The Federal Debt

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The federal government is required to maintain such things as the post office and the census, which necessarily require spending, and Congress may not make military appropriations extending more than two years. But it is empowered to appropriate money for the “general welfare,” a term left undefined. In the twentieth century it has come to be construed so broadly as to encompass a museum dedicated to the memory of Lawrence Welk.

Taxes merely had to be uniform throughout the United States and could not be laid on the exports of any state. The power to borrow, meanwhile, was entirely unlimited, one of the very few powers granted by the Constitution that had no checks or balances.

What did limit the fiscal powers of the new government was the universal consensus, among ordinary citizens and the political elite as well, about the proper and prudent way for a government to act when it came to taxing, spending, and borrowing. This consensus was best summed up, as you might expect, by Adam Smith in The Wealth of Nations . “What is prudence in the conduct of every private family,” he writes, “can scarce be folly in that of a great kingdom.” In other words, governments should finance current expenditures out of current income, save for a rainy day (or, more properly, allow the people to do so by lowering taxes when the budget is in surplus), borrow only when inescapably necessary, and pay back borrowed money as quickly as possible.

Alexander Hamilton, appointed by President Washington to be the first Secretary of the Treasury, moved swiftly to put the new government’s fiscal house in order. Taxes were laid. Mostly excise taxes on products like whiskey and duties on imports, these were intended both to fund the new government and provide a revenue stream to service and reduce the new national debt. This debt in turn funded the redemption of the old Revolutionary War debt on a sound basis.

At the beginning the national debt amounted to $80 million, something on the order of 40 percent of the gross national product of the day. But as the government found its fiscal feet after 1795, it ran a deficit only twice until the War of 1812. As the country’s economy rapidly expanded, the debt declined in both relative and absolute terms. By 1811 the total debt was only a little more than half what it had been in 1795.

The war, of course, sharply reversed matters. Federal government outlays in 1811 were a little more than $8 million. By 1814 they were more than $34 million. Meanwhile revenues suffered as the ever-tightening British blockade cut sharply into import duties, the main source of government income at the time. In 1814 outlays exceeded revenues by 211 percent.

Hamilton had intended that the Bank of the United States, which he established, should finance deficits incurred by the government, but its charter had expired in 1811, the victim of politics. The government now found itself hard pressed to raise loans to finance the war, because the country’s financial markets were still in their infancy and unable to handle the large sums required.

The country’s affluent were approached directly, and many responded. John Jacob Astor, already America’s richest citizen, subscribed to $2 million worth of government paper. (He drove a very hard bargain, buying the bonds only at a steep discount from their face value. The government, of course, had little choice but to go along with the demands of someone who could easily singlehandedly fund 2 percent of the entire national debt.)

Jackson Does Away With the Debt Once and for Once

By 1815 the debt stood at $127,335,000, a level it would not see again until the Armageddon of the Civil War. For when peace was again established, the government again determinedly whittled away at that debt. By 1829 it had been reduced to less than $50 million.

When Andrew Jackson entered the White House that year, he decided as a matter of deliberate policy to rid the federal government of debt entirely. By the end of 1834 he was able to announce that he had succeeded. The last of the debt would be discharged, Jackson wrote to Congress in the State of the Union message that year, and the Treasury would have a positive balance of $440,000 on January 1, 1835.

Jackson left no doubt just how important he thought discharging the debt was, equating it with peace itself. “Free from public debt,” the President wrote, “at peace with all the world … the present may be hailed as the epoch in our history the most favorable for the settlement of those principles in our domestic policy which shall be best calculated to give stability to our Republic and secure the blessings of freedom to our citizens.” Praise for Jackson’s action on the debt was universal. Roger B. Taney, the Chief Justice, wrote the President that the extinction of the debt was, as far as he knew, unique in the history of nations. Indeed, Jackson’s achievement remains singular today.