U.S. History/What was George Washington and Alexander Hamilton's public policy on the national debt?
QUESTION: As I understand it, Washington and Hamilton wanted the federal government to retire all of the debt that was incurred through the Revolutionary War, both on a state level (through Hamilton's plan for assumption) and on a national level as well.
However, I'm reading a biography on George Washington, which says that in a speech, Washington "pointed [favorably] to the appreciation of American debt as a direct consequence of Hamilton's program".
So naturally, I find myself confused as to whether the national debt shrunk or increased during Washington's tenure as president. It sounds like under Washington and Hamilton, the federal government was paying back old debt that had been incurred during the Revolutionary War, while simultaneously taking out new debt of an even greater amount. Is that correct?
ANSWER: Hi Jeremiah,
Yes, your understanding is correct, but your confusion is understandable. I'll try to help clarify the matter.
At the time, there were two divergent views on the debt, Jefferson's and Hamilton's. After considering both, Washington agreed with Hamilton, so that the debt policy of the Washington Administration was Hamilton's policy.
Hamilton argued that it was important for the US to pay its Revolutionary War debts in order to build the country's credit, so that it could establish trade with other countries. The debts were paid by selling what were effectively treasury bonds. Those were purchased by wealthy people. Hamilton argued that this arrangement meant that wealthy people had a stake in the success of the new government and country, which Hamilton thought of as critical. He wanted the rich and influential citizens to buy into the new country - by literally buying into it. This was the point of Hamilton's debt assumption plan. Further debt was accrued and it was financed the same way, for the same reasons.
At the time, Federalists like Hamilton liked to maintain debt because it kept rich people involved, or at least invested in, the American government. Opponents like Jefferson opposed the debt for that very reason. That's why when Jefferson was president he made a pointed effort to pay off the debt.
I hope this is helpful Jeremiah!
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QUESTION: Hi Marc. Thank you so much for your help! I have a follow-up question, if that's okay.
Here's are two quotes from my book:
"Hamilton's audacious report argued that, to restore fiscal sanity, the government did not have to retire the debt at once. All it had to do was devise a mechanism to convince people that, by setting aside revenues at predictable intervals, it would faithfully retire it in future years."
"[Jefferson]] believed that Hamilton...wanted to make the federal debt so gigantic that it would never be distinguished."
The use of the word "believed" in the second quote seems to imply that Hamilton had never made any public statements about wanting to keep the national government's debt around forever (even if he did indeed hold such an aim), and the first quote seems to imply that Hamilton's public stance was one in favor of retiring the national debt in full, somewhere down the road (even if he secretly had no desire to do so, as Jefferson feared).
Would you happen to know whether Hamilton supported a perpetual national debt and whether his public stance on this matter differed at all from what he truly believed? Also, what did Washington feel about sustaining a perpetual national debt?
ANSWER: Hi again Jeremiah,
Hamilton definitely supported a perpetual national debt, because - as mentioned - it meant that wealthy people would both be attached to the federal government (because they were the creditors), and therefore have a vested interest in its success. His public position, however, was not that eternally being in debt was good, since that would have been a very unpopular position in a country in which debtors were jailed. Instead, the discussion focused on the immediate issue of the assumption of state debts incurred by the Revolution.
Washington was persuaded by Hamilton's arguments. I am not aware of Washington stating a position about ALWAYS being in debt. However, I think it's fair to say that, in principle, he would have opposed a perpetual debt since he realized what a burden debt could be. (As a farmer, he was always in debt. The indebtedness of Southern farmers to English merchants and their intermediaries [called factors] helped produce the friction leading to the Revolution.) So, while Washington likely would have wanted America to be debt-free at some point, issuing bonds for Americans to purchase to pay existing debts was not objectionable, especially given the other reasons argued by Hamilton.
Jefferson's speculation that Hamilton wanted a perpetual debt was correct and justified because, after all, the very reason that Hamilton wanted the Revolutionary War debt assumed is the same reason that Jefferson opposed it: because it would establish a close relationship between the government and the wealthy, one that continues to this day.
I hope this is helpful, Jeremiah!
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QUESTION: Thank you again! This answers my question perfectly! I'm so glad that I've found this website and that you've been able to help me. There are two final points that I'm curious about.
I recently read that Treasury bills weren't used in the United States until World War I. Although I know that Treasury bonds and Treasury bills aren't exactly the same thing, in your first answer, you said that the US government under Washington and Hamilton sold "what were effectively treasury bonds". Your phrasing (the use of the word "effectively") makes me wonder when actual Treasury bonds were first used and in what sense they differ from what was sold under Washington's administration.
My second question also stems from the phrasing that you used in your first answer - you said that Hamilton "argued" in favor of the US government paying off its Revolutionary War debt. Did certain prominent politicians of the time actually want the government to default on its debt? Is this what Jefferson would have wanted? How do you suppose creditors would have reacted, had the government failed to pay them back?
That's correct about treasury bonds being introduced during WWI. The specific instrument used to finance Revolutionary War debt was securities. Like bonds, securities are elaborate IOUs.
The issue debated was how much to repay of the domestic debt, but all agreed that the foreign debt would be fully repaid. Some did think that the domestic debt could be partially repudiated without injury to national credit or causing civil unrest. But, Hamilton believed that American credit could only be established if all of its debt was totally repaid (also resulting in the other benefits mentioned.) So, yes, some in Congress believed that debt repudiation was better than full repayment, but Hamilton persuaded Washington that only full repayment would suffice.