Odyssey

It's as American as apple pie and as old as the nation itself it's the national debt and it has a past. I'm Gretchen health rich and today on Odyssey We'll talk with historian John Steele Gordon about the history of this extraordinary obligation. He is the author of Hamilton's blessing the life and times of our national debt. And joining the conversation on Odyssey next after the news from NPR here on WBEZ Chicago. From National Public Radio News in Washington one corps of a Coleman white whiter independent counsel Kenneth Starr says he is not out to get President Clinton over allegations that the president had an affair with a White House intern and then asked her to lie about the matter. Starr says he and his investigators are behaving

responsibly. Our job is to gather facts and to evaluate those facts and to get at the truth. I have a very strong belief in facts and in truth. And that the facts will come out and the truth will come out and eventually to get consistent with the presumption of innocence let's bear in mind that each individual in our country enjoys a presumption of innocence I think that's very important in terms of fairness that's why confidentiality which is very hard to maintain now. But we're doing our very best to maintain confidential. All because of individual reputation. Starr also defended his controversial use of taped phone conversations although they were done while the intern in question Monica Lewinsky didn't know that she was being recorded. This just in the judge in the Unabomber case has denied suspect Theodore Kaczynski the request to represent himself even though Kaczynski has opposed working with his own attorneys. Now US officials say the countdown is going well for tonight's launch of the space shuttle Endeavor. But shuttle

managers are worried about the weather. There's a 60 percent chance of rain tonight and that could scrub the launch Mazza hopes to soon the Endeavor up at nine forty eight Eastern Time. NATO troops in Bosnia have arrested a Bosnian Serb indicted for war crimes. NPR's Michael Goldfarb reports from London. Growing jealous It was arrested this morning in the eastern Bosnian town of beyond. Jealousy is one of seven people indicted by the International War Crimes Tribunal in The Hague for the crime of genocide genocide is the most serious charge the tribunal can bring Gorringe Allison she is alleged to have been in command at the Lucca detention center near Birch Co. In the early days of the Bosnian Civil War in 1902 the International War Crimes Tribunal indictment says hundreds of Muslim encroached men were systematically murdered at Lucca during that time. The self-styled Serb Adolf is charged with carrying out 16 of those murders personally. The arrest of jealous it leaves 54 indicted war criminals at large in Bosnia. Louise Arbor the tribunals chief prosecutor said that today's arrest showed the clear intent of the authorities

to bring war criminals to justice. Michael Goldfarb NPR News London. Palestinian leader Yasser Arafat visits President Clinton at the White House today. He says he will press Mr. Clinton to force Israel to keep its side of the peace accords signed at the White House in 1995. But Clinton administration observers say the White House is expected to push Arafat. The Palestinians poor record in preventing terrorism. On Wall Street the Dow Jones Industrials are down 35 points at 77 59. This is NPR. It NPR's business update the stock market is lower in a second straight session. Trading is active. Bloomberg's Krisna reports the market has been rattled by some disappointing earnings news. Sears reported that fourth quarter results fell and warned that first quarter profit will decline substantially largely because more customers fell behind on their credit card payments. At the same time the oil services company slumbers a reported weak earnings and conceded that the events in Asia may force its clients to

modify plans for oil exploration and shares in Sybase and have lost more than 15 percent after the company warned of a larger than expected loss because of problems at its Japanese unit. I'm Doug prisoner a computer software maker Microsoft and the Justice Department has settled a contempt of court complaint about the company's marketing of Internet software. But the main antitrust case against Microsoft is still going forward. Today's settlement was signed by a judge at a quick hearing in Washington. The order requires Microsoft not to force computer makers to install Microsoft's Internet browser software but the order does not settle other issues in the overall antitrust dispute. Saturn Corp. is cutting back the number of cars it makes this is the second time in less than four months this is happened. Company officials say more people are buying sport utility vehicles and minivans. The General Motors unit will cut back annual production by about 14 percent. Airlines Delta U.S. Airways and the parent firm of

American Airlines have all reported fourth quarter earnings that beat analysts expectations. Continental and Northwest Airlines reported record quarter rather record earnings for the final quarter of last year. This is NPR. Support for NPR comes from Borders Books and Music. Putting a world of knowledge within your reach. With over 200 locations across America 800 6 4 4 7 7 3 3. Morning. Good morning and welcome to odyssey on WBEZ Chicago I'm Gretchen how French today on the program we'll hear a biography of sorts. Historian John Steele Gordon is here and we're going to talk with him about the life and times of our national debt the staggering size of the debt has been the cause of much consternation recently and has led to a series of loud if nothing else budget battles on Capitol Hill.

