Philadelphia Reflections

National Debt, National Blessing

Alexander Hamilton

In 1789 while arguing for the establishment of a National Bank, Alexander Hamilton made one of the most famous counter-intuitive assertions of his controversial career. "A national debt, if it is not excessive, will be to us a national blessing".

The very suggestion of such an idea enraged Thomas Jefferson and his Calvinist adviser, Albert Gallatin. James Madison, ever the political schemer, immediately recognized a new bargaining chip in his move to relocate the national capital to Virginia. Political parties were promptly invented to mobilize votes on both sides, and the national bank remained a divisive issue for half a century afterward. Neither a borrower nor a lender is; how could anyone, then or now, say the debt was a blessing?

Indeed, that's evidently how the leaders of Singapore, Malaysia, Australia, China, and several other prosperous states still feel about it. While not eliminating taxes, these countries accumulated surpluses and created sovereign-wealth funds. Having paid off the national debt, and still finding a national surplus, what else are you going to do with it?

Gallatin

These countries hired investment advisers to buy stock for the funds, evidently feeling American stocks were the safest bet; it's hard to criticize that conclusion. In the present credit crunch, they are investing five and ten billion per transaction in the equity of America's premier investment banks. So far, they only acquire 5 or 10 percent ownership, but then the credit crisis may not be over yet. For them eventually to acquire 51% controlling ownership somewhere is not at all inconceivable. An ominous sign of where that might lead is found in our own captive pension funds. The state employee pension funds have quickly become captive to unions with their own agenda, with the result that the prosperity of the companies in the portfolio could be sacrificed to the benefit of interest groups. And yet, it wouldn't be so hard for America to do the same thing. If Congress had adopted the Bush proposal of three years ago to create an investment fund for Social Security, we ourselves would soon have what amounts to the largest sovereign wealth fund in the world. Could this be a solution to the weakness of the Federal Reserve in controlling the currency with bank debt? Could we somehow create a common world currency based on a common fund of sovereign wealth funds and with that, create a new definition of wealth based on equity rather than debt? The technical answer to the potential corruption issue would probably lie in stripping the voting power from such shares and then submerging them in a world index fund. The United Nations sound of it nevertheless still boggles the mind. Are people who oppose an equity-based world currency going to be forced like Gallatin to eat their own dusty words when the reality of debt-based currency sinks in? How many of the ambassadors of ideas about such suggestions, both pro, and con, would eventually surface as sneaky connivers like Madison, with a hidden side-agenda? After all, in a democracy, everyone is expected to marshal every argument, weak or strong, for his own self-interest.

Federal Reserve

The loss of banks as a tool for the Federal Reserve would undermine the way the Fed does its job. A deeper reality is that many governments really don't want the job to be done perfectly and independently. The European common currency, the Euro, is already irking the French and other national governments who sometimes hanker to inflate away their debts or deflate their way out of the subsequent inflation. A perfectly automatic currency regulation threatens an important ingredient of the sovereignty of nations, thus the whole concept of nationhood. Somehow, the desire of markets to enhance wealth must come to terms with the desire of governments to re-elect themselves.

It will take more than the present crisis to provide credibility for ideas as wild as substituting equity-based currency for the present debt-based one. Unless someone devises a better-sounding scheme, it seems more likely that financial Jacobins will propose sacrificing the unwelcome intruder. Derivatives, whatever that means, started this mess. Maybe we should make them illegal.

Originally published: Wednesday, December 26, 2007; most-recently modified: Friday, May 24, 2019