What follows is a synopsis of my article, "United States public and private debt: 1791 to 2000" published in English, French, and Spanish in the International Social Science Journal, United Nations Educational Scientific and Cultural Organization, 1987, pages 577-591.
Anyone who pays attention to United States national affairs knows that the debt of the Federal Government has been growing explosively for many years.
Fewer people know that the debt of the US Federal government is the tip of a debt iceberg. Debt in all categories of the economy has been growing explosively - the debt for state and local governments, farmers, consumers, home buyers and, largest portion of all, debt for corporations.
No one seems to know that total public and private debt in the United States has been growing explosively since 1790. To prove it, take Federal debt in 1790, which was $75 million, and increase it at a compound interest rate of 5.8 percent. The results will match almost exactly actual total public and private debt for the years from 1916 to 1976 - the only years for which the Federal government has published complete data.
Most remarkable is that it was predicted by James Jackson, Representative from Georgia in the First Congress of the United States. Speaking in Congress, then meeting in Philadelphia, on February 9, 1790, Jackson warned, "Though our present debt be but a few millions, in the course of a single century it may be multiplied to an extent we dare not think of."
To support his prediction, now validated by two centuries of debt multiplication, Jackson cited the experience of Florence, Genoa, Venice, Spain, France, and England. All had adopted a system like the one the First Congress was about to adopt and adoption in all cases had been followed by what Jackson called general ruin. The speech was published in the Annals of Congress, Volume 1, pages 1140-1143. Click here to read the entire speech.
The problem faced by the First Congress was Revolutionary War debt. Under the Articles of Confederation, Congress had been unable to collect the taxes needed to pay interest on that debt, so the debt had grown by compounding interest from about $40 million to $75 million. The Constitution strengthened the central government precisely to collect taxes to pay interest on the debt. Abraham Lincoln at Gettysburg may have said that the new nation was "conceived in liberty" but the Constitution was conceived in debt.
As a new nation, the United States needed to create a money supply. Congress could have created that money by the authority given it in the new Constitution: "to coin money and regulate the value thereof." It chose instead to use the authority also given it in the Constitution to borrow money. The choice was fateful. It shifted control of the country's money from Congress to its creditors, private bankers.
The system adopted was recommended to the First Congress by the first US Secretary of the Treasury, Alexander Hamilton. He was a banker and a plutocrat. He believed that wealthy people should rule the country. He distrusted the common people. So Hamilton recommended a "funding system," an odd name because no funds were created, that put the wealthy in control of the money supply and, therefore, the country. The first step was that Congress pass a law obligating itself to pay interest to holders of Revolutionary War debt certificates. By so doing, Hamilton argued that people would consider the debt certificates valuable and would exchange them for goods and services, thus the debt certificates would circulate as money.
The second part of Hamilton's recommended plan was to allow holders of debt certificates to use them to buy stock in a national bank that Congress was also to charter, The Bank of the United States. That bank would create the country's money as loans costing interest. By putting these two parts of the plan in place, the $75 million debt would become the base for a growing money supply, but all of it as debt.
The problem with Hamilton's plan was that interest had to be paid on the debt-circulating-as-money. If the debt certificates were used to pay the interest, the money supply would shrink and money shortages would cause economic recession. To maintain debt-money in circulation, owners of the debt, the creditors, would add more debt to what was already owed. So debt would grow at about the rate of interest forever. After 200 years of debt money, total public and private debt has grown to about $20,000,000,000,000. That's $20 trillion, and it will continue to grow, like a snowball rolling downhill, by ever larger amounts.
If such a system had caused bankruptcy is so many cases in Europe, why did members of the First Congress adopt it?
On January 28, 1790, a few days before his speech to the First Congress predicting a debt explosion, James Jackson gave another speech in which he accused Congressmen of sending agents throughout the country to buy up the depreciated debt certificates before Hamilton's plan became known to the public. In this way, these Congressmen would own the certificates when the Funding Act was passed into law and the value of the certificates appreciated to their face value. Then, they and their friends would become stockholders in the new Bank of the United States and profit from interest and growing debt.
At the time, James Callender, reporter for the Philadelphia Gazette, wrote: "The funding law was passed through Congress by the influence of a majority, who purchased certificates from the army at under value: and who voted for the law, with the single view of enriching themselves. It is firmly believed and loudly asserted, by at least one half of the citizens of America, that the funding system was devised, not for the sake of paying the real creditors but of wronging them. Hamilton planned. Congress voted. The president approved."
