Political Economy

America’s First Debt Bargain

Jul 25 '11

This is a guest post by my colleague Stephen Kaplan:

Mired in a surge of summer heat amid escalating debt ceiling banter, we in Washington are asking a vital question.  Who is to blame for our present woes?  President Obama?  Congress? The Tea Party?  China?  Your neighbor’s hairspray or your boss’s gas-guzzler?  To find the true culprits, we must travel back through the space-time continuum to our nation’s first debt swap.  Tomorrow, July 26, we celebrate the two hundred and twenty-first anniversary of the legislative fruit of a back-room bargain between the ‘Gang of Two’: Secretary of Treasury Alexander Hamilton and Secretary of State Thomas Jefferson.  And Washingtonians are still paying the price today!
As if the fundamental questions of the day were not sufficiently contentious, Hamilton and Jefferson also quarreled about real estate like a newlywed couple torn between the city and the burbs.  New York City, a place that Jefferson considered “a sewer filled with all the depravities of human nature,” was the temporary home for the nation’s capitol.  The Virginian Jefferson insisted on a permanent relocation of the nation’s capitol to a rural, Potomac River dwelling.  Hamilton, a native New Yorker, preferred the commercial rhythm of the Wall Street neighborhood.  In a New York tryst in Jefferson’s Maiden Lane home, the two struck a fateful compromise.
With New York hovering on the verge of bankruptcy, Hamilton offered to relent to Jefferson’s demands on one condition: the federal government would assume the colonies’ revolutionary war debt.  This was a good deal for New York in light of its hefty war debt, but not necessarily for other colonies like Jefferson’s Virginia that had already paid off their obligations. Nonetheless, Jefferson accepted Hamilton’s conditions.  In a move worthy of Monty Hall , the two swapped their city digs for a patch of malarial swampland by the Potomac.
Leveraging the new deal, Hamilton promptly issued $80 million dollars of new national debt, creating the humble beginnings of the United States’ bond market.  Hamilton considered “a national debt, if it is not excessive…a national blessing.”  Now, millions have become trillions.
Shame on you, Thomas Jefferson and Alexander Hamilton! Washingtonians must now wade through the murky waters of debt negotiations, while the sweltering summer sun beats on our backs.  Perhaps, if the capitol would have remained in New York City, with heat indices of a mere 105 degrees compared to the District’s oppressive 115 degrees, the political center’s cooler heads would prevail today.
As we sink further into these debt-ceiling disputes, this Washingtonian has a single modest suggestion.  In commemoration of the first debt swap, perhaps we could obtain a compromise by moving the nation’s capitol.  Why not a beach town in coastal New England?  Better yet, maybe a mountaintop perch in the Rockies or Tetons?  I wonder if the national debt is truly excessive, or just the hot air surrounding it?