Non-historians often write the most readable and interesting popular history. What they lack in rigorous scholarship they more than make up for with punchy and highly engaging narratives. Some of my favorite writers in this genre are David McCollough, Candice Millard, Erik Larson, Robert Massie, and Stacy Schiff. After reading “Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt” (1997), I may need to add John Steele Gordon to this illustrious group.
If you’ve ever read about the national debt and thought: “How is that even possible!?” “Hamilton’s Blessing” is likely the easiest way to educate yourself, although it may not be the most authoritative and comprehensive account available.
When Gordon first published this book in 1997 the US national debt stood at the then eye-watering figure of $5.4 trillion. Little could the author have imagined that in just a quarter century that number would balloon to $34 trillion, a 537 percent increase since “Hamilton’s Blessing” first hit bookstores, and a whopping 123 percent of GDP. It’s a number so big it’s almost impossible to fathom. For instance, if you converted the 2024 US national debt of $34 trillion into silver dollars and then stacked them on top of one another, it would reach 819 million miles into the sky. The final coin in the stack would be nine times further away from earth than the sun.
Alexander Hamilton, the first and arguably greatest treasury secretary in American history, envisioned the national debt as a powerful strategic instrument to be leveraged energetically but thoughtfully in the event of a significant national emergency. He was inspired by the British and the Bank of England, which enabled Parliament to borrow vast sums of money at low interest rates to fund wars against her global rivals. The Bank of England and the funded British debt were more significant instruments of warmaking than even the mighty Royal Navy. “Thus no other country in Europe was able match Britain’s ability to marshal so much of its national wealth for the purpose of waging war,” Gordon writes, “while disrupting its national economy so little.”
Hamilton had a clear vision for the fledgling republic’s fiscal policy. It included three components. First, Hamilton sought a steady stream of revenue in the form of tariffs on imports. Some excise taxes were also laid on sugar, spirits, salt, and carriages, but they proved politically unpopular and even erupted into armed resistence in western Pennsylvania during the Whiskey Rebellion of 1791-1794. The Jeffersonians would repeal all excise taxes by 1807. The tariff would fund the vast majority of federal operations in peacetime for the first 125 years of the republic. Second, Hamilton insisted on the consolidation of the national debt by buying up the wartime debts of the individual states. Finally, Hamilton insisted on the creation of a new central bank modeled after the Bank of England. It would hold the government’s tax revenues as deposits, which it would then loan out to other banks, allowing the bank to regulate the money supply and discipline state banks. States flourished despite the close oversight. From just three banks with $2 million in total capitalization in 1790, there were 29 by 1800 and 100 by 1810. (It is significant, Gordon says, that Hamilton clearly believed that politicians could not be trusted with the authority to print money.) The Hamiltonian system came into full fruition in 1792 with a new consolidated debt of $80 million (40% of GNP) and the fledgling Bank of the United States capitalized at $10 million.
Hamilton’s financial program was stunningly successful. After the American Revolution the country was a “financial basket case,” according to Gordon. By 1794 the infant United States of America had the best credit rating of all of Europe. Yet, Hamilton remained reviled by many on the emerging political left. “It is a curious phenomenon in political history,” Hamilton wrote, “that a measure which has elevated the credit of the country from a state of absolute prostration to a state of exalted preeminence, should bring upon the authors of it obloquy and reproach.”
Gordon argues that the economic and foreign policies of the Jefferson and Madison administrations may have been the most inept in American history, and I’m inclined to agree. The author calls the disastrous Embargo Act of 1807 “one of the most extraordinary political acts in US history” that deliberately cratered American exports from $47 million in 1807 to $9 million the following year. The failure to renew the charter of the Bank of the United States in 1811 he calls “the most feckless act in the history of the United States Congress.” Consequently, by 1813 the United States was “dead, flat broke.” Gordon says this harrowing experience “chastened” the Jeffersonians and in 1816 they reluctantly re-chartered the Bank of the United States for twenty years. The country exited the War of 1812 with a national debt of $127 million, a staggering sum for the time, but one that was cut by more than half, to $50 million, in just over a decade, showing that the debt could work just as Hamilton intended it to.
