the wisdom of Hamilton

It seems to me this passage from a three-year-old Mises Daily summarizes a lot more than the logic of government debt:

“A Sizable National Debt Is Good Because It Gives the Citizens an Incentive to Support the Government.”

I have never seen a textbook discussion of colonial America that didn’t mention this alleged wisdom from the champion of infant industry, Alexander Hamilton. The idea is quite simple: As we have seen above, the national debt consists of financial claims (such as government bonds) against the Treasury. The holders of these bonds would be disappointed, therefore, if the government fell, because then their bonds wouldn’t be paid off.

What the textbooks fail to note is that (typically) the government can only pay off its creditors by taxing the money away from them first. Suppose you lend me a $20 bill, and I give you a piece of paper saying, “IOU $20 next Monday.” I take my fresh twenty and go spend it on a nice dinner. Then Monday rolls around and you hand me the piece of paper. I reach into your wallet, pull out a different $20 bill, and hand it to you as I crumple up the IOU. Aren’t you glad I didn’t get hit by a bus Sunday afternoon? You might never have gotten paid back!

Of course, the real logic behind Hamilton’s proposal is that wealthy capitalists could lend money to the government, which would then levy taxes on the general public to pay off the bondholders. In this more realistic scenario, the privileged few would indeed support the regime, because it pledges to use its coercive powers to transfer wealth into their pockets. But if this is the mechanism we use to gain support for the regime, why go through the shenanigans of issuing debt? The government could just openly state to the elite, “Support us and we will use our guns to siphon off money from the unorganized rabble every year and give you a cut.” (Now that I think about it, that probably wouldn’t have been too popular, and even history textbooks might not have approved.)

“Government Debt Has No Upside” by Robert P. Murphy


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