Founders' Quotes - Debt of the Nation

We must not let our rulers load us with perpetual debt.
Thomas Jefferson 1816 - letter to Samuel Kercheval

There is not a more important and fundamental principle in legislation, than that the ways and means ought always to face the public engagements; that our appropriations should ever go hand in hand with our promises. To say that the United States should be answerable for twenty-five millions of dollars without knowing whether the ways and means can be provided, and without knowing whether those who are to succeed us will think with us on the subject, would be rash and unjustifiable. Sir, in my opinion, it would be hazarding the public faith in a manner contrary to every idea of prudence.
James Madison 1790 - Speech in Congress

The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.
Thomas Jefferson 1816 - letter to John Taylor

No pecuniary consideration is more urgent, than the regular redemption and discharge of the public debt: on none can delay be more injurious, or an economy of time more valuable.
George Washington 1793 - Message to the House of Representatives

But with respect to future debt; would it not be wise and just for that nation to declare in the constitution they are forming that neither the legislature, nor the nation itself can validly contract more debt, than they may pay within their own age, or within the term of 19 years.
Thomas Jefferson 1789 - letter to James Madison

[T]he government of the United States is a definite government, confined to specified objects. It is not like the state governments, whose powers are more general. Charity is no part of the legislative duty of the government.
James Madison 1794 - speech in the House of Representatives

The crisis of the abuses of banking is arrived. The banks have pronounced their own sentence of death. Between two and three hundred millions of dollars of their promissory notes are in the hands of the people, for solid produce and property sold, and they formally declare they will not pay them. This is an act of bankruptcy, of course, and will be so pronounced by any court before which it shall be brought. But cui bono? The laws can only uncover their insolvency, by opening to its suitors their empty vaults. Thus by the dupery of our citizens, and tame acquiescence of our legislators, the nation is plundered of two or three hundred millions of dollars, treble the amount of debt contracted in the Revolutionary war, and which, instead of redeeming our liberty, has been expended on sumptuous houses, carriages, and dinners. A fearful tax! if equalized on all; but overwhelming and convulsive by its partial fall.

Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper, as we were formerly by the old Continental paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burthen all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs. Prudent men must be on their guard in this game of Robin's alive, and take care that the spark does not extinguish in their hands. I am an enemy to all banks discounting bills or notes for anything but coin. But our whole country is so fascinated by this Jack-lantern wealth, that they will not stop short of its total and fatal explosion.

~~Thomas Jefferson to Dr. Thomas Cooper, 1814

The enormous abuses of the banking system are not only prostrating our commerce, but producing revolution of property, which without more wisdom than we possess, will be much greater than were produced by the Revolutionary paper. That, too, had the merit of purchasing our liberties, while the present trash has only furnished aliment to usurers and swindlers.

~~Thomas Jefferson to Richard Rush, 1819

The bank mania is raising up a moneyed aristocracy in our country which has already set the government at defiance, and although forced at length to yield a little on this first essay of their strength, their principles are unyielded and unyielding. These have taken deep root in the hearts of that class from which our legislators are drawn, and the sop to Cerberus from fable has become history. Their principles lay hold of the good, their pelf of the bad, and thus those whom the Constitution had placed as guards to its portals, are sophisticated or suborned from their duties.

~~Thomas Jefferson to Dr. J. B. Stuart, 1817

It is a litigated question, whether the circulation of paper, rather than of specie, is a good or an evil. In the opinion of England and of English writers it is a good; in that of all other nations it is an evil; and excepting England and her copyist, the United States, there is not a nation existing, I believe, which tolerates a paper circulation. The experiment is going on, however, desperately in England, pretty boldly with us, and at the end of the chapter, we shall see which opinion experience approves: for I believe it to be one of those cases where mercantile clamor will bear down reason, until it is corrected by ruin.

~~Thomas Jefferson, letter to J. W. Eppes, 1813

I have ever been the enemy of banks, not of those discounting for cash, but of those foisting their own paper into circulation, and thus banishing our cash. My zeal against those institutions was so warm and open at the establishment of the Bank of the United States, that I was derided as a maniac by the tribe of bank-mongers, who were seeking to filch from the public their swindling and barren gains.

