Commentary / News

Hamilton on Debt: Turn It into Capital!

by Nancy Spannaus

June 15, 2019–In their June 12 column in Wall Street on Parade, Pam and Russ Martens reviewed the scandal of the century—the fact that the Federal Reserve has bailed out Wall Street to the tune of $27 trillion since the crash of 2008-9. They concluded, appropriately, with the warning that nothing has been done to prevent another such crash.

Hamilton on Debt: Turn It into Capital!

U.S. Federal Debt as percentage of GDP

The Martens’ column takes off from the question: Why has the 2008-9 stock market crash not, like the 1929 crash, led to an obvious depression collapse (yet)? The answer, they note, is the creation of Federal debt, especially by the Federal Reserve, which has supported Wall Street by fantastic dimensions. However, the creation of that debt has done virtually nothing to support the physical economy—the industry, infrastructure, agriculture, and living standards—of the nation as a whole. Wall Street has simply used it for speculation.

The only alternative to facing a new collapse, the Martens state, is reinstitution of Glass-Steagall banking separation, the FDR measure established June 16, 1933.

I agree, but the question of the debt remains.

The Martens’ column brought to my mind what Alexander Hamilton, founder of the American System of Economics, said and did about debt. There are some important principles involved.

Hamilton was widely attacked for his views on debt, which have usually been summarized by his statement in an April 30, 1781 letter to Robert Morris: “A national debt if it is not excessive will be to us a national blessing; it will be powerful cement of our union.” How could he say that?

What Hamilton understood, and others like Jefferson did not, is that debt (the obligations of the past) could be turned into the basis for credit (the promise of the future). His concept for doing this was concretized in his proposal for the creation of the Bank of the United States, which used the reorganized U.S. government debt as a source of capital intended for use by private industry, agriculture, and commerce, as well as the creation of a common national currency and solid public credit.

Thus, dead debt became credit and would create the prosperity that would allow the nation to service, and ultimately pay off its debts – all the while it created new debts through borrowing to invest in upgrading the economy. At the same time, Hamilton insisted in his First Report on Public Credit, that “the creation of debt should always be accompanied with the means of extinguishment.” That meant providing funds dedicated to servicing the debt, and then ultimately paying off the principal.

The application of Hamilton’s principle of debt management has many examples in American history, of which the Reconstruction Finance Corporation, the Transcontinental Railroad, and the TVA are very prominent examples.  It took decades in many cases, but the initial government funding was repaid.  In fact, in these cases the investment (debt) was repaid many times over and cannot be quantified, as it resides in the realm of the intangible Total Factor Productivity—a measurement of increased efficiency and innovation in the economy that spurs economic progress.

The 7-state region transformed by FDR’s TVA project, begun with government debt.

According to American System principles, debt (money) is legitimate if it is issued to fund productive activity. Reliance on massive borrowing is necessary, for example, with significant infrastructure projects, such as canals in Hamilton’s time, or high-speed rail today. Of course, much of the debt created and held by the Fed to bail out Wall Street today is not legitimate and even fraudulent (like various forms of Asset-backed securities the banks have offloaded from their books onto the Fed), and will have to be written down. But more than $16 trillion is being held in Treasury bonds by a wide range of entities, much of which could be put to use.

Using Hamilton’s method, the Congress could establish a National Infrastructure Bank, using subscriptions of Treasury bonds of 3 years or more maturity, and outstanding municipal bonds of 5 years or more maturity to purchase preferred stock, which would form the capital base of the bank. The national debt would not be increased by this method, but it would be turned into what Hamilton would call “active capital,” creating good for the nation. A level of $4 trillion would provide a healthy start, in the face of the massive needs of the U.S. economy today for a radical upgrade of its basic economic infrastructure.

So yes, Glass-Steagall. And yes to a Hamiltonian National Bank, with a mandate to turn our national debt into a “national blessing.”

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