Skip to comments.Conservatist #1; Debt.
Posted on 01/28/2009 7:43:09 PM PST by pickrell
When Alexander Hamilton, having been chosen as the first Treasury Secretary by George Washington, set up the basis for our entire economic system, he did so virtually single handedly. Never in human history had a single human being drafted, constructed and emplaced such a collossus. Fan or foe of our present mechanisms of finance must both grant that the driving force behind our American Financial System was a man who understood the grave risks facing the new nation, if it were to hope to survive its birth.
By the end of the Revolutionary War, the separate States, and the weak, unfunded shadow of a Federal Government, (installed under the purposely-weakened Articles of Confederation) had amassed a total war debt exceeding $ 79,000,000.00, a sum staggering in its implications, and manifested in bonds held both by foreign and domestic creditors. So unlikely were these debts ever to be paid that foreign investors soon regarded them as the original precursors to "junk bonds". The same realization eventually befell domestic holders, too, as farmers and businessmen, struggling under the weight of their own debts, began selling off these bonds for a small fraction of their face value- often as low as fifteen cents on the dollar- to speculators. In even worse straits were the soldiers of the Revolutionary war, who were also paid off in bonds- there being no money in a federal government which had been intentionally denied the ability to levy taxes. And those soldiers had been in the field at war for years- many with no other income for their families.
The Revolution secured by so much blood and sacrifice was immediately in grave danger of being lost through foreclosure. Debt was the poison to any hopes for the future, as it also had been for countless civilizations in the past.
But having fought in that war, beside those soldiers, Colonel Hamilton was not about throw up his hands in despair. And so General Washington's war-time Aide, (and many argue the brains behind the outfit), became President Washington's best hope for a financial miracle. Hamilton was to forever bear the awed adulation of many, and the ferocious denouncement of others.
The brilliance of Hamilton was, among so many other things, to see clearly the theory behind debt. To the newly installed Congress, debt and funding were just transient problems interfering with the race to assemble political power bases, and so secure re-election. But without an understanding of debt, no financial system could be, or can be, constructed, and no nation, then, can long endure.
Debt is a contract. Debt is an obligation and an assurance. It is a variably-enforceable trust between two parties in which one party, the Creditor, transfers wealth to another party, the Debtor, in the solemn assurance and covenant that such wealth will be repaid, with interest, at specified intervals, over an also specified and limited period of time.
Why is an examination of the principles of debt necessary?
Hamilton understood, as have countless small businessmen over the centuries, that without this understanding, and the ironclad adherence to the terms of each loan... that any defaulting Debtor will lose the future ability to borrow when he may desperately need to. And that the alternative to such credit availability is often liquidation, bankruptcy, and the ruin of his family and name. Bad credit is a heartless harvestor.
The same applies equally to families, cities, states and countries. Any country which accepts money from Creditors with the only exchange being a good-faith assurance that the wealth it has accepted from the Creditor... will be faithfully repaid in full at, or over, a specified time... owes its very future existence to the ironclad weight of that assurance. And should that assurance ever become tainted and reneged upon, should ever that assurance be proven worthless, then the country earns a history of bad debt, has no credit worthiness and hence no future ability to finance itself. No Creditor will entrust wealth to a Debitor who's covenants have been proven faithless.
And so in a massive report to the first Congress, Hamilton set out the structure for debt management for the country, as well as an astonishingly visionary examination of future business, banking, manufacturing structures and the prescient need for a stock market. What he accomplished would have taxed the energies of twenty men.
His Treasury Department nationalized all the individual States' war debts, established that securities once purchased carried with them all benefits of future capital appreciation and loss, (which angered those who had previously sold their war bonds at a steep discount, and now demanded to rescind their earlier sale), and unintentionally, singlehandedly, invented the 2 party political system, when the many who fiercely denounced him as a big-government money-man, a tool of the British, and a monarchist, formed an opposition party, the Republican Party, under Jefferson and Madison. Until that time the Federalists, who had soundly defeated the anti-Federalists in the Constitutional battle, had no opposition. (As a note, this new party of Jefferson bore little resemblance to today's GOP.)
Yet by doing so he also single-handedly restored and solidified the credit-worthiness of the new United States, and provided methods of tariffs and taxations which enabled the building of a permanent Federal Navy and Army which he fought for his entire political life. He enabled money to be borrowed to build the infrastructure of an entire nation. And he rescued investment in the United States, for who would invest money in purchasing a security, only to find out later, that IF it rose in value, the original seller wanted his share of the increased worth? Such sellers were curiously reticent about demanding the right to pay their share of any loss when a security went down in value!