~~Thomas Jefferson to John Adams, 1814

I am an enemy to all banks discounting bills or notes for anything but coin.

Thomas Jefferson to Dr. Thomas Cooper, 1814

The failure of some stock gamblers and some other circumstances, have brought the public paper low. The 6 per cents have fallen from 26 to 211-4, and bank paper stock from 115 or 120 to 73 or 74, within two or three weeks. This nefarious business is becoming more and more the public detestation, and cannot fail, when the knowledge of it shall be sufficiently extended, to tumble its authors headlong from their heights.

~~Thomas Jefferson, letter to William Short, 1792

Like a dropsical man calling out for water, water, our deluded citizens are clamoring for more banks, more banks. The American mind is now in that state of fever which the world has so often seen in the history of other nations. We are under the bank bubble, as England was under the South Sea bubble, France under the Mississippi bubble, and as every nation is liable to be, under whatever bubble, design or delusion may puff up in moments when off their guard.

~~Thomas Jefferson to Charles Yancey, 1816

Jefferson on central banks:

"This institution is one of the most deadly hostility existing, against the principles and form of our Constitution. The nation is, at this time, so strong and united in its sentiments, that it cannot be shaken at this moment. But suppose a series of untoward events should occur, sufficient to bring into doubt the competency of a republican government to meet a crisis of great danger, or to unhinge the confidence of the people in the public functionaries: an institution like this, [like today's Federal Reserve] penetrating by its branches every part of the Union, acting by command and in phalanx, may, in a critical moment, upset the government. I deem no government safe which is under the vassalage of any self-constituted authorities, or any other authority than that of the nation, or its regular functionaries. What an obstruction could not this Bank of the United States, with all its branch banks, be in time of war? It might dictate to us the peace we should accept, or withdraw its aids. Ought we then to give further growth to an institution so powerful, so hostile?

That it is so hostile we know: 1, from a knowledge of the principles of the persons composing the body of directors in every bank, principal or branch; and those of most of the stockholders; 2, from their opposition to the measures and principles of the government, and to the election of those friendly to them; and 3, from the sentiments of the newspapers they support. Now, while we are strong, it is the greatest debt we owe to the safety of our Constitution, to bring its powerful enemy to a perfect subordination under its authorities. The first measure would be to reduce them to an equal footing only with other banks, as to the favors of the government. But, in order to be able to meet a general combination of the banks against us, in a critical emergency, could we not make a beginning towards an independent use of our own money, towards holding our own bank in all the deposits where it is received, and letting the treasurer give his draft or note, for payment at any particular place, which, in a well-conducted government, ought to have as much credit as any private draft, or bank note, or bill, and would give us the same facilities which we derive from the banks?

~~Thomas Jefferson To Albert Gallatin, 1803

Private fortunes, in the present state of our circulation, are at the mercy of those selfcreated money-lenders, and are prostrated by the floods of nominal money with which their avarice deluges us. He who lent his money to the public or to an individual, before the institution of the United States Bank, twenty years ago, when wheat was well sold at a dollar the bushel, and receives now his nominal sum when it sells at two dollars, is cheated of half his fortune; and by whom? By the banks, which, since that, have thrown into circulation ten dollars of their nominal money where there was one at that time.

~~Thomas Jefferson to John W. Eppes, 1813

It was impossible the Bank and paper mania should not produce great and extensive ruin. The President is fortunate to get off just as the bubble is bursting, leaving others to hold the bag. Yet, as his departure will mark the moment when the difficulties begin to work, you will see, that they will be ascribed to the new administration, and that he will have his usual good fortune of reaping credit from the good acts of others, and leaving to them that of his errors.

~~Thomas Jefferson to James Madison, Jan. 1797

The bank filled and overflowed in the moment it was opened. Instead of twenty thousand shares, twenty-four thousand were offered, and a great many were presented, who had not suspected that so much haste was necessary. Thus it is that we shall be paying 13 per cent, per ann. for eight millions of paper money, instead of having that circulation of gold and silver for nothing. Experience has proved to us that a dollar of silver disappears for every dollar of paper emitted; and, for the paper emitted from the bank, seven per cent. profits will be received by the subscribers for it as bank paper (according to the last division of profits by the Philadelphia bank), and six per cent. on the public paper of which it is the representative. Nor is there any reason to believe, that either the six millions of public paper, or the two millions of specie deposited, will not be suffered to be withdrawn, and the paper thrown into circulation. The cash deposited by strangers for safe keeping will probably suffice for cash demands.

