In his latest work, One Nation Under Debt, Robert E. Wright, who has written extensively about debt and finance during the decades that marked America’s climb to economic preeminence, carefully documents the evolution of U.S. dependability and integrity in the international investment community. This reputation led to the acceptability of U.S. financial markets and government bonds, especially in critical periods of economic and military conflict.
Wright, curator for the Museum of American Finance and author of 11 books, has dedicated years of research to the lives and times of those individuals who bought, sold, and held the variable forms of U.S. debt issuances of the day. Tedious as that might sound, it’s actually fascinating. By recounting the trading of early U.S. government bonds, the author deepens the reader’s understanding of why people accepted the debt obligations of a new nation without a track record for repayment. In so doing, Wright destroys some myths, such as that only relatively wealthy Americans purchased the new debt securities, that the debt was just held domestically, and that debt securities were concentrated in only a few states and urban locales.
Wright sees a template for all successful economic growth in the evolution of U.S. dependability. He portrays it as a baseball infield where home plate is the government protection of life, liberty, and property. First base is the all-important financial system; second base is the entrepreneurial firm; and third base is the cadre of management expertise. The more solid each base becomes, the easier it is for the nation to rack up runs on the wealth scoreboard.
And so it is with debt. America entered a century of enviable growth in which federal bonds were regarded as outstanding investments. Thanks to Wright’s painstaking research, the midsection of the book fully illustrates the lives and times of bondholders.We learn about the people who held the debt and why they bought and sold it.We learn how debt issuances helped Revolutionary War veterans settle the frontier. We also learn how modern the new American financial markets quickly became. It wasn’t long before “flight to quality” had become an international stamp of approval for U.S. debt.
All told, Wright contends that U.S. national debt became a “national blessing” because we had a “non-predatory” government. The debt system was workable and credible because Washington had not become the all-consuming leviathan it grew into during the twentieth century.
Wright does include warnings aplenty, explaining why public debt, while serving as financial cement and trust among people and nations, is also to be feared. He quotes Adam Smith: “When national debts have once been accumulated to a certain degree, there is scarce . . . a single instance of their having been fairly and completely paid.”
Even Alexander Hamilton noted that there was a tipping point beyond which additions to the national debt would be deleterious: “Where this critical point is cannot be pronounced; but it is impossible to believe that there is not such a point.” Before leaving office as Treasury secretary in 1795, his final report on public credit sought to rectify “and to prevent that progressive accumulation of debt which must ultimately endanger all government.” The danger, though, is not to government, but to the people. When politicians can borrow and spend without restraint, people’s liberty and property are imperiled.
Some of the Founders knew that, and Wright adds gravitas to his book by contrasting the Federalists’ advocacy of a centralized financial system with the stance of the Antifederalists. One Antifederalist in particular, writing under the pen name Brutus, provided one of the most sagacious, prescient, and potent predictions in American history when he warned in 1788 that the federal government eventually would use the “necessary and proper” clause of the Constitution [last paragraph of Article 1, Section 8] to greatly extend its powers, thereby subverting state authority. We would have avoided many national disasters if people had heeded that warning.
Wright notes, “Unlike Adam Smith, Hamilton believed that the issuance of bonds by government augmented rather than destroyed capital.” Considering how much government in 21st-century America uses debt to finance astounding amounts of wasteful spending and the erosion of capital, I’d say Smith had the more realistic long-term vision.
One Nation Under Debt provides valuable history on the origin and development of U.S. fiscal affairs and warns us about where we are headed. The author looks on our national debt as a good idea gone awry, but I believe that the better view is that Hamilton’s debt system was a grave danger from the very beginning.