In 1789, Alexander Hamilton, the first U.S. Treasury secretary, faced a dilemma still challenging Congress today. The new nation was deeply in debt, and there was a lack of consensus in Congress about how to pay for it.
Of the $75 million total debt, everyone back then agreed that the U.S. had to pay in full the $10 million loans from France and other nations to finance the American Revolution. Otherwise, no nation would ever loan money to the U.S. in an emergency again.
More than $44 million, however, was owed to American citizens who had purchased war bonds during the war. Many of the original purchasers of these bonds had died or sold them at a significant discount to wealthy speculators. They had lost confidence in the ability or willingness of the infant nation to pay.
Some leaders, including James Madison, argued that the new government should pay the current or market value of the bonds, rather than the higher, original face value. Others argued that the government should attempt to discriminate between the original purchasers of the bonds who paid the higher price and the speculators who paid the lower market value.
Adding to the complexity of the issue was the fact that some states had incurred $20 million of debt fighting the Revolution. Other states, which had already paid off their war debts, argued that their citizens shouldn't be forced to pay the debts of other states. Some even suggested that some of the state debts were the result of non-war spending.
Hamilton's "Report on the National Credit of 1790" stunned everyone, including President George Washington. Hamilton advised paying off the entire national debt at full face value and assuming all existing state debt. To do otherwise, he argued, would cause citizens to lose faith in the credit and integrity of the struggling government and sabotage the new Constitution. The Revolution had been fought for the benefit of all states, and the unity of all states would be critical to the survival of the new nation.
To pay for his proposals, Hamilton called for an excise tax on whiskey and a tariff on imported goods. Since most manufactured goods at that time were imported, most consumers opposed the tariff. Western farmers who used whiskey as a pseudo-currency were opposed to the excise tax. In fact, in 1794 Hamilton and Henry Lee led an army into western Pennsylvania to defeat the Whiskey Rebellion.
Despite this inauspicious start, Congress approved all of Hamilton's controversial proposals, and the U.S. began a long road to pay off the national debt and move to long-lasting prosperity. Modern economists agree that Hamilton's bold policies were responsible for the survival of the new republic.
On a somewhat more dubious note, the controversy over Hamilton's fiscal policies was directly linked to the emergence of the current two-party political system, which we Americans love to hate. Hamilton's supporters became known as Federalists. His many detractors, including Thomas Jefferson and Madison, were called Democratic-Republicans. Over the course of the next half-century, these parties morphed into the modern-day Republican and Democratic parties.
For the most part, good faith in the nation's credit still exists today. What lesson should Americans today take from Hamilton's legacy?
Our nation can never default on the national debt no matter how painful or controversial the process. Economists estimate that a national sales tax of 1 to 2 percent would eliminate the existing current debt in approximately three decades with little adverse impact on the economy. Coupled with the adoption of a balanced budget amendment to prevent wasteful new spending, such a plan would offer a solution, not just a political talking point, to the current financial morass.
Finally, those who recommend balancing federal, state and local budgets by cutting pensions owed to millions of public employees should ask themselves what effect this will have on public credit, not to mention patriotism. Reconfiguration of new retirement policies is another story. But existing public pension debt must be paid in full if national unity is worth saving.
Default, Hamilton reasoned, was not an option for the new nation. Nor is it an option today. Our grandchildren's future will depend on how we resolve this issue today.
Robert J. Fisher of Upper Saucon Township has taught U.S. history in the Allentown School District and at Northampton Community College and DeSales University.