~~Thomas Jefferson to James Monroe, 1791

The flood of paper money had produced an exaggeration of nominal prices, and at the same time a facility of obtaining money, which not only encouraged speculations on fictitious capital, but seduced those of real capital, even in private life, to contract debts too freely. Had things continued in the same course, these might have been manageable; but the operations of the United States bank for the demolition of the State banks obliged these suddenly to call in more than half their paper, crushed all fictitious and doubtful capital, and reduced the prices of property and produce suddenly to one-third of what they had been.

~~Thomas Jefferson to Albert Gallatin, 1820

”Comments? Additions?”

Yes.

[First, Washington.]

As a very important source of strength and security, cherish public credit...timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it.

. . . . . George Washington, Farewell Address, 17 September, 1796

[Things haven’t changed much in over two thousand years.]

”The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt.”

. . . . . Cicero, BC 63

Society in every state is a blessing, but government even in its best state is but a necessary evil in its worst state an intolerable one; for when we suffer, or are exposed to the same miseries by a government, which we might expect in a country without government, our calamities is heightened by reflecting that we furnish the means by which we suffer!

. . . . . Thomas Paine, Common Sense, 1776

[Not so, says President Jackson]

There are no necessary evils in government. Its evils exist only in its abuses.

. . . . . Andrew Jackson, veto of the Bank Bill, 1832

[George Mason would not be popular with approx half of today’s society.]

We have always acknowledged we are always ready to recognize the Sovereignty of Great Britain but we will not submit to have our own Money taken out our Pockets without our Consent; because if any Man or any Set of Men take from us without our Consent or that of our Representatives one shilling in the Pound we have not Security for the remaining nineteen. We owe to our Mother-Country the Duty of Subjects but will not pay her the Submission of Slaves.

. . . . . George Mason, letter to the Brent family, 6 December, 1770

[Bastiat names it for what it is – plunder.]

Sometimes the law defends plunder and participates in it. Sometimes the law places the whole apparatus of judges, police, prisons and gendarmes at the service of the plunderers, and treats the victim - when he defends himself - as a criminal.

. . . . . Frederic Bastiat, The Law

In 1790, Alexander Hamilton was the leader of those who pushed for assumption, the act of taking the Revolutionary War debts of the states and nationalizing them. Hamilton saw this as an opportunity to bind the states closer to the federal government and thus make a clean break with the Articles of Confederation. (Despite the ratification of the Constitution, there was an undercurrent of mistrust and hostility that eventually led to the election of Jefferson by the House in 1801.)

Some history is in order.

In the aftermath of the Treaty of Paris in 1783, tensions with Britain eased, and the country got around to governing itself under the Articles of Confederation without war clouds hanging overhead. But the war debt caused major problems, not the least of which was a deflationary depression. A few states took these debts seriously, but a few took the attitude, “What are the French and Dutch bankers going to do to us? Send over their armies?” These states engaged in partial or total repudiation of their debts.

At the same time, the Continental Dollar, supposedly backed by one Spanish Milled Dollar each, was collapsing in value because there was no backing except for a nebulous promise to pay. (During the war, Patriots had accepted the Continental Dollar in commerce while Loyalists dealt only in British gold and silver.) In 1785, Robert Morris’ Bank of North America in Philadelphia failed, leaving only two banks in the entire country, one in Philadelphia and one in New York. These banks didn’t care about the farmer or the shopkeeper, but only the owners of the textile mill in Lawrence, Massachusetts, the import-export business in Manhattan and the iron foundry in Batsto, New Jersey. Ordinary Americans held their wealth in their mattresses and under their floorboards. Without a genuine coin of the realm, people relied on coins of gold and silver minted in Spain, England and France, along with base metal coins minted by the states (before the Constitution stopped the practice). Coins of foreign mintage had been clipped so many times that merchants often weighed the coins to see just how much gold and silver was really present.

