A Conversation with Robert E. Wright
1. What inspired you to write ONE NATION UNDER DEBT? The U.S. government inspired me to write this book. More precisely, William Jefferson Clinton, George Walker Bush, and David Walker did. In his final years in office, Clinton began paying down the national debt, just as Thomas Jefferson did when he was president (1801-1809). Also like Jefferson, Clinton was followed in office by a president who involved the country in a war many thought necessary but others believed to be an expensive boondoggle. Under Bush, the national debt increased instead of being extinguished as once projected. Meanwhile Walker, the Comptroller General of the United States, has been screaming silently from the nonpartisan sidelines that the national government’s financial situation is tenuous and growing worse every year. Many market participants around the world are catching on, driving the dollar down and fears of inflation up. New York may be losing its preeminence in international capital markets and the government’s fiscal stimulus package had to be laughably small lest it induce inflation expectations and further depreciation of the dollar. The Founders did a much better job under much more dire circumstances. 2. How was the nation’s debt born? The first national debt arose during the American Revolution. The newly independent states did not have the tax revenue to fight the world’s largest superpower (Britain) so they borrowed, borrowed, and borrowed some more. By the war’s end, they had allowed over $200 million of paper money to inflate away to almost nothing and owed another $70 to $80 million to bondholders at both home and abroad. Those were enormous sums at the time because the economy was much smaller and a dollar could buy much more, like a sumptuous feast in Manhattan! 3. What political and economic problems did the national debt cause? The debt created considerable political controversy. Some people argued the nation should repudiate all of it. Others argued for paying that owed to foreigners but stiffing Americans. Still others thought the opposite more sensible. After years of discussion, the nation’s best statesmen, Alexander Hamilton and Thomas Jefferson, agreed that all the debt needed to be repaid. The big question became how and when to do so. Hamilton wanted to spread repayment over several decades so as to minimize the tax burden, which could have crushed an economy still struggling from war and domestic strife, and to maximize the debt’s virtues, its ability to cement the union politically and to form the basis of a modern financial system. Jefferson wanted to repay the debt as soon as possible because he thought it a monstrous fraud on posterity. He feared that politicians would
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find it expedient to enlarge the debt rather than increase taxes and keep expenditures in check. 4. What were the broad outlines of the first national debt’s history? The nominal level of the debt stayed almost unchanged during the administrations of George Washington and John Adams. It dropped a bit but then surged back due to the undeclared quasi-war with France in the last years of the eighteenth century. The next president, Thomas Jefferson, found it difficult to pay down the debt at first. He made some progress, but then couldn’t pass up on the Louisiana Territory. During his second term, though, the debt dropped from over $80 to just over $40 million. However, his successor, James Madison, got into a little scrape with Britain, the world’s leading superpower. Historians often claim that the War of 1812 was a wash, a tie. That might be but the nation ended the war more deeply in debt than ever, to the tune of over $120 million. Presidents James Monroe, John Quincy Adams, and Andrew Jackson kept the country out of war and kept expenditures in line. In every year, except the recession years following the Panic of 1819, the national government ran budget surpluses that it applied to repaying the principal on its bonds. And it stayed at it until the end of 1834, when all its obligations were paid up in full. 5. How did the government manage to pay off the first national debt? After the War of 1812, it consistently ran budget surpluses. It was able to do so because it kept expenditures in line and tax revenues, mostly in the form of customs and shipping tonnage duties, up. Politicians and voters both wanted to keep the government small so when cultural, economic, political, or social problems arose, they asked not what their country could do for them but what they could do for themselves. Politicians actually competed for office on planks promising to keep taxes up, expenditures down, and the debt on the run. Most Americans paid federal taxes only indirectly, in the form of higher prices for imported goods. As customs duties increased, some people, especially in the more agricultural South, took a dislike to them. Most people, though, thought customs and duties a good way for the federal government to obtain what it needed to support the military, pay veterans’ pensions, run federal courts, and the like. 6. Why did the United States government go into debt within a few years of completely paying off its first debt? The proximate reason was that the recession that followed the panics of 1837 and 1839 decreased government tax revenues more than the administration of Martin Van Buren was willing to cut expenditures. More