Yet only a man such as Hamilton who had fought in the Revolution... could chart the politically devastating course of telling the soldiers who had earlier sold their bonds off cheap, that the deals stood. For only by enforcing that selling cheap carried huge risks of loss to the seller, and making an entire nation soberly realize that this was the case, did he end the perception that National Bonds were worthless, and should be sold for whatever the speculator offered. Hamilton single-handedly thereby restored the value of the bonds, for the soldiers who hadn't already sold cheaply. Did that cruelly necessary job get handed off to an underling to take the heat? No, that wasn't Hamilton's way. He would face the derision and ferocity himself.
Ironically, the warnings that Hamilton had included in that first and in subsequent reports to Congress, that "...debt must inseparably be accompanied by the established means of its extinguishment,"- a set and rigid plan for paying off that debt, and the tax revenues devoted exclusively to fund that certain repayment- were somehow "overlooked" by those who would later excerpt, and thereby distort, his writing to read only that "Debt is good and useful to a growing society and government." Who would have ever believed that a modern Media and the pundits for the "debt is good" agenda... would distort one of the Founding Father's warnings, to promote their agenda?
And now, elevenscore years later, in the "modern" era, a chastened public is slowly awakening to what many on this forum have been arguing in vain for many years. The tragedy is that this new conundrum of debt is not new at all. The only thing new about debt was the present day ability to cast aside all that had been understood by previous generations, in favor of the Media-enforced perception of "New-Debt" by a new generation that had not the maturity yet to understand the price of "free". And so the new term had to be invented; a new way of thinking about debt. New Debt!
For the New Debt wasn't debt at all. Debt is money that is borrowed with the clear establishment of repayment terms. The New Debt was something far older and uglier, that slunk in the shadows, safe from affronting the public view.
The New Debt involves indentured servitude; something that had disappeared over a century ago. Perhaps that is why it could slip back into the country unrecognized, whereas overt slavery would be turned away at the borders.
Quite simply, the public was told that New Debt didn't have to be repaid! It was government money. This was debt that could simply be passed on to a new generation which would be more than happy to accept it. A generation that hadn't been born yet, and so had no representation for it's pre-packaged taxation. A generation which never got the chance to vote "No!"; a generation who's fate was a fait accompli.
This New Debt enabled us to enjoy things we could have never have afforded... if we actually had to pay for them. And once it became known that anything could be had as long as a vocal advocacy group could kneel in front of the all-powerful national Media, and ask succor from the suckers- the die was cast.
Would you like someone else to pay for your child's education? His health care? His lunches? His medical care? Your oversized house? How about Grandma's care? It has been an inconvenience to you to support the old bird- why not avail yourself of government money?
Why would anyone turn down free money?
The government couldn't possibly tax the voters enough to pay for it all. The alternative was to borrow it.
The worst kept dirty little secret of the century is that it really isn't debt. Debt is where you repay what you borrowed. And many, with sly sideways glances, smile that the incautious foreign investors, who lent in 2001 dollars, will at best be repaid in 2012 or 2015 dollars. If you borrow enough purchasing power to buy a hundred railcars full of grain... and later repay with inflated dollars sufficient only to buy forty railcars full of grain, a debt transaction has not occurred. The technical term for this type of transaction is "a swindle." The more palatable term for such a transaction is... inflation.
And when you borrow money, knowing full well ahead of time, that the face amount in real value could not possibly be repaid, you are engaging in a fraud. "Given that the only ones getting hosed in this little scheme are foreigners, where's the downside?" some ask.
The downside is in several parts. The most corrosive of which is that money itself is a debt- though few realize it to be the case. The only reason dollars are freely exchanged in the United States and the rest of the world is that money is a promise of represented value. This promise that a dollar earned this morning will suffice to buy a "dollar's worth" of bread tomorrow, enables commerce itself to continue. Any doubters need only to fly into Zimbabwe, or other such countries, and witness what happens to life in a million-plus-percent-inflation economy. The result is, of course, no economy at all. If you wish to barter your duck for 3 fish today, all is well. But if you wish to exchange your duck today, for the future promise of three fish, only to discover that this promise has evaporated by next week, (or by noon in extreme cases), into part of the gills and perhaps a fin, you'd be foolish to sell any more ducks. You might instead trade the duck for a fishing pole, (only to later be horribly shocked by the price of bait...)
The dollar has been accepted around the globe as the "new gold", the hardest currency of all times, outside of actual silver and gold coins. This absolute faith in the stability and worth of the dollar has enabled the United States to vault ahead of all other countries in commerce. It is a true national treasure that, once squandered, will be impossible to replace. Faith in anything, once shattered, can never be the same again. A government which attempts to inflate away it's debt by running the printing presses to flood new currency into it's coffers, makes a grave mistake.
This is no new trick. Going back to the Shay's Rebellion, and beyond, unmanageable debts have always produced suggestions of repayment with hollow money. The idea that a contract, (once the part that you receive has been enjoyed, of course), should be regarded less as a contract, and- as the "Pirates of the Caribbean" would have it- "more of a guideline, really," is piracy nonetheless. (Okay, we'll call it the New Piracy, to make it more palatable.)
