Walker and Company • 1997 • 214 pages • $21.00
Richard Timberlake, a Freeman contributing editor, is professor of economics emeritus at the University of Georgia, Athens.
Hamilton’s Blessing, by historian John Steele Gordon, begins by declaring that “The United States, was born in debt.” And the last sentence in Gordon’s conclusion states: “So while it will be a bruising political battle [to stop the government's debt-creating fiscal folly], it is one we must fight, not only for our own sake, but even more for the sake of our children.” In between, Gordon describes the growth of the federal government’s debt in six chapters, plus the aforementioned conclusion. The six chapter titles imply the arguments that Gordon develops: “The Hamilton Miracle,” “Andrew Jackson Redeems the Debt,” “Armageddon [the Civil War] and the National Debt,” “The Twilight of the Old Consensus [of a balanced federal budget],” “Keynesianism and the Madison Effect [Men Love Power],” and “The Debt Explodes.”
Gordon notes that as early as 1781, at the age of 26, Hamilton had observed in a letter to Robert Morris (“the financier of the Revolution”) that “A national debt, if it is not excessive, will be to us a national blessing. . . . It will . . . create a necessity for keeping up taxation to a degree which, without being oppressive, will be a spur to industry.”
Hamilton’s attempt at fiscal sophistry, although it provided an attractive title for a book written more than 200 years later, is fundamental economic fallacy. The notion that any taxation, whether oppressive or not, is or could be a “spur to industry” is palpably absurd. To use public debt to encourage such taxation is error compounded. Every tax takes a share of some product’s value without contributing any realized resources to its development. Therefore, every tax is an immediately identifiable burden on production whether the tax is “justified” by some alleged services from government institutions or not.
The immature Hamilton may have been thinking of import taxes (tariffs) that would have given home industry a competitive advantage in foreign trade. But that famous popular belief was as wrong in Hamilton’s time as it is today. Adam Smith, whom Hamilton often cited, knew and preached against the fallacy of protectionism. All impediments to trade—taxes, tariffs, quotas, and the like—sap income, destroy incentives, and are counterproductive. Hamilton’s nationalism and penchant for a relatively powerful federal government, a trait that Gordon and many others have emphasized, may have contributed to this elementary error.
Opening the Pandora’s Box that supposes debt to be a blessing was Hamilton’s original folly. Gordon’s attempt to give this notion legitimacy, even if his purpose is to show that it has gone too far, is full of factual historical error. He attempts to trace the development of the federal government’s debt from pre-Revolution times to the present to show how the national debt has become an ungovernable monster about to devour all of the annual federal budget. The trouble is that he has not done his homework.
I cannot, in the limited space of a review, catalogue the catenae of historical misdemeanors that Gordon commits. His analysis of recessions, Civil War financing, and, especially, the Great Contraction and Depression of 1929-42 are so flawed that it would take another book to correct his errors.
A public debt is not so much a blessing or a curse as it is an index of the kind of government we have with us. The nineteenth-century U.S. polity included many government-limiting institutions: an operational gold standard; a Supreme Court that understood and supported the U.S. Constitution—until its shameful capitulation on the legal tender cases in 1871 and 1884; a fundamental political understanding that the budget would be overbalanced every year in order to pay off the debt that had arisen from wartime emergencies; the Jeffersonian principle in foreign policy of no “entanglements” but free and open trade with all; and a general belief that welfare is the province of private charities and churches that are close to the venues of the needy rather than the province of government.
Reducing the national debt is not the first order of business, even though the debt is and will be a burden on our children. For the ballooning debt is only an outward and visible sign of an inward and spiritual disgrace. It starts with the idea that the state works for us, that it can do good things for us at no cost (such as Social Security programs and job creation) that it provides services that private individuals cannot provide for themselves. If the state in doing all these good things goes into debt—well, we just have to endure it. In short, it is statism and not the debt as such that is the problem.
If Hamilton’s Blessing had even the beginnings of an answer to the momentous problem of statism, its historical shortcomings could be forgiven. With an antidote for statism, the significance of the national debt, whether curse or blessing, would shrivel into nothing. As it is, the book is completely misleading as financial history, and never recognizes the fact that the debt is only a symptom and not the primary disease facing U.S. policy makers today.