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broadly, the national government had a sterling credit record so it could borrow what it wanted, when it wanted, on cheap terms. That made it oh so easy for vote-hungry politicians to maintain expenditures without raising taxes. That is more or less the same reason the national debt has persisted ever since and also explains why state governments began borrowing massive sums as well. Unlike the national government, many state governments tried to constrain their own borrowing with constitutional restrictions against it. Loopholes muted the effects of such restrictions, however, so many state governments are also in hock for large sums. 7. Who was right and who was wrong about the national debt? Both Hamilton and Jefferson, it turns out, were right. Hamilton’s policies became law in the early 1790s and soon led to the completion of America’s development diamond, a non-predatory government (the ratification and solidification of the U.S. Constitution), a modern financial system (a central bank, securities markets, commercial banks and insurers), open access entrepreneurship (availability of financing and easy entry into a wide variety of economic pursuits), and sophisticated business management (in the growing number of business corporations). As Hamilton foretold, the national debt became a powerful cement to the new union because Americans far and wide owned government bonds and of course did not want any ill to befall their debtor. Prompt payment of interest on the bonds also signaled good governance, bolstering support for the new regime. In the long run, however, Jefferson was also correct. Almost immediately after completely repaying the first national debt, America created a new one. Grown fat on war (Mexican, Civil, Spanish, W.W.I, W.W. II, Cold War, “wars” on terror, drugs, and poverty) and entitlement programs, the national debt has spiraled to staggering proportions because, as Jefferson foretold, politicians find it easier to borrow and spend than to tax and retrench. Americans themselves are partly to blame for not remaining eternally vigilant, for not insisting on fiscally responsible policies. 8. How will consumers benefit from reading ONE NATION UNDER DEBT? Originally called Born in Debt, we renamed the book One Nation Under Debt so there could be no mistaking the fact it is about the government’s debt, not the personal debts of its citizens. So while consumers per se will not benefit from the book, save perhaps by learning that the government is much more financially profligate than they are, consumers as taxpayers should benefit because the book raises awareness of the country’s current cash conundrum and explains how the new nation managed to repay its first debt without onerous levels or types of taxation. 9. What will general readers gain from reading ONE NATION UNDER DEBT?
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One Nation Under Debt presents a new model of economic growth, the development diamond described above. As Microsoft founder Bill Gates recently discovered, economic growth is the most important question of our time because it is the key to ending poverty, ameliorating terrorism and violence, and repairing the environment. Unlike many growth models, which stress business investment, consumer spending, foreign aid, and other short-term palliatives, the development diamond points to the crucial, long-term importance of good governance, stable finances, entrepreneurship, and efficient management. The book also shows that our national government’s current financial situation is tenuous at best. The explicit national debt now amounts to over $30,000 for every man, woman, and child in the country, from billionaires to prisoners, newborns to centenarians, the famous, infamous, and everyone in between. Social Security and healthcare obligations could double that sum, or more. Nobody knows and the uncertainty is frightening. Merely paying interest on the debt is a major and growing drain. There is hope, however, if voters again insist on candidates committed to fiscal responsibility. It may be too late to save our grandchildren from excess atmospheric carbon but there is still time to rescue them from our fiscal profligacy. 10. Why should businesspersons read financial history books like ONE NATION UNDER DEBT? Business leaders, especially those in financial services firms, could avoid repeating failures if they would look to the past as a guide. The United States experienced mortgage securitization debacles not once but six times in its history prior to the 2007 implosion. Tellingly, all six previous episodes were also caused by extending improper incentives to mortgage originators. ONE NATION UNDER DEBT describes some early agricultural bubbles similar to those that may be recurring now. It also shows that foreigners have a long history of buying large sums of U.S. government bonds. Early sovereign wealth funds, in the form of state investments in corporate equities, are also discussed, as are myriad other topics of present-day interest and relevance.
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