Public Debt

Alexander Hamilton was appointed in 1789 the first Secretary of the Treasury by Washington. Robert Morris, who essentially financed the Revolution, was Washington’s first choice. He declined the position but recommended, to Washington’s great surprise, his former aide: Alexander Hamilton. Hamilton had widely studied the financial writers of the day while a colonel serving on Washington’s staff. He had experience as a merchant before the war. Jefferson (State), Knox (War), and Edmund Randolph (Attorney General) rounded out the first cabinet.

I have been reading Ron Chernow’s book: ALEXANDER HAMILTON. I wanted to leave a few of Hamilton’s remarkable insights before you. These thoughts come from over 229 years ago. Hamilton was a Federalist who championed a strong US Constitution and was adamantly opposed by Jefferson, Madison and Adams. He established the Bank of the US, the Coast Guard, set up the Treasury Department, our currency, debt and banking system (to name only a few of this genius’s work).

Hamilton put forward his assembled thoughts in his report to Congress entitled: REPORT ON PUBLIC DEBT. In this document, after instructing himself in the works of Hume, Montesquieu, Adam Smith, Malachy Postlethwayt, Jacques Necker and others, Hamilton presented his grand plan.

Let’s look at a few of Hamilton’s viewpoints. He wanted the new federal government to assume all state and federal war debt. Hamilton proposed making state and federal debt from the Revolutionary War one. The important point here are his thoughts: debt should always be extinguished and the government must be given the means to end it. Debt was good for the nation if properly managed. He later said that debt is the “natural disease of all governments.” Madison, commenting on government debt (bonds) stated that whoever owns the debt, owns the country. Thinking of China yet?

He also believed strongly in property rights. Hamilton linked liberty with property. They were one. Securities must be freely transferable and the owner assumes all profits and losses. Financial transactions cannot be retroactively altered. This policy became known as security of transfer and is sacrosanct in business. Thinking of Chrysler and GM bond holders yet?

On paper money as currency, he believed that “the stamping of paper…is so much easier…than the laying on of taxes…paper emission would rarely fail in any such emergency to indulge too far.” Hamilton established that the central banks could print money only based on hard assets like coins. Remember the gold standard? The money supply is rising and not backed by any hard assets. He also wisely foresaw that the head of the central bank, which set monetary policy, should necessarily be insulated from politicians. Thus we avoid abuse. This is why Bernanke can act.

In addition, he believed that speculative abuses are “an occasional ill, incident to a general good.” Abuses and bubbles will happen, but he tells us we must remember that such things do not outweigh the good banks and markets do for the general population. We should remember that now as our government looks to tougher regulations. Today, the stock market told us it did not like it.