National debt. The Alexander Hamilton society and museum of finance host this. Welcome, as the commemoration of Alexander Hamilton continues. I am the president of the American Museum on american finance. Our partner today is the Alexander Hamilton awareness society, an organization that you turn to for all things hamiltonian. We welcome their leadership, rand, mariana and tom, nicole, sergio, as well as friends of the museum, doug hamilton, dan simon, susie pock in the house. Mike newton, our founder and former board chair, john herzog. And seth caller has brought some amazing original hamilton documents you should check out afterwards. And of course the cspan audience. Now some 20 years ago our board chair professor Richard Sylla wrote me a noke that started with the words a stroke of luc. He had been introduced to a sunni buffalo ph. D. Candidate who was very interested in Alexander Hamilton and early American Financial history. You have to remember, this is well before the show, although while they were people interested in hamilton there were very few of us doing a financial dive on the aspect of his financial vision. Our first look at bob was his ph. D. Thesis, 1300 pages. That is staggering. To put that in perspective, mine was a paltry 300. His was 1,000 more. It led to the first equip about bob. Which is he cant hold his ink. Fast forward 20ers yao. He has 20 more books he has either authored or coauthored to date. That led to a second equip about books which is that he writes books faster than we can read them. If you add to that, five edited volumes, 65 scholarly articles, many of which have received awards and i am seriously only at page 10 of his 47page cv. An incredible document you should check out at his Augustana University webb page where he says he teaches but i only have seen pictures of him with fishing gear in tow. We have been good friends since we met some two decades ago. Yes, he loves satire. He lests that on his webb page as his favorite type of humor. And i know his sons. One of which he has named Alexander Hamilton was wright. I can tell you when i am stumped on something that has to do with early American Financial history i often turn to bob. He has combed so many archives, and he answersed in a new york minute. He likes to tell it like it is, especially to jeffersonians and jacobians. I love having a front row seat from the sidelines watching that. What is not controversial, his latest project, historians against slavery. His latest book, the poverty of slavery. When you look at bobs incredible outpouring of writing it reminds you of somebody else who couldnt hold his ink, Alexander Hamilton. Today is bob will address a fourletter word that hamilton created. Debt. And while at 20 trillion today you may think it is a different fourletter word. Lets hear from bob about the many who created it and its origins. It is my pleasure to introduce Professor Robert wright. [ applause ] thank you so much, david. And thanks to aha and the museum of course and all of you for coming today. I know it has absolutely nothing to do with the heat outside and the airconditioning in here. Can you hear me in back . Yeah, i am getting getting the thumbsup. Not to brag too much, but those books, even most of the coauthored ones, i did do the bulk of the writing with. But one area in my career was find of a downer is when i wrote a book with david. Our financial Founding Fathers and difds name was supposed to be first on the cover. It came out and my name was first. That was a shame. And regret it though i had nothing to do with it. Just a little thing in case you ever coauthor a book. Just because your name is second on the contract, doesnt mean it is going to be second on the cover. In any event, speaking of book, according to Duke University political scientist rochester salzman in his new book, the political economy of public debt, three centuries of theory and evidence, people hold one of three views on Government Debt. If they hold any at all. Holders of the optimistic view believe that debt is an unadulterated good. The closest thing to a free lunch possible and a world of scarcity. To fund their activities, optimists believe governments need only sell bonds, preferably this their own currency. Or, if debt issuance is too pricey or too dicey, governments need only print money. Inflation will occur, but inflation, especially unexpected inflation is a good thing because it redistributes wealth from creditors who are just evil rich people to debtors, the poor salt of the earth. Holders of the pessimistic view, by contrast, think any government borrowing, especially long term borrowing are an abomination. Borrowing simply imposes the tax burden on generations unborn. Every dollar the government borrows, moreover, takes a dollar away from entrepreneurs and businesses in a process called crowding out. Governments that borrow in another currency will soon find the burden too great and hard default like russia did in the 1990s. Governments able to borrow in their own currency will soon print money to cover payments and relate in doe Police Station that will hurt creditors, in other words, savers, the salt of the earth and help debtors, a species of swine. Holders of the third view salzman calls realists. For them, context is everything. Borrowing is simply a tool that can be used responsibly to improve a nations Economic Situation or irresponsibly to destroy it. And some situations government dent is good policy. In others it is unwarranted. Neither pest miss nor optimists are always wrong. It depends upon the situation. Moreover, savers and debtors simply represent economic positions that can and do change over say a life cycle or a business cycle. Neither group is inherently or morally good or bad. Alexander hamiltons few of the National Debt could be summed up in a single quotation a line from his april 