David M. Walker and Mark J. Higgins
In the late 1780s, the finances of the United States were in disarray. Revolutionary War debts incurred by the Continental Congress and former colonies were defaulting, and the democratic experiment in the New World was on the brink of failure. But the nation caught a break when President George Washington appointed Alexander Hamilton as the first secretary of the Treasury.
In 1790 and 1791, Hamilton persuaded a reluctant Congress to establish the nation’s first central bank and consolidate all outstanding state and federal debt. The federal debt burden after this action was just 30% of gross domestic product. A few years later, President Washington reinforced in his farewell address the need to avoid excessive debt.
Over the next 175 years, politicians across the political spectrum largely adhered to Hamiltonian principles to preserve the integrity of the public credit. The most important principle was that debt should be issued primarily to address emergencies – especially those involving foreign wars – and that debt burdens should be reduced during times of peace.
This discipline enabled America to establish and maintain its excellent credit record, which provided ample lending capacity during periodic crises. As Hamilton predicted, the ability of the nation to borrow proved critical during the War of 1812, the Civil War, World War I and World War II.
After the first three wars, the United States restored fiscal discipline, had…
