The United States accrued a huge debt to fight the American Revolution. The debt equaled 35 to 40 percent of GDP at a time when government spending and taxes were just 2 percent of GDP. Interest consumed about half of the government’s revenues. Numerous states and the government under the Articles of Confederation were negligent in paying interest and principle. The nation faced a real debt crisis.
The Founding Fathers recognized the burden of such a large debt and wanted to pay it off.
No measure can be more desirable, whether viewed with an eye to its intrinsic importance, or to the general sentiment and wish of the Nation” than to establish “a systematic and effectual arrangement for the regular redemption and discharge of the public debt. ~ George Washington
No pecuniary consideration is more urgent than the regular redemption and discharge of the public debt. ~ George Washington
I, however, place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared. ~ Thomas Jefferson
Many of you know that Alexander Hamilton took a different outlook. Hamilton argued:
A national debt, if it is not excessive, will be to us a national blessing.
It is a well known fact, that in countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money. Transfers of stock or public debt are there equivalent to payments in specie.
Years later, Jefferson scoffed at this very notion:
At the time we were funding our national debt, we heard much about “a public debt being a public blessing;” that the stock representing it was a creation of active capital for the aliment of commerce, manufactures and agriculture. This paradox was well adapted to the minds of believers in dreams…
However, even Hamilton proposed in 1795:
Extinguishing the whole of the present debt of the United States, foreign and domestic, in a period not exceeding thirty years.
So how did the Founding Fathers pay off the debt? Did they raise taxes as some on the left currently suggest? Did they reduce spending as those on the right want?
One thing is certain: the federal government did not raise taxes to pay off the debt. In 1789, the government enacted taxes to fund the operations of government and to pay the interest on the debt. But the taxes were not high enough to pay off any debt. When the federal government assumed the state debts in 1791, a tax on spirits was raised to pay the additional interest, but not to help pay off the debt. As a result, the level of debt remained stable throughout the 1790s. However, the debt as a percentage of gross domestic product fell in half during that decade as the economy grew by leaps and bounces.
When Jefferson and the Republicans took over the reins of government in 1801, they cut spending and started paying off the debt. Half of it was paid off by 1811, but then the debt rose even higher because of the War of 1812. After the war ended, the government started paying off the debt again and did so by the late 1830s.
Taxes were only raised in the initial period of 1789 to 1791 when the federal government was getting set up, and then to fight the War of 1812. But at no time did the federal government raise taxes to pay off its debt. Yet, the Founding Fathers all wanted to pay off the debt, but they did so by promoting economic growth through small government and keeping taxes low.
Today, we have an even greater debt problem. Nominal debt is about 80 percent of GDP and unfunded liabilities are many times greater than the official debt figure. Some are suggesting that we raise taxes to pay off the debt. Nearly all economists argue that higher taxes would reduce economic growth, making debt reduction all the more difficult. We must follow the path of the Founding Fathers. We must ensure that government spending and taxes are as low as possible and enable the economy to grow. That is the only way to restore fiscal soundness to our nation’s government.
Michael E. Newton is the author of the highly acclaimed The Path to Tyranny: A History of Free Society’s Descent into Tyranny. His newest book, Angry Mobs and Founding Fathers: The Fight for Control of the American Revolution, was released by Eleftheria Publishing in July.