Not everyone shared Hamilton’s sanguine view of the national debt. The debt and its close cousin, banks, had no greater enemy than Andrew Jackson. To Old Hickory, the national debt was a “national curse.” When Jackson became president in 1829 he was committed to extinguishing the national debt – and with it, he hoped, paper currency – and killing the Bank of the United States once and for all. By and large, he was successful. On January 1, 1835, the treasure showed a positive balance of $440,000. For the only time in American history the national debt had been completely retired. “Jackson’s achievement remains singular,” Gordon harrumphs. But Jackson lived long enough to see that his assumptions about the national debt and banks in general – and the Bank of the United States in particular – were terribly misguided. An orgy of new and unrestrained paper money swept the nation, driving wild speculation in land and the stock market. Land sales handled by the government’s General Land Office exploded from $2.5 million a year in 1832 to $5 million a month in 1836. Wall Street eventually experienced its first great bubble and crash in April 1837. It was followed by the most protracted period of continuous economic contraction in American history. Jackson had inadvertently created his own worst nightmare. (He died in 1845.)
Moderate deficit spending was used first to pull the country out of a deep recession and then to help finance the Mexican-American War, which left the national debt at $68 million. Surpluses and the California Gold Rush reduced the debt to just $32 million at the start of the Civil War.
If ever Hamilton’s Blessing was necessary, it was the Civil War. The Union’s superior economy and financial system was eventually able to overcome the Confederacy’s interior lines and superior military ability. Treasury Secretary Salmon Chase cranked out $450 million greenbacks during the war, but that only accounted for 14 percent of the Union’s war expenses. Prices in the North only doubled between 1860 and 1865. Meanwhile, prices in the South, flooded with new Confederate paper dollars, jumped 700 percent in the first two years of the war alone. The better organized, more industrial, and more populous Union was able to cover over 20 percent of war costs with new wartime taxes, including an income tax. Meanwhile, the Confederacy was only able to cover at most 5 percent of its expenses with taxes. That said, the bulk of the Union’s war effort – roughly 65 percent – was financed with bonds. Philadelphia financier Jay Cooke – “the most famous and prestigious banker in the country,” according to Gordon – was enlisted to sell “five-twenty bonds,” which paid 6 percent interest in gold, but could not be redeemed before five years or after twenty-five. Gordon says there is “no doubt that the national debt was one of the most powerful tools at [Lincoln’s] disposal for forging victory.”
At the time of Appomattox the national debt stood at $2.7 billion – 42 times what it had been at the start of the war (yet still only 50 percent of GNP). Amazingly, the federal budget remained in surplus for 28 straight years after the Civil War. By the 1890s the national debt had shrunk by two-thirds and stood at $961 million. Thanks to the roaring economy of the Second Industrial Revolution, the debt was less than 10 percent of GNP. As the country entered the twentieth century, Gordon notes that “the doctrine of Adam Smith that debt should be paid down as expeditiously as possible was still questioned.”
But Smith’s days were numbered, soon to be replaced by another British economist of genius: John Maynard Keynes (1883-1946). “The General Theory of Employment, Interest, and Money” didn’t appear until 1936. By that time the United States had a permanent income tax and a formal central bank. The Sixteenth Amendment authorizing a federal income tax was passed at a point in time when the national debt stood at just 2 percent of GNP. Clearly, the income tax was not about a pressing need for revenue, but rather a desire to target a certain class of American citizen – the rich. Gordon goes so far as to call the income tax “a basically Marxist vision of society.” Only about 2 percent of the population was required to pay the new personal income tax, which was a modest 1 percent tax on incomes above $3,000 and 7 percent on income over $500,000 (or roughly $14 million in 2024 dollars). The legislation sailed through both houses of Congress (77-0 in the Senate and 318-14 in the House). Gordon says the original sin of the income tax law was that it unnecessarily maintained separate taxes on personal and business income. “Many perverse – and entirely unintended – consequences have resulted,” the author says.
Once again war inflated the national debt significantly. During America’s short two-year participation in the First World War the debt climbed from a trivial $1.2 billion to over $25 billion in 1919, roughly 10 times the level reached after the Civil War. During the 1920s, and perhaps for the last time in American history, the United States had a government committed to balanced budgets and reducing the debt. Treasury Secretary Andrew Mellon, a fiscal conservative and a pioneer of trickle-down economics, is something of a hero to Gordon. He led an effort that reduced federal spending by half and reduced the national debt by a third, all while cutting income tax rates three times. By 1930 the national debt was down to $16 billion. The cataclysm of the Great Depression would change everything, particularly the old pay-as-you-go consensus of balanced budgets and shrinking debt as the model for national fiscal policy.
Gordon argues that the Great Depression is the great dividing line in the history of American fiscal policy from one of relative moderation and responsibility to one of reckless profligacy. “It is, perhaps, not going too far to say,” Gordon writes, “that Franklin Roosevelt and the Great Depression changed the country’s perception of the proper scope of the federal government’s responsibilities as much as Abraham Lincoln and the Civil War had changed the country’s perception of itself.” From the introduction of the national debt in 1792 to the first year of the Great Depression in 1930, the American federal budget was in surplus 67 percent of the time. In the 96 years since 1930 the American government has run a surplus just 8 times or just over 8 percent of the time. As of 2024, the last time the federal government ran a surplus was 2001. Washington may never be in the black ever again.
