. Throughout it all, Hamilton, contrary to popular opinion, did not wish to see the country saddled with debt. He said debt “is perhaps the NATURAL DISEASE of all governments,” and his first actions as Treasury Secretary were designed to reduce the nation’s indebtedness.[ii]

Hamilton’s restructuring of the debt on the surface may have resembled what Governor Arnold Schwarzenegger of “Koli-for-nya” did in 2004, but only on the surface. Hamilton ensured that payments on the debt went to the oldest debt first, and through a “sinking fund,” no new debt could be contracted until the old debt had been settled—in essence setting the United States up with an “American Express” version of credit instead of a Mastercard/Visa “revolving” credit line. So while the U.S. indebtedness remained at about $83 million when Thomas Jefferson became president, the payments on interest remained at a minimum.

In part, Hamilton also knew that he could count on those whom he knew well—President George Washington, plus John Adams, James Madison, and Thomas Jefferson (two men quite likely to hold the office in the future)—to limit spending and to practice federal frugality. Indeed they did. They ran the government with a handful of secretaries and a few hundred public officials; they carefully watched expenditures, with the largest being the construction of four large frigates under Adams and Thomas Jefferson’s purchase of Louisiana for $15 million. Yet despite the Louisiana Purchase, Jefferson still managed to slice more than one-quarter off the national debt.

All the Founders recognized that for the “monied men” to ally with the new nation, it had to honor its contracts (which it did through assumption); it had to establish a sound currency (which it did by adopting a gold standard and coining money along the Spanish system of tens and fives); and by paying its debts, which it did. By the presidency of Andrew Jackson, the nation had a surplus, but more important, it had a sterling credit record, and investment money flowed into the new nation. Hamilton, Washington, Adams, Madison, and Jefferson had all adroitly kept the “Revolutionary Debt Bomb” from exploding, and instead leveraged it for the growth of future generations. The key was confidence—confidence in the fiscal frugality and restraint of the leaders, confidence by the business sector in the government. Do either of those exist today?

While the numbers are staggering, like all numbers they matter little compared to the “animal spirits” of entrepreneurship, investment, and business growth. A sunny Ronald Reagan dug the U.S. out of deep straits just 30 years ago. The Founders, operating with even less, founded a nation on confidence and freedom, and the lessons of history tell us that such turnarounds can occur if the nation is determined to once again defuse its debt bomb.

Larry Schweikart

University of Dayton

co-author, A Patriot’s History of the United States


[i]. Richard W. Fisher, “Storms on the Horizon,” Remarks before the Commonwealth Club of California, May 28, 2008.

[ii]. One of the best analyses of Hamilton’s program is in Charles Calomiris, “Alexander Hamilton,” in Larry Schweikart, ed., The Encyclopedia of American Business History and Biography: Banking and Finance to 1913 (New York: Facts on File, 1990).

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