Tuesday, February 22, 2011

First in War, First in Peace, First in Solvency?

First in war—first in peace—and first in the hearts of his countrymen, he was second to none in the humble and endearing scenes of private life; pious, just, humane, temperate and sincere; uniform, dignified and commanding, his example was as edifying to all around him, as were the effects of that example lasting. – General Henry Lee

George Washington died, unlike any subsequent American statesman, with a universal sense of loss felt by his countrymen. For a quarter of a century, one man seemed to hold the fate of the American Revolution and the experiment in republican self-government afloat through his own herculean character and self-control. In a number of real crises Washington was trusted with an amount of power and a position of importance that few men in all of recorded history have ever resisted abusing. Americans and observers the world over marked on this at the time and marveled in it. So should we. There has been nothing like it since as all subsequent revolutions ended in anarchy and/or dictatorship.

Much ink has been, and will continue to be, spilled in investigating Washington’s life and legacy. New biographies of major proportions are written about his career at least every decade or so and countless references can and will be made to our first president on seemingly every issue under the sun. But in the present, few issues loom over us quite like our ballooning national debt—being compounded at an unprecedented rate by annual deficits unlike anything we have ever seen in the entire history of the republic.

National debt has been a problem since the very creation of the republic. The very existence of an unfunded debt led very able and intelligent statesmen to toy with the notion that they could goad army officers into threatening to march on the Continental Congress in order to force that body and the states to properly finance the debt and satisfy the nation’s creditors. Fortunately, in that instance as in so many others, Washington was there to deftly and firmly handle the crisis, remind his friends that unleashing the army from its subordinate position to the civil authority would likely—as it had so many times before in history—“deluge our rising Empire in Blood.” The Rubicon remained uncrossed.

But the conspiracy at Newburgh was just the latest near miss, circa 1783, with a problem well known to the founding fathers and one of the proximate causes that impelled them to abandon the Articles of Confederation for the current U.S. Constitution in 1787-89. That problem related to the fundamental strength and stability of their republic—its ability to finance itself through some manner of tax revenue—and, derived from that, its ability to secure loans and raise armies in times of emergency and war. The late 1780s were not peaceful times in the western world. The British had never evacuated their frontier forts—as stipulated by the Treaty of Paris in 1783—because they were protesting what they considered the American failure to deal justly with loyalists and their property. War—including the past war debts from the Revolution—stalked the republic in its earliest years and with it the republican nightmares of standing armies, burgeoning debts, and higher taxes. In short, debt was tied up with a nexus of fears and worries that were all too real and that were illustrated in the fates of former republics, the corruption of the British government, and the collapsing French monarchy mired in the debts of a century of warfare.

On the matter of paying the war debts from the Revolutionary period and protecting the republic through a government capable of raising armies and the funds to pay for them, Washington’s loyalties were never much of a secret. But Washington was determined to not be a Caesar or a Cromwell (later Napoleon’s name would join the list). To have used the trust he had gained during the long years of hardship of the Revolution, even for a purpose he deeply believed was necessary, troubled Washington greatly. But his friends, at this time mainly his Virginian neighbors Thomas Jefferson and James Madison, as well as his former aide-de-camp Alexander Hamilton of New York, persuaded him that the times were dire enough—that the country’s very future was in jeopardy—that Washington’s legacy would either be enhanced by success or that he and the country would fail together. In the event of the latter, if he had not attempted to save his country all his previous efforts would have been for naught and would be forgotten at best.

It is in this context that the 1790s need to be understood. This is difficult because the Federalist overreaction to the war scare with France at the very end of the period and Jefferson’s interpretation of his subsequent election to the Presidency has obscured much of what was really going on before 1798-99. George Washington, upon being unanimously elevated as the nation’s first President, wanted to give what was already expected to be the new cabinet’s most controversial and important position—the Treasury—to Robert Morris, the Financial Superintendent most responsible for giving any semblance of soundness to the Continental Congress’s finances during the war. Morris was not interested in the job however (angling for a Senate seat), leaving his old lieutenant—Gouverneur Morris—or Washington’s financially astute former aide Hamilton the likely candidates for the job. Hamilton’s plan—assumption of the state war debts, creation of a national bank similarly modeled after the 17th century Bank of England to finance the debt, and the promotion of domestic manufactures—was largely a repackaging of what nationalists had been fighting for since the final years of the Revolutionary war. Each piece of it was tied to what all perceived was the new government’s primary function—to gain respect in the world and to protect the freedoms won by the revolution against anarchy at home and tyranny abroad. Almost all of this program was passed by the first congresses—the major exception being the idea to have direct Federal support for certain domestic manufactures. In his Second Annual Message to Congress, Washington gladly reported the first fruitful results of the nation’s new footing: “The progress of public credit is witnessed by a considerable rise of American Stock abroad as well as at home. And the revenues allotted for this and other national purposes, have been productive beyond the calculations by which they were regulated. This latter circumstance is the more pleasing as it is not only a proof of the fertility of our resources, but as it assures us of a further increase of the national respectability and credit; and let me add, as it bears an honorable testimony to the patriotism and integrity of the mercantile and marine part of our Citizens.”

