As
Americans celebrated New Year’s Day in 1790, the new nation’s economy was
tittering on the brink of collapse. The cumulative debt of the states and
nation was enormous, soldiers who had served in the Revolution hadn’t been
paid, farm foreclosures were so rampant that mobs burned courthouses, there was
no national coin or currency, in many states inflation raged out of control,
and international trade was near impossible because the nation had no credit.
It looked likely that the American experiment would fail.
The
newborn country might have failed, except the United States had three enormous
assets that it had not possessed just ten months earlier. A new government had
been formed under the recently ratified United States Constitution, George
Washington had been sworn in as the first president, and Washington had a
cabinet member with a plan. The man with a plan was Secretary of the Treasury,
Alexander Hamilton. On January 14, 1790, the secretary presented his economic plan to Congress.
Alexander Hamilton |
Hamilton’s
goal was to renew confidence in the government, and “to promote the increasing
respectability of the American name; to answer the calls of justice; to restore
landed property to its due value; to furnish new resources both to agriculture
and commerce; to cement more closely the union of the states; to add to their
security against foreign attack; to establish public order on the basis of an
upright and liberal policy.”
The
major elements of his plan included: 1) Assumption of Revolutionary War debts of
over $54M, 2) issuance of tiered debt instruments to finance the retirement of existing
loans, 3) retirement of all prior debt at face value, 4) a national bank 80%
privately owned, 5) a sinking fund to retire new debt, 6) a sound national
currency backed by gold and silver specie, and 7) tariffs to raise revenue and
protect fledgling commerce.
Hamilton’s
Plan worked like a charm. With renewed confidence; the economy boomed; foreigners
engaged with us in expanded trade; a trustworthy currency dampened civil
unrest; jobs became plentiful; and debt as a percent of Gross Domestic Product
dropped to negligible levels. When Washington retired seven years later, he
left John Adams a healthy economy.
Economic
collapse is not uncommon in world history. Even when everyone can see a looming
calamity, it requires courage to take the necessary steps to re-instill
confidence. Hamilton’s Plan was hugely controversial. Critics said it wouldn’t
work, or that it was unfair. The critics were wrong.
Alexander
Hamilton saved a shaky nation. (Actually, he didn’t do it by himself. Only
George Washington had the political influence to overcome objections from
powerful foes.) If this was a single occurrence, we might count ourselves as
lucky, but there are at least two other occasions when we avoided financial
collapse.
The
Great Depression was horrific, and it was used as an excuse for government
intrusion into every corner of the economy. None of these government actions
worked, and when WWII came along, we piled on even more debt. When peace came, the
question on everyone’s mind was did we re-engage the New Deal and deficit
spending, or take a different path?
In
1946, Republicans ran against “big government, big labor, big regulation, and
the New Deal’s links to communism.” The elections were a rout, with Republicans
capturing the Senate and House for the first time since the start of the
depression. Republicans also beat 37 of 69 liberal Democrats in Congress,
making the minority party much more conservative. The 80th Congress passed the
first balanced budget since the Great Crash, cut taxes, and shut down price
controls. Opponents screamed that Republicans were driving the nation back into
the Great Depression. The naysayers were wrong. The country enjoyed over two
decades of prosperity.
In
January of 1981, the Misery Index was 19.33. This was a new measurement that
added the unemployment rate to the inflation rate. The Misery Index had never
been worse. Inflation was over ten percent, and a 30-year fixed mortgage was
14.9%. In mid-1979, President Carter declared a “Crisis of Confidence” in his
famous Malaise Speech. The economy was so bad that pundits were saying that the
world had become too complex for one man to manage. Perhaps they were right—it
took two men. Ronald Reagan and Paul Volcker worked in tandem to put the
economy back on track so fast that Reagan won reelection in 1984 in a
landslide, winning 49 of 50 states.
All
three of these financial crises had a common characteristic. We got out of them
by returning to sound fiscal policy that supported a strong dollar and
re-inspired confidence. Confidence drove high rates of growth in the private
sector and reduced the proportion of government activity in the economy.
We’re
in another economically dangerous situation. The good news is that our current predicament
is no more severe than these historic crises. To put things right, we need only
to restore confidence in the private sector by adopting sound fiscal and
monetary policy. The right actions are not hard to find. They’re right there in
our own history. Those who repeat history are not always condemned.
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