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The Next Economy / THE NEXT ECONOMY: COVER STORY

What Alexander Hamilton Saw as a Strength Has Become a Symbol of National Decline

Alexander Hamilton.(Wikimedia Commons)

photo of Ronald Brownstein
September 26, 2011

INDIANOLA, IOWA—The rain varied only between pelting and torrential as Dick Pipho trudged through a muddy field at a tea party rally here on Labor Day weekend.

A retired venture capitalist and businessman from nearby Grimes, Pipho didn’t seem to mind the weather. He moved steadily through the crowd, carrying a clipboard to which he had affixed a succinct bumper sticker: “Debt is our greatest threat.” The clipboard held a pledge committing everyone who signed it to vote in 2012 only for a presidential candidate who presents a plan to balance the federal budget by 2017 and to begin paying off the government’s debt—roughly $10 trillion, not counting what the government owes to itself—by 2018.

Even amid the recurring downpours that drenched the crowd waiting for headliner Sarah Palin, Pipho did a brisk business. He estimated that he had already filled 12 sheets with signatures. “People are getting serious about our deficit and our debt,” he said. “China is going to come in and foreclose one of these days.”

 

Except for one or two years during the mid-1830s, the United States has carried a public debt every year since its founding. In fact, the debt preceded the nation: The Founders borrowed heavily from Europe to finance the Revolutionary War. Yet only rarely since then has the debt seized a central role in America’s politics. As the blurry signatures on Pipho’s waterlogged pledge sheets suggest, this is one of those times.

In the Republic’s early days, many citizens viewed the ability to carry and service a public debt as a source of national strength. Great Britain’s ability to borrow more effectively than its rivals, for instance, allowed it to finance a military establishment that vaulted it past all of its competitors in the 18th and 19th centuries. Alexander Hamilton, the first U.S. Treasury secretary, had that example partly in mind when he declared in 1781, “A national debt, if it is not excessive, will be to us a national blessing.”

Thomas Jefferson and the Democratic-Republican Party that he led never accepted that logic and paid down the debt during the first decade of the 19th century. Even so, the public debt didn’t become a major political issue until Andrew Jackson made it one in the 1820s. Jackson’s objection was less economic than ideological—and personal. His abhorrence of debt was rooted in a failed land deal of his own, and his contempt extended to paper money, most federal spending, and—above all—the Bank of the United States, a distant precursor of the Federal Reserve. He viewed all of these as the means by which the rich and powerful manipulated government to gain advantage over the nation’s small farmers and workers.

“At that point, the idea of the federal government living beyond its means meant that the rich and powerful were bilking the taxpayers,” said historian Sean Wilentz of Princeton University, who has written extensively on that era.

As early as his (losing) 1824 presidential campaign, Jackson called the debt “a national curse” that served “a monied aristocracy,” historian John Steele Gordon recounted in Hamilton’s Blessing, a concise history of the federal government’s debt that provided key insights for this account. After Jackson won the White House in 1828, he proudly tracked progress toward extinguishing the debt in each of his State of the Union addresses. When it was finally paid off at the end of 1834, he triumphantly wrote: “Free from public debt, at peace with all the world … the present may be hailed as the epoch in our history which shall be best calculated to give stability to our Republic and secure the blessings of freedom to our citizens.”

Ironically, Jackson’s maneuvers—particularly, his Javert-like quest to eliminate the central bank—produced a financial crash that sent the nation back into debt. The red ink became a torrent during the Civil War, whose costs demanded enormous borrowing, even after the first income tax was introduced. Validating Hamilton’s vision again, the Union’s superior ability to borrow contributed to its victory over the Confederacy.

During the next half-century, the federal debt declined steadily as a share of the economy without much fuss or discussion. Predictably, it rose again during World War I, though the government subjected more Americans to the income tax and raised its rates. The war’s aftermath produced the first big round of debt politics since Jackson’s day. Calvin Coolidge and his Treasury secretary, Andrew Mellon, placed reductions in the debt, spending, and taxes at the center of their economic vision—anticipating arguments that Ronald Reagan and then the tea party would offer decades later. “From a reduction of the debt and taxes will accrue a wider benefit to all the people of this country than from embarking on any new enterprise,” Coolidge insisted.

The Depression reversed Coolidge’s progress against red ink, and the debt soared during World War II to its highest level ever as a share of the economy. Even after the necessity of borrowing to defeat Nazi Germany and Imperial Japan had passed, the debt provoked surprisingly little debate in the postwar years. That largely reflected the influence of British economist John Maynard Keynes, who believed that governments should try to manage the economy by running larger debts during slow times and smaller ones during fat years.

Over the next quarter-century, annual budget deficits became routine, but the debt declined anyway as a share of the economy because growth was generally so robust. The debt soared in the 1980s, measured against the overall economy, when Reagan sharply cut taxes, increased defense spending, and constrained domestic expenditures only to a limited degree. This generated some anxiety (and modest congressional steps to trim the deficit) but never a full-scale revolt. This was partly because tax cuts had supplanted deficit control as the top priority of many Republicans, but probably more because the economy was humming.

The recession that followed under George H.W. Bush provoked the most serious debt debates since Coolidge. Bush’s 1990 budget deal took important steps to reduce the deficit, but the issue reached critical mass in the 1992 presidential race. The spark was Ross Perot, the quirky businessman who echoed Jacksonian arguments about the debt and insider influence; his independent campaign attracted nearly a fifth of the vote.

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Partly inspired at first by Perot’s success, Bill Clinton pushed two deficit-reduction packages through Congress that eventually combined with buoyant growth to produce repeated surpluses in the late 1990s. Federal Reserve Board Chairman Alan Greenspan even fretted in congressional testimony that the nation might pay off its debt too fast.

Greenspan, it turned out, had nothing to fear. After persuading Congress to cut taxes, George W. Bush launched wars in Afghanistan and Iraq and established a prescription-drug benefit for Medicare, all without establishing any offsetting source of revenue. Again, the deficit spiked. As in the 1980s, however, it never became a central point of political contention, in part because the GOP’s priorities had shifted but also because the economy was fairly stable through the middle years of Bush’s presidency. Grumbling about the debt became a roar only after it grew under Barack Obama—swelled both by the economic collapse of 2008 and the cost of his stimulus plan to combat it.

Much of today’s heightened anxiety over the debt may be grounded simply in the sheer speed of its growth; the money the government has borrowed from domestic and foreign investors is on track to double between 2008 and 2012. “The public doesn’t like sharply escalating debt,” noted Robert Bixby, executive director of the bipartisan Concord Coalition, which advocates fiscal discipline. “It really is symbolic of a government out of control.”

Especially during hard times, Americans forced to economize may understandably wonder why government doesn’t do the same. Politics also plays a part: Conservative voters, who tend to get the most exercised about the debt, usually object more when a Democrat is in the White House.

What’s new in 2011 is that, even to a greater extent than in the 1990s, the national debt has become for many Americans a symbol of national decline. Alexander Hamilton saw the debt as evidence of America’s strength—its ability to finance its rise by tapping its future wealth. Now, however, millions of Americans regard it as evidence of weakness—presenting the threat of an economic collapse like Greece’s or of a dangerous vulnerability to nations such as China that hold our debt. Today’s agitation over Hamilton’s “national blessing” may be less a cause than an effect of deeper fears about whether America’s best days have passed.

The author is the editorial director of National Journal.

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