1780 letter to a philadelphia merchant and financier of the american revolution, robert lewis. The line is often given as, quote, a National Debt, dot, dot, dot, will be to us a national blessing, unquote. That re that rent dags, though, was designed by as a debt optimist in a country that was, due to its mothers long struggle can debt dependence, pessimistic about sovereign debt. But the part left out of the quotation, the dot, dot, dot part, shows that hamilton was a debt realist and consistent of just five words. Quote, if it is not excessive, unquote. So, hamilton believed that a National Debt would be a blessing if, and only if, it was kept within reasonable bounds. A concept to which we will return in due time. But first, it is important to understand the context of the debt as hamilton understood it. He was not advocating that the government should always borrow money, to stimulate the economy or to transfer wealth to the poor in order to decrease the countrys coefficient. Rather, hamilton was arguing for the eventual repayment of a debt already incurred by the state and federal governments to win the american revolution. Some of the burden would fall on the unborn, as debt pessimists complained, but the unborn would receive something of immense value in return. Their political liberty. To fail to repay the debt owned owed to foreigners, a position owned by on a few seine phones, would ruin the nations honor and thereby presenting the United States from borrowing abroad to finance future wars. More debt pessimists, however, were willing to repute yat the domestic debt, where the sum owed by the u. S. Government to u. S. Citizens. Such a move would simply be a onetime capital levy that would keep taxes down for a time, for everyone in the future, the debt pessimists argued. Most holders of the Government Debt instruments of ious were speculators who had purchased them for pennies on the dollar. They were rich, in other words, and could well suffer the loss. In fact, the low price they were willing to pay for government ious proved that they expected a default. Hamilton countered that the low prices reflected only the time value or opportunity cost of money which was quite high in the 1780s. And the possibility, not the certainty, of repudiation. Again, context is critical, as most of the ious were in default with the issuing governments, paying i ining neither interest principle as promised or resorting to practice of paying interest on ious with yet more ious. Late in the 20th century, Edwin Perkins showed that hamilton was right and that early speculators and revolutionary war debt did not earn windfall returns, especially when the risk they undertook are considered. In any event, hamilton also argued that repudiation would be immoral and make it difficult, if not impossible, for the federal government to borrow from americans and maybe even foreigners when necessary in the future. That would mean the next war would have to be financed by a oppressive taxes and or the sale of state assets that ruin its prices. To ensure that the federal government would not try to repute yat part of its debt by changing the value of money, hamilton induced congress to pass the mint act. In addition to providing for the production of u. S. Coinage, the act carefully defined the u. S. Dollar in terms of grains of silver and gold. That anchored the real value of all debts denominated in dollars and induced increasing numbers of americans to give up reckoning value in their old colonial units of account, like york schillings in favor of a decimalized dollar. Hamilton then went a step further and argued that the federal government ought to assume or take responsibility for the warrelated debts of the several states. Boy, did that ever make the debt pessimists howl. They feared that hamilton was trying to create a huge permanent National Debt that would be used to cow the populous into submission of federal authority. But again, hamilton argued from first principles, noting that the states should not have been obliged to incur a wartime debt in the first place. Opt the want of an effective federal government has december stated the practice. Moreover, only the new federal government received the right to tax foreign trade, so it could generate the revenue to repay the debts much more cheaply and easily than the State Governments could. The debt pessimists, led by James Madison and thomas jefferson, also pushed for what was called discrimination. They proposed that the government pay the original holders of government of wartime ious, who were mostly soldiers, sailors and farmers, in combination with subsequent holders of the debt, who they de ed as wealthy speculators who defrauded the original holders. Hamilton by the kibosh on discrimination, as well, noting the administrative difficulties of tracking the chain of ownership for each of hundreds of thousands of ious. More over, original holders were not defrauded in most cases, they valued the Cash Payments they received until the bankrupt governments finally got around to repaying them. They knew when they sold, they were relinquishing all rights to the principle and were fine with it. To give them the cut would be fine for them but would ruin the reputation for the nation dealing at home and abroad. With the aid of some astute back room bargaining, hamilton managed to implement most of the plan for the revolutionary war debt, including assumption of state debts and nondiscrimination against holders. And here is where most history books stop, though it is far from the whole story. The details of hamiltons Funding Program were brilliant. And what ultimately established American Public credit or its ability to borrow again in the future from sources foreign and domestic, to do nice little things, like double the size of the country, fight and win a second war for