Hamiltonian Lessons For Geithner

The nightly news for two years has been filled with comments and proposals for the smartest guys in the room about our economy and what it should be and how it should function.  Even pretty arcane matters such as the purchase of Treasury notes by the Fed have become common fodder for the pundits.  Economists are regular guests on the news broadcasts offering conflicting views about how things are and what course of action or inaction should be taken to improve our economic health.  Ultimately, economic health is the foundation of our freedoms and prosperity.   Universities, foundations and the halls of government are loaded with PhD’s in economics who are guiding or misguiding economic policy of Government, Inc.  It is a complicated subject and it is easy to have one’s head twisted by the minutia of the discussions.  But the fundamental concepts aren’t that hard and the basics for a free market system can be understood by most.   It would be a help if some of these experts would spend less time studying the Great Depression and the recessions of ’81 or ’01 and studied the history of our economic beginnings as a nation.

Over 220 years ago we had just approved the Constitution and the first government under Washington was formed.  There wasn’t a formal cabinet the way we think of one today.  Jefferson was Secretary of State and had five employees under him, Know was the Secretary War with a handful of people under him, the Attorney General had not staff and was a part time employee who continued to have a private practice.  Hamilton was appointed Secretary of the Treasury.  He quickly had a staff of about 50 because of the paperwork needs to collect and process the import taxes from thirteen states which was the only source of revenue for the country and that was spotty.

Hamilton had no PhD in economics, there was no such discipline at that time.   He did have books on commerce and trade and studied the British system of commerce, trade and public credit.   He was starting with a blank slate and genuine economic turmoil.  What we face today is picayune compared to the troubles our new nation faced.  The
Revolutionary War had made the states run up enormous debts to fund the fight.  Theyd issued bonds for the money received.  Many of the buyers were the soldiers themselves and small farmers and merchants.  But some wealthy individuals such as Morris of Pa. had also advanced considerable sums to pay for the war effort out of their own pocket with a promise of repayment from the Continental Congress.

Economic activity during  the War and after was stagnant because there was no universally accepted medium of exchange.  We had Continental dollars but they were not worth face value.   The bonds issued were heavily discounted because most have serious doubts they would ever be repaid.   Business transactions were conducted in a true hodge podge method.  Spanish pieces of eight, Dutch Guilders, British pound sterling, the Continentals and bonds were all used to pay for goods and services.   It was a mess to say the least.  This was the economy that Hamilton faced.  He naturally studied the British model since it was the one most Americans were familiar with and it had in fact helped expand and preserve the British empire.  It worked better than chaos.  For this he was later blamed for being “pro British” and a closet monarchist.

He studied everything he could for a few months.  He was acutely aware of the political pains of any decision made.  Many of the bonds issued by the states had been bought by speculators.  They were gambling that the new country would succeed.  The sellers needed money and had lost faith in the future.  Stark philosophical issues abounded with the political mix.  Our Constitution recognized the need for paying the debts and is embodied in Article 6 of the Constitution for the debts of the Continental Congress.  There was much public outcry about the government paying off the debts reflected in the bonds.  The populist sentiment was that  this would only reward the rich and the speculators and hurt the little people.  Many wanted to default on the bonds.  Hamilton wrote his ideas and Theories down in a 40,000 word booklet.  It was a master piece of scholarship and practical application of our values, the law and sound economic theory.  Hamilton was an excellent lawyer and had prospered as one before he became Secretary of the Treasure.  Trust was critical.  The people and all creditors had to believe in the government and its commitments.  Without that trust all else would not matter.  He knew that the sanctity of the contract was the cornerstone of the rule of law and all the rights of property that emerges from that foundation.  Without that we would have no freedoms. 

Hamilton concluded that the bonds would be paid and honored at full face value.  This would greatly benefit some of the speculators he knew.  Some were his friends but that was beside the point.  It was the rule of law; it was a matter of building trust.  Some had advocated that the bonds should only be paid to the original owners but Hamilton shot that down on practical grounds–how could you find them, determine the price they sold them for, and what about the claims of those who paid hard money for them?   He also realized that the bonds would have real value when folks recognized they would be paid in full with interest.  They could become like money.  They would be a medium of exchange between merchants because they would have real worth. 

After much ballyhoo and political tumult, the Hamilton plan was adopted.  It got the nation off on the right course.  It established firmly the principle of the rule of law in all matters commercial and that public debt was a sacred obligation and that it should be honored and provision made for its retirement.  As a note, he at one point talked about public debt being a “blessing”  those who favor stimulus now often quote that.  They do so out of context.  Read his essay on economics.  He was referring to the overall scheme of building trust with that debt that already existed. He was not promoting the idea that government should borrow and spend willy nilly.  He would be appalled at our current economic mess and debt.  Where is a Hamilton when we need him so badly.  Regrettably our tax cheat in chief Geithner hasn’t studied Hamilton enough if at all and certainly isn’t channelling him in the new age sense.

Article 1, section 9 of the Constitution provides that a “regular Statement and Account of the Receipts and Expenditures of all public money shall be published”.  Well, the government spews out reams of numbers annually.  But one wonders how “regular” it is.  http://www.olcranky.wordpress.com

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