Financial History Issue 127 (Fall 2018) - Page 24

Signature of Treasury Secretary Albert Gallatin. which they had neither the wi[s]dom to plan nor the spirit to adopt.” Gallatin’s views on debt and democracy could not have been more different. He and other Republicans thought Hamil- ton’s funded debt endangered freedom and republican government. That belief rested on interlocking economic and political foundations. The economic foundation for the belief was the orthodox liberal premise—elabo- rated by Adam Smith and others—that government spending on everything except public improvements consumes a nation’s investment capital. As long as a government could spend no more than the people were willing to pay in taxes, there was a salutary natural limit on this consumption. Credit made that limit flex- ible. But the British funding system that Hamilton had adopted practically demol- ished the natural limit. It allowed the government to borrow far more than the people were willing to pay in taxes because the people had to pay only enough to cover the annual interest. It prevented the people from understanding how much money the government actually was spending, and that ignorance allowed the government to go deeper and deeper into debt. The federal government already used about 70% of its revenues to pay interest on its debt, and the taxes needed to do that shifted more and more capital from ordinary people into the hands of wealthy creditors. Until the government freed it revenues from this burden, it could not afford to do much of anything without borrowing even more. That economic analysis supported the Republicans’ political critique of funded debt. Hamilton had argued that the public debt would strengthen national govern- ment because the public creditors’ self- interest would lead them to support the federal regime. The Republicans accepted that prediction, but they thought it was a malediction. True republican government required the participation of the people, and Republicans thought the people could participate more effectively in state and local governments where they were more directly represented. Consolidating power in a distant federal government shifted political control from the people into the hands of wealthy and designing men who ultimately would corrupt the government. Embedded in the Republicans’ eco- nomic and political thinking were more visceral beliefs about debt and democ- racy. Like Adam Smith and other liberal political economists of the time, Repub- licans thought about public debt in the same way they thought about private debt. They believed that the failure to pay it would bring ruin. And that notion 22    FINANCIAL HISTORY  |  Fall 2018  | interlocked with an equally visceral belief about democracy. A republican govern- ment gave sovereignty to the people, but true popular sovereignty depended on the people’s independence—their freedom to act in their own best interests. Economic arrangements that made voters depen- dent on others—creditors, landlords or employers—compromised their indepen- dence. Public debt compromised the gov- ernment’s independence in the same way. A government beholden to its creditors was not truly under popular control. Its people were not wholly free. True freedom depended on frugal government uncor- rupted by debt. Republicans believed that public debt jeopardized not only freedom, but peace. Montesquieu, Rosseau and other Enlightenment thinkers had maintained that monarchies were more warlike than republics because they could shift the physical and economic burdens of war to their subjects. Republics were inher- ently peaceful because the people who bore the awful burdens of war would avoid armed conflict. Were all nations to become republics, destructive wars would end and universal peace would usher in an era of unparalleled prosperity. Hamilton dismissed this vision as a utopian dream. The best way to avoid war, he had written in The Federalist, was to prepare for it.