The last summary of this book addressed the idea of frugality, thrift and savings as a driving force behind our economy and helping other people. Today’s summary focuses on the Founders views on debt. I think the subtitle is telling of their views. So let’s get started…
Chapter #3: The Founders – A Revolutionary Way to Think about Debt
John Jay, the President of the Continental Congress, and our first chief justice of the Supreme Court obsessed with preventing our nation from being a saddled with debt that would lead to oppression and tyranny. Jefferson compared the debt as hovering over the nation’s neck like a guillotine. “Debt is a weapon… wielded by those to whom it is owed” and especially dangerous when the creditor is a foreign nation or other entity. Jefferson believe it was up to the people to not let rulers “load us with public debt” (Beck 24).
THE ROAD TO SERFDOM
One result of debt is that it forces people to work harder to pay it off, whether personal or governmental. I can speak personally about this because of the debt my wife and I took on to pay for our wedding; we are still paying it off. Imagine the wealth we would have if we did spend all that money on debt payments each month. Its more money to give us more freedom to do what we want. It is the same with government, we must work harder and longer to pay it off through our taxes.
Jefferson died bankrupt with tons of personal debt but he understood that taking other people’s money, through taxes, to spend it frivolously is immoral, breaks the public trust and is theft. James Madison also understood the problem of debt for the new nation. He had two major concerns. First, citizens would be pissed if collected taxes only to pay interest on debt (which we are doing) instead of government services. Secondly, interest payments should our creditworthiness as a nation, meaning foreign powers would “gobble up our debt” and buy us out, since we were reliable debtors (Beck 25)
THERE IS NOT SUCH THING AS A COINCIDENCE
Our Founder were familiar with and were well read of the Scottish moral philosopher and economist Adam Smith, author of The Wealth of Nations. Adam Smith understood the critical ingredients to all economic activity: human nature. He also knew that governments would interfere with free will and markets because they want power. Both Smith and the Founders, under the Judeo-Christian belief system, understood that humans are not perfect, and sinful creatures. There was no guarantee because of this belief that self-government would work. Also because they studied the history of the Greeks and Romans, knew that debt was a pretty good way to end this experiment (Beck 25-26).
THE WAR ON DEBT
The Revolutionary war mired our young nation and its states into debt at its very start. The nation had gotten loans from foreign nations, France and the Dutch being chief among them. They also sold bonds to citizens, risky considering there was no government to back them. They knew this debt would be used against them by the British and other because a strong economy is essential to national security as much as a strong military. The British counterfeited bonds as well as waged a propaganda war against them, but it was to no avail. By 1795, over 21,500 different people and groups owned U.S. national bonds, including many of the Founders who pledged “their life, their fortunes and their sacred honor” in the Declaration of Independence.
After the treaty of Paris in 1783 debate raged as how to manage the future expenses. Should services be paid in full or is debt okay? “A consensus emerged.. the general view that carefully managed debt could be helpful in two narrow realms: trade or commerce and in fighting and winning wars… Beyond that, debt was to be fiercely avoided… Except for commerce and war, debt was off-limits” (Beck 28).
Jefferson, as stated before, thought government debt for short-term gain was theft and wanted a balanced budget amendment to the Constitution to take away from the government the ability to borrow money. Big government spenders use Hamilton to praise accumulation of national debt, but neglect to mention that he says debt should not be excessive to “bolster her standing on the international stage by making good on her financial problems.” We needed to dip into debt every once in a while to build a good credit rating with other nations, but when we make that debt we must also include a plan to pay it back. Hamilton even suggested a fund that be separate from the general fund that would be used to retire five percent of the debt each year until it was entire paid off. Due to this mentality and the practices of the government to pay down the debt, by 1794 we had the “highest credit rating in Europe” (Beck 28-30)
BORROWING FOR BAILOUTS?
George Washington would have laughed out loud at current use of debt, to manage the economic fluctuations of the nation, instead of using it “sparingly as possible.” He recommended using the times of peace to discharge the debt as quickly as possible. In 1792 land speculators crashed the markets of the U.S. Hamilton in response “made sure people with good credit got loans, used government money to pay off bonds in the open market, and eased up on debts owed to the government to keep liquidity in the system. It worked and France noted this years later when they sold their claims to Louisianan to the U.S. The U.S. did not have all the money upfront, so they floated bonds that sold very well due to our credit history. “This added on more approved use of debt to the Founders list: expansion” (Beck 30-32)
CHECKS AND BALANCES FOR OUR CHECKING ACCOUNT BALANCES
The Founders though that the President would be the biggest obstacle to keep spending under control, not Congress. They were wrong. They set up a system to prevent the President to ruin the country with more and more debt. They balanced that power with representatives voted on by the people. They did not think that both the President and the Congress would both become reckless with the people’s money. Due to the practices of our Founders were got our debt under control and increased our reputation in the world.
The next chapter looks at the practices of the government during the nineteenth century, debt retired under Jackson, the massive increase under Lincoln, and commitment to pay it down after the Civil War.
Questions? Comments? Concerns? Class dismissed.