Gordon says that FDR was the first president in American history to deliberately run an unbalanced budget. The New Deal doubled government spending between 1933 and 1940 from $4.6 billion to $9.6 billion or 9 percent of GNP. To put that into perspective, in 2008 federal outlays were 18 percent of GDP. Then the Second World War added $211 billion to the national debt. By 1946 the debt stood at $269 billion, over 17 times what it had been in 1930. At the dawn of the Cold War, the balanced budget philosophy of Adam Smith was dead and had been replaced by the government-driven aggregate demand model of Lord Keynes. In Gordon’s view, this is really when the wheels came off.
There are three critical flaws in the Keynesian theory, according to Gordon. First, the economy isn’t some sort of predictable machine that can be reliably manipulated by various targeted inputs. Second, critical information needed to affect the macroeconomy is often lagging and unreliable. Third, politicians don’t have the courage to make the difficult and dispassionate decisions required to cut spending and raise taxes in good times. Gordon emphasizes this last point with what he calls the “Madison Effect” or “Men love Power.” In short, Keynesianism provides congressmen with a powerful political justification to serve their own self-interest. Congressmen love the power they wield and will do almost anything to keep it. Raising your constituencies’s taxes while cutting their government services is never a great way to get reelected. Rather, Keynes provides rationale to “spend yourself rich” by keeping spending high while not raising taxes.
The national debt grew by 35 percent in the 1960s, surprisingly modest growth when you consider the Kennedy and Johnson administrations were funding both the war in Vietnam and the Great Society at home. The debt really exploded over the next two decades, tripling during the 1970s (from $371 billion to $909 billion) and then tripling again during the 1980s (to $3.2 trillion in 1990). In the past the debt ballooned during a genuine national crisis, such as the Civil War, Great Depression, or Second World War. The late twentieth century, however, was remarkably peaceful and stable, yet the national debt grew by a factor of forty. Gordon claims the problem is structural. There is intense political pressure to spend on specific government programs – especially the gargantuan service programs like social security and medicare known as entitlements– but there is no institutional check on total spending. The strategic instrument Hamilton had designed to be used in times of national emergency had become nothing more than a convenient safety valve for politicians to avoid the political pressure of making tough decisions, like cutting federal programs and raising taxes.
The Founding Fathers thought the danger of out of control spending would come from the executive branch, as it had in Europe during the age of monarchs and empires. Therefore, the Constitution gave the power of the purse to Congress, the representatives of the people who would ultimately bear the burden of paying the taxes to fund federal expenditures. The United States government’s ability to borrow is one of the very few powers granted by the Constitution with virtually no checks and balances, and Congress has consistently abused the privilege. By the twentieth century the roles had been reversed. “Congress became the engine of spending, not the brake,” Gordon writes. Washington had become flooded with lobbyists funded by rich political action committees (PAC) all seeking some generous spending earmark from some congressman. Each congressman has much to gain and little to lose by successfully inserting the requested earmark into new legislation.
Ironically, the executive office became the only forward-leaning check on out-of-control Congressional spending. One controversial tool is called impoundment. Basically, the executive branch simply refuses to spend money that Congress has allocated for something. For instance, in 1966 Lyndon Johnson impounded over $5 billion from a $134 billion budget, a non-trivial percentage of the budget. Another long sought after tool for fighting waste is the line item veto, which allows the president to eliminate specific spending programs without having to veto the entire bill. Sought after since the days of Ulysses Grant, the line item veto was not granted to the president until 1996 when Bill Clinton used it to veto 11 times before it was struck down by the Supreme Court in 1998 in a 6-3 vote using a strict-constructionist argument.
In closing, the United States government does not have any institutional arrangements for controlling costs. The formal federal budget process was only introduced in 1922 and to this day the US government does not use double-entry bookkeeping. Gordon suggests two reforms that might help remedy the situation. First, he says that politicians should not be able to perform their own bookkeeping, just like politicians are not allowed to control the money supply. Gordon offers no details as to how this might be accomplished. Second, the author advocates a flat tax as a means to streamline and simplify the American tax system. Something serious needs to be done, Gordon says, or else the United States will share the fate of seventeenth century Spain, another wealthy global superpower that disastrously mismanaged its debt and subsequently went bankrupt.
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