The second downside is that a large part of that Federal Debt is in domestic retirement money. Folks who's later lives depend on the government repaying that debt, have been assured that their Social Security money has been protected from the wild schemes of Social Security reformers... by having Congress immediately spend that money, thereby insuring that none of it goes to waste. The most astonishing fact that science has uncovered in this century is that the people who promulgate such theories... actually get re-elected.
Careful study has shown that they accomplish this by humorously spray-painting this debt as "a Trust Fund." By creating a fantasy that this money actually exists somewhere, they provide a bodyguard of lies to the real, ugly, brutal truth. And that truth is that we have pawned our children's and grandchildren's rights to the same economic opportunities we enjoyed, by forcing them to "repay" the massive principal and interest of the Social Security money we have long since spent on government largess for ourselves.
And this repayment we force them into will also go to us, in the Social Security checks we have indentured them into paying taxes for. When they ask how we could have done such a thing, will the Media replay for them the spectacle of the Democratic-controlled House of Representatives applauding and cheering, as President Bush conceded that his best attempt to reform Social Security had been defeated by the Democrats? Should anyone be surprised that we now prepare to add trillions more in debt, under the cover that it is all an "investment in hope"? Should anyone be surprised that living beyond our means is now policy, rather than pathology?
The truth is that the Americans who react with self-righteous revulsion to television's "Forty-Eight Hours" segment showing the Pakistani villager who sold his daughter into a ten-year indentured servitude, in exchange for the handful of money that the villager was paid... have oddly no remorse or guilt at all, that they sold their own children and grandchildren into that same servitude to repay the "free" government money that they now enjoy and demand as their due.
Many may argue that this is an unfair comparison, and they are right. Ten years from now that Pakistani girl may return to freedom. Later Americans forced for many decades or longer to pay the interest and principal on embezzled amounts unparalleled in mankind's history will have no sly smiles at what was done to them. There will be no understanding nods and winks that their birthrights were pawned years and decades before, so that political largesse could be delivered by forklift to a brazenly indifferent "me" generation, and to cover the multi-trillion dollar "gambling debts" of home speculators who knew that houses "could only go up!"
Just to show the raw irony of history, the entire false wealth of that "me" generation was in large measure produced by the very thing that Hamilton first struggled with, and went to such pains to explain to the American people. The sad truth is that there is nothing new about speculators of securities and properties counting on there being an inexhaustable supply of undiscovered and unrealized equity, in the commodities, properties and securities sold to them by less perceptive others. The idea that financial security is not created by hard work and intelligent choices in spending, but rather by "flipping" whatever the flavor-of-the-day hot property happens to be, creates herd-mentality "bubbles" which, when burst shower grief upon all who had hoped for rain.
Hamilton knew that for commerce to expand, the government could not protect buyers and sellers from unwise transactions, no matter how heart-rending the situation. That only the scorching lessons of the market could force prudence and caution. Attempts at government "bailouts" were really only reaching into the future to forcibly seize yet more income from the unborn, to pay off the ill-considered gambles of today. Far too shameful for a mere word like shameful to be sufficient. Unfortunately our ancestors never invented worse words... because they couldn't have imagined more dishonorable deeds.
We are not robbing Peter to pay Paul. We are instead confiscating the eventual income from Peter's and Paul's grandchildren... to pay both Peter and Paul today. Peter seems not to be unhappy with this outcome. Neither does Paul. In fact, they both just voted into power what promises to be the most left-wing, redistributionist government in history.
The audacity of hope... replaces the effort of thought.
Whatever Hamilton's faults, we as a nation will forever be... in his debt, for his words were there, if any had cared to see them. And the admonitions and warnings from our fathers and grandfathers against unnecessary and unserviceable debt still ring faintly, somewhere in our memories, if we cared to listen.
If we as a nation choose to continue to throw away all that is remaining, from what we have inherited from a dozen past generations who understood the corrosive effects of debt, loss of the honor of our word, and the cost of a worldwide repudiation of the value of our committments, then we've made a bad choice.
We will certainly never be confused with the aptly-named "greatest generation", having looked quite differently at what we owe those who will come after us, and ignoring what we were gifted with by those who came before us.
We examined the securities left to us in trust by the blood of those who bought them for us...
And sold out too cheaply.
I propose we call it the "Conservatist" series, in honor of the Federalist Papers, if that hasn't already been done before.
Maybe then, we can figure out again what we agree upon.
Our first Treasury Secretary, the venerable genius Hamilton often published under the pseudonym Publius.
Geithner is a disgrace who would have been unworthy of changing Hamilton’s chamber pot. It seems appropriate that Geithner should publish his comprehensive plan under pseudonym Ben Dover.
Just finished reading Ron Chenoff’s biography of Alexander Hamilton. Of course there was some conjecture in the book with which I took issue but overall it was a great book.
I can't come to that conclusion after being reminded of the difficulties faced early on.
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