independence. Defeat mexicans angry over the annexation of texas and win a long, bloody war between the states that ended slavery. Well, kind of sort of ended slavery. But thats another story. With the possible exception of texas, all those sound like blessings to me. Just kidding. Dont mess with texas. As previously noted, markets for government ious existed through the 1780s. But most were rather thin and hence inefficient, by which i mean costly and time consuming. Literally, scores of different types of ious were extant and not even broker ed due to the details of each. Not even brokered. Under hamiltons plan, holders of the ious traded them in for just three types of registered government bonds. Called threes, sixes and deferreds. Registered meant the government tracked each owner of the bond by name and location. A fact that will help me make another point a little bit a little later. Threes were socalled because the government paid on them 3 interest annually. Or 0. 75 quarterly, to be precise. They were redeemable at the pleasure of the government, which means, in effect, after the other bonds had been paid off, because who in their right mind is going to pay off a 3 debt when they have a 6 debt thats still outstanding, right . The government paid 6 about uli, or 1. 5 quarterly, on sixes, and retained the option to redeem up to 2 of the principle annually. This is a brilliant feature that allowed the federal government to slowly repay the principle due on the bonds when it had adequate resources to do so. Because it was an option. It wasnt an obligation. Deferreds were socalled because the government deferred paying interest on them until the end of the year 1800, when they converted into sixes. So, in a sense, they were zero coupon bonds but they were convertible on maturity, not into cash, but into 6 bonds. The market price of deferreds slowly rise towards that of sixes and maturity came ever closer. When a holder of revolutionary war debt redeemed their ious, most of which had promised 6 interest, they voluntarily received a combination of sixes, deferreds and threes that yielded about 4 total. A few of the holders thought that was a bad deal and held off but most preferred a more or less certain 4 over the possibility of one day receiving 6 . Hamiltons funds were fully funded, in other words, backed, by taxes and pledges, while the wartime ious were not. In addition, a liquid market for hamiltons bonds formed immediately. That means that holders could sell their bonds to other investors at fair market prices quickly and at minimal brokerage expense. Holders of revolutionary war ious may not be able to find a buyer at all or they might have been offered a low ball price. A holder of a three a holder of a three, by contrast, could see the going rate published in the local newspaper and contract with a broker to sell it in a day or two for a half Percent Commission or less. Or the holder could sell it immediately to a dealer for a dollar or less than the price listed in the paper. That pessimist complained that hamiltons debt is perpetual because threes were payable at pleasure and sixes had no definitive repayment sked ewe. They were simply wrong about that, as the National Debt was entirely repaid during Andrew Jacksons presidency. There was no way that hamilton or anyone else could know that in the 1790s, but clearly, what hamilton wanted was repayment flexibility. He wanted the government to repay its obligations when it was best able to do so, not according to some rigid schedule that might coincide with a war, a Natural Disaster or an opportunity to buy addition alter toir. The opportunity was low because his bonds did not lay idle, like so many full bodied gold and silver coins did in vaults and chests. Rather, federal bonds were used to clat rise bank loans and make large payments. Indeed, millions of dollars changed each year at a time when a Million Dollars was, you know, a Million Dollars. And thousands of separate transactions, hamiltons bonds were, in other words, near money instruments that kid not crowd out private investment to a considerable degree and that served a unique role in the portfolios of banks and other businesses as secondary reserves. Or reserves that paid interest but could be quickly turned into cash when needed. After federal bonds were extinguished in the 1830s, state bonds were demanded to fill those roles, but they never did quite so well as hamiltons threes, sixes and deferreds had. The next line in hamiltons april 1780 letter to Robert Morris on the National Debt explained that the debt, quote, will be powerful cement of our union. Unquote. By that, hamilton meant that one of the debts blessings would be political rather than economic. By making the federal government the creditor of people throughout the nation, the National Debt would create Political Sentiment in favor of the union as bold holders protected their vested interest in the health of the national government. Debt pessimists, including many historians with antihamiltonian views, assumed and claimed that his bonds were held only by a small number of rich urban elites. I showed otherwise by using federal bond registers to show that tens of thousands of americans throughout the union owned federal bonds at some point. I devote an entire chapter to bondholders in virginia, the home state of great debt pessimists like thomas jefferson. Many federal bond holders in virginia owned plantations and slaves. Others were professional doctors and lawyers, others were urban artisans and retailers. And some were women. Abigail adams wasnt the only female trading government securities, woody. Woodys not here, okay. Some bond holders lived in what is now called nova, what could become the nations capital, others lived on the south side, others on the blue ridge, and others along the james, in richmond and beyond. Well never