Alexander Hamilton & Gold Jude Wanniski March 22, 2001

Memo To: Treasury Secretary Paul O’Neill
From: Jude Wanniski
Re: The No.1 Treasury Secretary

One of the things you might do to give yourself a better feel for your job -- which I think is one of the three most important jobs in the world (after GWB’s and Alan G’s) -- is to take a look at how Alexander Hamilton handled Treasury in the first term of George Washington. If it were not for Hamilton, I really don’t think there would have been a second Washington administration, because there surely would have been a collapse of public finance, and with it confidence in the new union.

I’m not sure about the following numbers, Mr. Secretary, but they are in the ballpark. When the new government opened for business, it had budget outlays for government expenses of roughly $800,000 a year and revenues of about $1 million, all of which came from duties collected at the eight or so ports of entry. In addition, the interest on the national debt amounted to $5 million per year. That’s right! Income of $1 million and obligations of $5.8 million. The situation was so bleak that the first Congress actually was mulling the possibility of reneging on the national debt, as there seemed so little chance of being able to service it. The government paper floated to finance the Revolutionary War was trading in the secondary market at 15 cents on the dollar.

Hamilton did not think it a good idea to begin the new nation with a declaration of bankruptcy, so he went in the opposite direction. As the 13 states had their own debt problems, Hamilton was not going to be able to extract taxes from them quite as easily as we do these days. He solved the problem by announcing to the 13 states that the federal government was willing to take all their debts and pile them atop the national debt. In exchange, they only would have to allow the federal government to collect excise taxes on whiskey, tobacco and such to build a sinking fund that would retire the whole of the debt.

At the same time, Hamilton told America’s bank creditors in Amsterdam a simple thing that went a long way to building the nation’s credibility. He told them they would get all their money, with interest, at par with gold, even though there was no gold in the Treasury. All the creditors had to do, he advised them, was to refinance the debt and extend the maturities, to give the new nation time to get its footing. As the banks practically had written off the debts, this was music to their ears, so they cheerfully agreed to the refinancing. He had to get the Congress to agree to all this, and a gold standard to boot. Because Virginia would stand to lose proportionately as it had the smallest per capita state debt, Hamilton persuaded Thomas Jefferson to support the plan in exchange for moving the capital to Washington from Philadelphia.

There was a whiskey rebellion in Pennsylvania, with resistance to the excise tax. But once that was put down, the public finances began to straighten out. This was a rich country, after all, and there were plenty of public lands that could be auctioned off as the country grew. Even with another war, in 1812, the nation’s debt almost disappeared in the 1830s. I thought about all this recently, with all the talk of paying off the national debt in the next several years.

If Hamilton were around today, I think he would be quick to see the problems we got ourselves into in 1971 when President Nixon took us off the gold standard. Hamilton had warned Congress that while a small group of men could make monetary policy over a short track of time, that it would be far better to have the market determine the value of the dollar by fixing it to gold. In that way, he said, when too many dollars are issued in error, they would be presented at the bank for gold and the bankers would see their error and produce fewer dollars.

This is a good time for creativity in public finance, Mr. Secretary. You have impressed me enormously with your intelligence and wit thus far, in sparring with the various congressional committees. You clearly are a man of independent thinking and independent means, so you do not have to go by conventional wisdom. I’m especially happy that, like Hamilton, you are not a banker by training, as we have not had a creative banker as Treasury Secretary since Andrew Mellon in the 1920s. The best solutions to the biggest problems almost always turn out to be simple ones, as Hamilton’s maneuvers now seem to be with hindsight.