But it was on the frontier, in those days western Pennsylvania and New York, that things were really primitive. Money didn’t circulate on the frontier, so people used barter. Farmers preserved the value of their fields and orchards by brewing beer products or distilling whiskies and brandies from grains and fruit. A barrel of beer or cask of whiskey or brandy had a known value at a general store or trading post when traded for a barrel of flour, a bolt of gingham or hemp cloth, machine tools or a side of bacon (for those who didn’t raise their own hogs).

While farmers and shopkeepers could survive without a coin of the realm, the owners of the two banks and larger businesses could not. How could a capitalist perform the Italian art of accounting if there is no coin of the realm? How can he construct a balance sheet or income and expense statement if there is no standard by which to measure value? And where did the almost worthless Continental Dollar fit in, especially because it was technically “legal tender”, i.e. “forced tender”?

The states that wanted to treat their war debts honorably had a problem. The basic unit of governance in America was the county. The county collected the property tax, and a voter had to show his tax receipt at election time to the county clerk in order to be allowed to vote. The county built the roads and maintained the county poorhouse for indigents. States collected taxes for their own issues, but repaying war debts would require a major hike in state taxes, and a war had just been fought over that issue.

There is an old saying in the word of taxation: “Don’t tax him, don’t tax me, tax the guy behind the tree.” The states that wanted to retire their war debts found a way of taxing the guy behind the tree: they decided to tax the residents of other states. After all, residents of other states could not vote in state elections. Of course, the old taxation-representation issue that had led to war should have stopped them before it got this far.

So the states charged tariffs on goods crossing state lines. The Connecticut farmer who loaded his wagon and took his produce to New York to sell now found himself confronted at the state line by a New York customs agent who slapped taxes on his produce. Quickly other states took up the idea, and a full scale trade war erupted.

While the French and Dutch bankers couldn’t send their armies to collect, they could turn to their Spanish allies to deny the US access to the Mississippi River for navigation and commerce. Thus, the European powers hovered like vultures, waiting for the American experiment to fail.

And then the issue of the legality of the Continental Dollar came to a head when creditors began refusing to accept it in payment, in spite of the words “legal tender”. And that led to Shay’s Rebellion, which led to the Constitutional Convention in 1787.

This was what Hamilton faced as Washington’s Secretary of the Treasury. What Hamilton wanted was financial ballast. A ship without ballast is gyroscopically unstable and tosses and turns on the sea. Hamilton believed that a properly managed national debt would act as ballast and be a blessing. Hamilton didn’t figure this out on his own but copied Sir Robert Walpole who established the Bank of England in 1694.

The key was “properly managed”. Hamilton saw a national debt as a way of encouraging a basic conservatism in American finance. By rolling up the state debts into the national debt, Hamilton effectively monetized all those Continental Dollars whose value had dropped almost to zero. On a weekly basis, Hamilton’s clerk at Treasury went down to the New York Stock Exchange and either bought or sold treasury bills, thus managing the money supply. (This is similar to what the Federal Reserve does today on a daily basis.) Was each new American dollar backed by the proper amount of gold or silver as mandated by the Constitution? No. And that is one of our lesser known financial secrets: the US Dollar started out as a fiat currency in violation of the Constitution’s Gold and Silver Clause. (The Gold and Silver Clause has been honored more in the breach than in the observance.)

Speculators sold derivatives on the New York Stock Exchange as early as 1792 as people hedged the Treasury’s next move in controlling the money supply. This led to our first government scandal when an unscrupulous former employee of the Treasury used his wife in a badger game where the goal was to blackmail Hamilton into divulging the Treasury’s moves ahead of time. When Hamilton was contacted by the blackmailers, he fell on his sword, admitted the affair and ended his political career rather than compromise America’s finances.

Hamilton intended the US Mint to fix the gold and silver problem. The US Mint was established in Philadelphia, and Congress established gold and silver coins of different denominations as a standard. People who owned coins of foreign mintage or bars of gold and silver could take these precious metals to the Mint, which would smelt them to the correct purity and mint coins of the realm, which would in turn be handed back to the owner to be put in circulation.

