It’s unfortunate that economics is such an esoteric subject, for it certainly impacts all of us. It’s perhaps all the more unfortunate because of the ease with which the political class can confuse and dupe the public, thereby exploiting the masses.
Thomas J. DiLorenzo begins the second chapter of his Hamilton’s Curse noting that “[g]overnment debt is every politician’s dream” because it allows him or her to “buy votes by spending on government programs…that will make him popular now, while putting the lion’s share of the cost on future taxpayers, who must pay off the debt” (p. 38).
The result of this is obvious enough: we, the taxpayers, never truly grasp how expensive are the programmes with which we’re presented, and so the debt keeps mounting. The national debt, at the time DiLorenzo was writing his book, had exceeded $9 trillion, with unfunded liabilities mounting around $70 trillion (p. 39).
Then there’s “the biggest government program of all—war” (Ibid.). The American taxpayer would be much more likely to demand peaceful relations if they were presented with “an explicit tax bill for it” (Ibid.). Thus DiLorenzo writes, “Taxpayers feeling the sting of gigantic wartime increases would be much more inclined to pressure their governmental respresentatives to limit their military adventures to national defense purposes, as opposed to imperialistic ventures based on more dubious motives” (Ibid.). And this is why Jefferson held that “the perpetuation of debt, has drenched the earth with blood” (p. 40).
What has any of this to do with Alexander Hamilton? It was precisely Hamilton who “championed,” in pursuit of his goal of bigger, more centralised government and imperial glory, “the creation of a large national debt” (Ibid.). He did this in two ways: He (1) encouraged the federal state to assume all of the debt from the old government and (2) encouraged the central government to assume the war debts of the various states (pp. 41, 46).
His ﬁrst proposal was very popular, as it allowed the political class to become much more wealthy. Federal politicians and other New Yorkers learned of the federal government’s plans to pay off old war debts at full face value long before the information could ﬁltrate to the rest of the country and the many holders of old war bonds. These members of the political class, with their inside information, quickly entered the game of speculation, buying up these government bonds around the country from “haplass and unsuspecting war veterans at prices as low as 10 percent of full value” (pp. 41–42). Republicans and Federalists alike proﬁted from the graft.
This did not sit well with James Madison, however, who proposed that the original bondholders also be paid at full value. Madison was denounced “as a dreamer” (p. 44).
Hamilton’s second proposal was not as popular as his ﬁrst. For one thing, this entire generation saw the various states as free and independent countries, with the federal government being merely a meeting of the states to better secure their basic and collective needs, such as defence or the coining of a uniform currency (p. 46). For another, the states that had already paid off their debt, such as Virginia, did not want to have to socialise the debt of the other states that had not been in their opinions as dilligent (p. 47). As such, Hamilton’s assumption plan was defeated in Congress no less than ﬁve times (p. 48). It did not eventually pass until Hamilton struck a deal with Jefferson to allow the U.S. capital to move from New York to Virginia, something Jefferson had desired but the Hamiltonians had, until that point, been blocking (Ibid.).
The reason Hamilton wanted the newly centralised government to assume vast quantities of debt was that “he wanted to tie the wealthy to the state as a permanent, big-government lobbying class” (p. 45). The primary government bondholders, after all, would be the more affuent citizens, and they would have an “interest in continued borrowing and continued tax increases to assure that they would be paid their principal and interest” (Ibid.). Therefore Hamilton, not surprisingly, also rallied for higher taxes, “including the notorious tax on whiskey, a carriage tax, and a national property tax (which spawned a tax revolt in massachusetts—the Fries Rebellion)” (p. 43).
Hamilton defended the “[p]lundering of the working class with onerous taxes” because he saw Americans as too “indolent” and held that these harsh taxes would encourage the people to work harder (Ibid.). Of course, the opposite is true. The more people have to surrender in taxes, the less motivated they are to work hard. What’s the point, they ask, when Uncle Sam is taking it all anyway? Perhaps one of the worst aspect of these changes was the opportunity for a standing army of tax-collectors to be created, precisely what Hamilton had used to squash the Whiskey Rebellion (p. 44, cf. 33–36). DiLorenzo cites this as “one of the chief reasons why the Anti-Federalists never trusted Hamilton. A standing army of tax collectors could (and eventually would) destroy states’ rights altogether” (p. 44, cf. 48).
As I expressed in my previous entry, I’m not personally fond with DiLorenzo’s use of the term “states’ rights.” Governments, after all, cannot possess rights. Only individuals—and the voluntary associations they create—can possess rights. The founders understood clearly that states did not and could not possess “rights,” and thus, when they drafted the tenth amendment, they clearly referenced powers rather than “right.” What this Hamiltonian centralisation of power threatens, therefore, are the powers that were reserved to the states under the U.S. Constitution.
In any event, there were those who opposed Hamilton’s nationalist schemes. Albert Gallatin of Pennsylvania called Hamilton’s assumption plan “subversive of the rights, liberty and peace of the people,” a view “endorsed by the Pennsylvania legislature” (p. 47). (Luckily for Gallatin, Hamilton was unsuccessful in his drive to “have Gallatin arrested and put on trial” (Ibid.).) John Taylor of Virginia pointed out that the Hamiltonian schemes “would result in ‘the accumulation of great wealth in a few hands,’ accumulted through ‘a political moneyed engine.’ It would create British mercantilism in America, in other words” (p. 48).
DiLorenzo also addresses the despicable Sedition Act, which the federal government used to silence Jeffersonians and other Republican opponents of the Federalists’ nationalist agenda. Many innocent men were arrested under this law, including at least twenty-one newspaper editors, “all of whom supported Jefferson…. No Federalists were harassed by the Sedition Act” (p. 50). This act, along with the Alien Acts (collectively called the Alien and Sedition Acts by historians), was what lead Jefferson and Madison to author the Virginia and Kentucky Resolves of 1798, thereby nullifying these laws within their state borders.
DiLorenzo attributes the reactionary policies of the Federalists to the 1800 Republican victory. On pages 51–53, he details the history of national debt in the United States from the time of Jefferson to the present, showing how, over time, the amount of debt the government has opted to take on at any given time has ratcheted upward. He concludes on page 53 that perpetual government debt “essentially relies on forced labor,” turning today’s citizens into tax serfs, and points out that governments have historically relied in the “hidden tax” of inﬂation to pay off debt, knowing that citizens do not notice this form of taxation in the same way they notice direct taxes. Finally he spells out the destructive effects of this approach on pages 54 and 55, and draws the connection between Hamilton’s bad policy ideas and the destructive policies of modern Keynesians on pages 56 and 57.
Overall, I found the chapter stimulating. Authors do not often comment, especially in any great detail, on the problems with large national debts. This is probably because historians and political theorists often do not have much background in economics—DiLorenzo does, and is able to incorporate his understanding of this otherwise esoteric subject into his historical analysis.
—Alexander S. Peak