Washington’s two terms in office occurred at a time that any rational person would have considered dangerous. The new republic got started already heavily in debt, assuming powers heretofore unexercised by any authority since the British authority had collapsed, frontiers being monitored by a string of British forts and harassed by their Indian trading partners (the British traded weapons for furs primarily), pirates in North Africa raiding American commerce and demanding tribute, and the republic’s best ally, Louis XVI, facing revolution in Paris. It was hardly a propitious time to begin, but neither was it a time to not have a more powerful and effective government in place. Hamilton’s financial plan, which was heavily debated in Washington’s cabinet—the Commander-in-Chief accepting argument papers from both sides before endorsing Hamilton—as well as both houses of Congress, came just when the country needed to begin arming for war (both with the Indians and the British), paying off the pirates, and finally getting a hold on the national debt.

Below are charts illustrating the national debt during this period from various vantage points including total nominal dollars, per capita nominal dollars, and adjusted per capita dollars. I have included the Civil War years in the final chart to illustrate just what a tremendous emergency that conflict was and how the debt accumulated in those years dwarfed all that came before. What should be immediately apparent is not only the fact that the country began with nearly it’s highest debt right at the beginning, but that the financial plan put in place under Washington—which the Jeffersonians did not significantly alter except during the 1812-1816 period when the First Bank of the United States ceased to exist—quickly led to its reduction within a decade interrupted only by the Louisiana Purchase and the War of 1812. Those latter two endeavors were successful (meaning the Government could afford them and survive), along with a war against the Barbary Pirates, uninterrupted interest payments, continuing wars against and payments to various Indian tribes, and the real first steps at retiring the debt, because of Washington’s priorities in the first years.

Upon leaving office, Washington issued his farewell address. That document is a wonderful legacy to us, the heirs of the Revolution, and it addresses a great many topics that are still quite relevant. But on the matter of debt and debt financing, Washington was quite explicit: “As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible: avoiding occasions of expence by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it; avoiding likewise the accumulation of debt, not only by shunning occasions of expence, but by vigorous exertions in time of Peace to discharge the Debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burthen which we ourselves ought to bear.” To those who would look to spend more when government revenues fall, and who would cut the defense of the republic in a time of peril, when almost three times as much money is being allocated to non-defense spending, Washington’s farewell words are a stinging rebuke. This should surprise no one. The founders were republicans and liberals who invested the Constitution of the United States with ample powers to foster Union, raise armies and navies, pay for them, and accumulate (temporarily) and finance debt. However, it was a government limited by the rights of its individual citizens and its own crucial, but circumscribed, sphere of operations along with its strict divisions of power between the branches of the government and between the Federal government and those of the States.

Finally, Washington knew he stood first in a nation of equal citizens and not a nation of subjects. As such, he knew and expected everyone else to know, that they could not simply elect officials and then abdicate their responsibilities as citizens. Speaking of spending and debt Washington lectured his countrymen as only he was allowed: “The execution of these maxims belongs to your Representatives, but it is necessary that public opinion should cooperate.” If that meant more revenue was needed for the “public exigencies” then citizens should be there for their republic, but always with a view that any suffering would be temporary so long as everyone was willing to deal with the crisis promptly and honestly. In his last message to Congress, Washington said, once more, that “it will afford me, heart felt satisfaction, to concur in such further measures, as will ascertain to our Country the prospect of a speedy extinguishment of the Debt. Posterity may have cause to regret, if, from any motive, intervals of tranquility are left unimproved for accelerating this valuable end.” His countrymen did just that in the decades to come, retiring the debt entirely in the second term of Andrew Jackson less than forty years later.

Hard choices and dangers lie ahead of us. On that score no one should fool themselves in the least. A debt as large as $14 trillion is scarcely comprehensible and seems entirely out of our reach as far as ever getting it to stop accumulating, let alone to begin reducing it. But we must begin that process and we must begin it now. None of Washington’s contemporaries, not Hamilton, not Adams, not Jefferson, not Madison, not any of them that I am aware of, advocated an always expanding unlimited debt. The most Hamilton ever said on that score was that in times of warfare, the rate at which the government could and should accumulate debt was irrelevant so long as it could finance the interest. If the government were destroyed, its debts would hardly matter. But all were far too familiar with the wrecks of past and contemporary governments to be cavalier on the subject of debt. Washington always advocated a bold, firm, and manly confrontation of problems if one wanted to honestly deal with them.

No issue deserved a resolute response more than the fiscal solvency of the republic—quite simply everything else depended upon it in the late 1780s. If we do not confront our own ever-growing mountain of debt, we will have come right back to where we began when our first President rightly said “the destiny of the Republican model of Government, are justly considered as deeply, perhaps as finally staked, on the experiment entrusted to the hands of the American people.” Those Americans proved themselves worthy of his confidence. Will we?

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