America did not have a domestic supply of gold until the 1820's when gold was found in North Carolina and Georgia, and branches of the US Mint were established in Charlotte and Dahlonega respectively. Unfortunately, the gold was located on Cherokee land, and this ended up leading to the Trail of Tears episode.

Hamilton’s consolidated debt was paid off by James Monroe’s first term, but the new debt accrued during the War of 1812 didn’t come close to being paid off until the end of Andrew Jackson’s first term. And that led to a problem.

Under Nicholas Biddle, the Bank of the United States had put aside its function of neutral arbiter of capital allocation and started playing favorites. Biddle saw this as a prudent form of industrial planning, making him the father of Japan’s MITI and Jimmy Carter’s plan for favoring “sunrise" industries over “sunset” industries. The Bank’s foreclosure policies created ill will and almost wrecked Henry Clay’s political career when he acted as attorney for the Bank in foreclosure proceedings in Kentucky.

When Andrew Jackson ran for his second term, his campaign slogan was, “Jackson and no Bank”. Jackson referred to the Bank as “the Monster” and made its abolition the cornerstone of his second term. Nicholas Biddle inadvertently helped Jackson when he fought the president in Congress by allocating capital to congressmen who were the Bank’s friends and punishing its enemies via foreclosure. It was a fatal mistake.

With the end of the Bank, the national debt was gone – and so was the financial ballast. And the sharp practitioners of Wall Street were ready for a world under a gold exchange standard.

In the world of finance, there is Smart Money, Stupid Money, and Widows’ and Orphans’ Money. Smart Money can read a balance sheet and income and expense statement and park its money in an asset class as it first begins to appreciate. Smart Money’s participation defines Phase 1 of a bull market, known as the “Stealth” phase. Smart Money comes early to the party and knows enough to leave early, rarely getting caught when the inevitable bubble bursts. Stupid Money follows the Smart Money but always later, thus defining Phase 2 of a bull market, known as the “Mainstream” or “Great Unwashed” phase. Stupid Money is late to the party and late leaving which is why it gets burned. Widows’ and Orphans’ Money is more interested in capital preservation than income, so it functions best when invested in good, safe government bonds, America’s financial ballast. When the Widows and Orphans abandon their safe investments and jump in, establishing Phase 3 of a bull market, the “Mania” phase, the price of the asset goes parabolic, and no asset can survive a parabolic rise. Then comes the crash, and the Widows and Orphans take the worst bath of all.

With the end of good, safe government bonds, an asset bubble began to form on Wall Street in common stocks. The Smart Money had already staked its claim, and the Stupid Money followed. I often entertain people at FReeper Meets by doing my W. C. Fields impersonation while pretending to be a Wall Street broker in full carnival barker mode. “Ladies and gentlemen, come one, come all. You want textile stocks? We have textile stocks. You want railroad stocks? Why, the railroads will be the biggest thing until a man from Tennessee named Gore invents the Internet. Go away, little boy, you bother me.”

The asset bubble created the illusion of prosperity, and Andrew Jackson never understood what he had done. With the luck of the Scots-Irish, Jackson left the presidency to Martin van Buren before the Panic of 1837 erupted. That panic led to the worst depression America was to experience until the Great Depression of the 1930's. People lost their savings, their homes and their farms, and people froze to death in the cities. The road back was slow, arduous and was interrupted by other financial calamities, such as the Panic of 1857, when a ship full of gold coins minted in San Francisco was lost at sea in a hurricane off the coast of South Carolina. That hole in the money supply launched a panic from which the Cotton South recovered more rapidly than the industrialized North. In 1860, that fact led to a miscalculation by the southern states, but that’s a subject for another thread.

Since 1913, with the establishment of the Federal Reserve, America has spent most of a century in a state of war or cold war in order to preserve order on the planet. Since 1933, America has added the further financial burden of a full socialist welfare state. The domestic link to gold was severed by FDR in 1933, and the foreign link was severed by Nixon in 1971. Since then the dollar has steadily deteriorated, setting off a steady inflation which has led to a culture of instant gratification on Wall Street and elsewhere. The country has not yet come to grips with the concept of financial finiteness, thanks to the infinite flexibility of its fiat currency and its status as the world's reserve currency. But a century of chickens is coming home to roost.

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