In a letter to the editor, a 'farmer' protested: "Such injustice and oppression may be colored over with fine words; but there is a time coming, when the pen of history will detect and expose the folly of the arguments in favor of the proposed system, as well as the iniquity."
The farmer wrote "iniquity" not inequity. He considered the system not just unfair; he considered it evil.
After warning that, "A funding system will be highly dangerous to the welfare of the Republic," that "It must hereafter settle upon our posterity a burden which they can neither bear nor relieve themselves from," James Jackson added that, "It will establish a precedent in America that may, and in all probability will, be pursued by the Sovereign authority, until it brings upon us that ruin which it has never failed to bring." That is exactly what happened.
Thomas Jefferson tried to stop it. He warned, "If the American people ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless.... The issuing power of money should be taken from the banks and restored to Congress and the people to whom it belongs. I sincerely believe the banking institutions (having the issuing power of money) are more dangerous to liberty than standing armies. My zeal against these institutions was so warm and open at the establishment of the Bank of the United States (Hamilton's foreign system), that I was derided as a maniac by the tribe of bank mongers who were seeking to filch from the public." From: Olive Cushing Dwinell, The Story of Our Money.
President Andrew Jackson (was he related to James Jackson?) vetoed the second renewal of the charter of the Bank of the United States and managed to pay off all but $38,000 of Federal debt by 1836. However, because Federal debt then as now was the basis for the nation's money supply, paying the debt removed money from circulation and caused a terrible depression in 1837 (Gibbons, J.S., 1970. The Public Debt of the United States. New York: Burt Franklin. Orig. published in 1867).
When President Abraham Lincoln found out that bankers wanted interest in the range of 30 percent for loans to finance the Civil War, he issued about $450 million in government money that became known as greenbacks. They are still authorized but have been removed from circulation because bankers want to keep money scarce so they can charge interest for it. The greenbacks were debt free and interest free.
First, Congress must do now what the First Congress should have done; create money by the authority given it in the Constitution, Article I, Section 8, Clause 5: "to coin money and regulate the value thereof." This money is can lend or spend into circulation. Now Congress issue only the coin we use. It needs also to issue the paper money. Today what we think is US paper money belongs to the Federal Reserve System, which is a private corporation run for the profit of its stockholders.
National governments (the problem is worldwide) must stop borrowing money. A sovereign government should never borrow money. When it does it loses its sovereignty to its creditors. Mayer Amschel Rothschild said in 1790, "Let me issue and control the money supply of a nation and I care not who makes its laws."
National governments should pay into circulation whatever money is needed to maintain the economy at a healthy level of activity. Money is to an economy what blood is to the human body. Too little is as bad as too much. It is the central government's primary responsibility to ensure that there is just the right amount of debt free and interest free money in circulation to sustain a healthy level of economic activity.
Second, what we know as interest today must become a simple fee for service - a charge for bookkeeping. This would stop debt from compounding because a simple fee would add a small amount to debt, most of which would be paid to bank employees and be spent back into circulation.
Interest charged as a rate compounds debt. To stop the resulting exponential growth of debt, the mathematics of interest must be changed. This is not a moral issue; it is a mathematical one. A percentage rate causes exponential growth as surely as cancer causes death.
As Jackson warned on February 9, 1790, "The funding of the debt will occasion enormous taxes for the payment of interest. These taxes will bear heavily, both on agriculture and commerce. It will be charging the active and industrious citizen, who pays his share of the taxes, to pay the indolent and idle creditor."
Third, limit how much anyone can collect as the debt is paid off. Everything real in life has limits. Debt has been allowed to grow as if there were no limit to how much can be repaid. Simply paying creditors without an upper limit would make those creditors our rulers as far into the future as anyone can imagine. Let's not trade debt for plutocracy.
The system that produced trillions of dollars of debt was wrong, some called it evil, when it was adopted. The debt today is the original debt compounded for 200 years. A case could be made for repudiating that debt entirely. However, some people who own debt certificates today paid for them honestly. They should not be wronged by repudiation. Trying to distinguish between persons who obtained the certificates honestly and those who merely inherited the "illgotten goods" would be difficult, if not impossible.
Therefore, it is more practical and fair to pay the debt up to a reasonable amount to each current owner. A reasonable limit is the amount needed to live at a nationally defined decent standard of living for the rest of their life. When they die their claims should die with them, as Thomas Jefferson believed was natural law.
The problem must be solved. We are at the point of general ruin that James Jackson predicted in 1790. We don't need to let calamity overwhelm us. The remedies suggested here are simple, prudent, and painless. The only thing that stands in our way is our mindset, our habits of thought. We can change them more easily than many other things. Think about it.