Dartmouth-educated Tim Geithner, our current Secretary of Treasury, has either forgotten or never learned the lessons from Alexander Hamilton’s first year as our inaugural Secretary of Treasury.
Hamilton is no favorite of the Tea Party movement. Indeed, it can be argued that no figure in the early years of the Republic did more to usurp the Constitution than Hamilton. He was, after all, the man who persuaded the First Congress to pass and Washington to sign the National Bank Bill that both Jefferson and Madison considered unconstitutional. He followed that up with a vainglorious show of force in the Whiskey Rebellion, and, while out of office, vigorously supported the unconstitutional Alien and Sedition Acts. And did I mention his notorious speech at the Constitutional Convention where he argued in favor of a life time appointment for the head of the Executive Branch and the members of the Senate? If ever there was an American champion of centralized federal power, it was Hamilton.
But Hamilton, for all his flaws, understood how international monetary markets behaved long before most of his contemporaries caught on.
On January 9, 1790, he delivered his 140,000 word First Report on Public Credit in person to the First Congress as it met in New York City. The centerpiece of this plan was to consolidate all the Revolutionary War debts of the separate states, as well as the national government established under the Articles of Confederation. These debts, Hamilton argued, should be assumed by the new federal government. His initial plan called not for the reduction of the principal — because the government at the time didn’t have the resources to pay it. Instead, Hamilton proposed to pay the interest on the debt, with the reduction of the principal to be addressed later, when the new Republic was on firmer financial ground.
After predictable political wrangling, Hamilton’s plan was adopted in the summer of 1790. When the debt was consolidated, and interest paying securities were issued to honor that debt by the new federal government, the full faith and credit of the government was established. Hamilton knew that so long as investors were confident interest payments would be made in full and on a timely basis, the credit rating of the United States was sound.
Hamilton was exactly right on this. Despite over two centuries of ups and downs since, that full faith and credit has never been seriously questioned.
That is, until the budget busting ways of the Obama Administration and the unwise and politically calculated recent statements of Secretary Geithner on the issues of budget agreements and raising the debt ceiling.
In January of this year, Geithner made this ill-advised statement to Congress:
Those of us who live on tight family budgets understand that when revenues are down, you pay bills in order of their importance and priority. You may let your membership in the gym lapse, or drop cable TV, but you will certainly pay the rent or mortgage as well as the grocery bill.
What Hamilton knew in 1790, and what Geithner should know today, is that the first priority of the government is to pay the interest on our debt. Since those interest payments represent a relatively small portion of our current expenditures, such payments — if given first order of priority — can easily be made, whether or not the debt ceiling is raised. Right behind those interest payments ought to be personnel payments for our Armed Forces.
Secretary Geithner should know that the full faith and credit of the United States is harmed when he questions whether or not interest payments will be made. He also knows that, as Secretary of the Treasury, he has significant influence in determining what bills are paid first. If he didn’t know, Standard and Poor’s downgrading of the outlook for US debt to “negative” this week should be a wake-up call for him.
There are many candidates for bills that ought not be paid if the debt ceiling is not increased. How about National Public Radio, PBS, and the Department of Education for a start ?
But to suggest that the interest on the debt can’t be paid is reckless in the extreme. The next e-book we might consider publishing at Voices of the Tea Party is Hamilton’s First Report on Public Credit — and we ought to email it immediately to Secretary Geithner.
And, Secretary Geithner, there will be a test on the material.
Michael Patrick Leahy is the Editor of the Voices of the Tea Party e-book series. He can be reached on Twitter at @michaelpleahy .