US Debt Closer to Junk

 Sirs,

I channel through policy historian Robert E. Wright from the Great Beyond to warn that the recent debt downgrades by Mr. Fitch is much too sanguine. America’s debt today should be rated closer to junk than to top notch. The situation is not quite as dire as when I accepted General Washington’s request to serve as the nation’s first Treasury Secretary, but reforms akin to those that I implemented in the early 1790s must be made lest the nation’s public credit be impaired further.

A dozen years ago, Mr. Poor also downgraded the nation’s public securities a notch, leaving only Mr. Moody to assure the public that nothing is amiss. All of the Big Three credit rating agencies, it must be observed, inflate the scores of all but the most pathetic securities lest they face challenge. Given the power of the executive branch of the national government to tax, regulate, and otherwise control private entities and persons, rest assured that Messrs. Poor, Moody, and Fitch tremble at the notion of making public their true views of America’s current creditworthiness.

In my time, the prices of public debt obligations served as a reliable guide of creditworthiness. I watched proudly as my fiscal policies, though the subject of partisan controversy, steadily raised the price of public obligations from a few pennies on the dollar to above par. American economic independence from Britain was definitively achieved when the yields on its bonds dipped below those of the Mother Country, in Britain’s own markets no less.

Bond prices then were internationally comparable because stated essentially in gold or silver. Today, with the globe awash in bills of credit (“fiat money” as currently fashioned), they convey less information about creditworthiness and more about relative inflation expectations and the ability of some nations, like the United States, to force debt on their own citizens and on other governments. Creditworthiness is thus more subjective today, but still amenable to analysis.

I once stated that America’s national debt would be a blessing and a cement to the Union and it long proved a net benefit. The government’s ability to borrow large sums relatively quickly and cheaply saved the country from recolonization in the 1810s, being ripped into two by a massive insurrection in the 1860s, and being dominated by evil foreign powers in the 1940s. Yet despite those exertions it remained so easily manageable that it was completely paid off in the 1830s and could have been again in the 1910s if a great war had not interceded.

In the same breath that I extolled the virtues of public credit, however, I warned that the national debt could become excessive and hence a net burden. It became excessive following the government’s unwarranted bailout during the Global Panic of 2008, which triggered the downgrade by Mr. Poor. The Great Pandemic of 2020 occasioned another burst of unwarranted borrowing and the capitulation of Mr. Fitch.

I say unwarranted because both episodes broke rules that I laid down as Treasury Secretary and that were followed even by my Virginian political rivals. Firstly, during panics government money should be employed to make loans only to private parties willing to pay a penalty rate and able to post sufficient collateral. Due to my untimely death, this rule has come to be associated with one Mr. Bagehot. Whatever the attribution, adherence to the rule stymies panics by assuring solvent businesses that they can obtain gold if necessary while not subsidizing insolvent concerns. The technique of flooding the market with bills of credit and lending capital to commercial enterprises encourages nothing but profligacy in private business and extravagance with the public purse.

Secondly, the Treasury should never borrow money to stimulate the economy or to transfer resources from one citizen to another, or from the citizens of this nation to those of another. It should borrow only for emergencies, like just wars, and when tax receipts prove insufficient to service the debt during an unexpected downturn in trade. 

Although I sought to establish a national government larger and more vigorous than the one sought by my political rivals, even I am appalled by its current size and scope and am amazed that the legislative and judicial branches have allowed the executive to gain control of the public purse. America must restore its balance through legislation and court decisions before the republic is lost to an oligopoly of placemen and sycophants.

Thirdly, governments should never borrow money without also raising a tax sufficient to service and retire the resulting debt. In addition to putting creditors at their ease, such a policy minimizes the incentive of politicians to borrow and spend, which creates the illusion that they have provided some benefit without a cost.

Until America follows its unwritten fiscal constitution and grows out of its current debt burden, Treasury’s debt will remain closer to the junk status of the 1780s than to the AAA status my policies elevated it to in the 1790s, regardless of the letters assigned to it by the likes of Messrs. Fitch, Poor, and Moody.

Mr. Hamilton chose to channel through Robert E. Wright, a senior faculty fellow at the American Institute for Economic Research, because of his authorship of One Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe (2018).