We may be emerging from the dark days of debt explosion that remains to be seen but what is interesting is that the United States was born in debt and for much of its history has used the national debt to great advantage. John Steele Gordon is the author of Hamilton's blessing the extraordinary life and times of our national debt which is just out in paperback He is also a columnist for American heritage and a commentator for Marketplace. Thank you very much for joining me. I'm delighted to be here. Let's start with the title of your book Hamilton's blessing why did Hamilton think that a national debt was a blessing. Well he qualified that but he said it would be a blessing if it is not excessive. But he thought that the national debt could be used as a means of furthering the money supply because banks could use federal bonds as reserves. And that it would be a very useful way to import capital from Europe to help build the American economy and various other reasons. And he also thought that you could use a debt to the tax you would have to levy in order to pay off the debt would be a spur to industry. Right well he will counterintuitive.

Yes what he wanted a tariff that would be would service the debt but the tariff would also have the effect of protecting American industries from European competition until the American industries were strong enough to stand on their own of course when they finally used the protective tariff in the latter part of the 19th century the industries always claimed that they were never strong enough to do without the protection. So what was Hamilton going against the grain his his wisdom seems unconventional even now a lot of things that you read about fiscal policy and economics seem completely counterintuitive and his certainly do to suggest that being in debt was a good idea. How are his ideas received. Well remember that we were already in debt we had. I. Fought the revolution with borrowed money from France and the Dutch and also we had printed Continentals which were printing house money they were the Congress that they were legal tender but they had nothing to back them and they soon depreciated into worthlessness. So we had to find some way of refinancing that debt that we

were not even paying the interest on let alone the principle. So we and the. The new constitution commanded the federal government to assume the debts of the old federal government that we had in Hamilton had no choice even if he had not wanted to but he wanted to he wanted to assume the debts. Yes the old government right the old government and they also want to assume the debts of the states which the Constitution permitted but did not command in the southern states were adamantly opposed to it. Many of them it paid off the revolutionary war debts whereas the northern states especially knowing that had not paid off their debts and were delighted with the idea of the federal government assuming them and each of these steps along the way provoked loud and caustic battles and various assemblies. New England states really good Southern states over these issues and he had to fight tooth and nail each step along the way to get these programs implemented. Indeed he did mean it was welcome to democratic politics. Which is a loud and frequently messy business. He had to make a political deal to get the assumption of the state that the capital of the United States at that time was New York.

And he made a deal with Jefferson and Madison that to move the capital to the banks of the Potomac River and to move it to Philadelphia for 10 years while the new capital was being built in order to secure the vote of Pennsylvania for his assumption of the state debts. So there were a couple of other important parts of of Hamilton's plan for establishing the federal economy how did they which included establishment of the National Bank. And also I can remember what the third important one was. Could you describe his plan and how you went about. Well the National Bank was was very important to him he wanted to have a bank modeled on the Bank of England because he felt that whenever a government whenever politicians had the power to print money that that's exactly what they would do. It's short term it's a very easy way to solve fiscal problems you simply go down to the basement and print up all the money you need to go shopping with. But the Hamilton felt that it would ruin the the money system and every time in

fact in his own time the French revolution produced in the Essene euro which promptly. Spiraled into worthlessness in every country since the word the politicians have the power to print money they have promptly ruined the monetary system. And so he wanted the bank to have the power to print money which to be a private bank would be 20 percent of it was owned by the government and the government of the right to inspect the books at any time. But it was a private bank and hope to make a profit and of course they could make a profit if they printed too much money they would go broke and Hamilton managed to turn the country very quickly into and extremely credit worthy operation the bonds of the of the new government were very popular around the world a lot of a lot of sales of government bonds in Europe. It was it was really he did a really fine job of putting the country on sound financial footing. Yes when he became secretary of the Treasury and in 1789

the United States was in many respects the world's largest banana republic with only with no bananas and within a few years it had the best credit risk of any country in the world of course by that time Europe had been plunged into war. And war is very bad for your credit rating. Maybe we should go back a moment because Hamilton in putting forth his ideas about the role that a national debt might play he was reflecting on years of British experience with a national debt I mean he had a model for his ideas he wasn't coming out of nowhere what what was he looking at what had he seen in Britain that was leading him to think that this might be a good thing. Well Britain was the first country in Europe to develop a modern fiscal system in the very late 17th century. The Bank of England was founded in 16 94 I believe as a private bank which had remained until after the Second World War. And they also had a modern developed a modern system of four for debt until then national debts had been in theory and frequently in fact the personal debt of the Sovereign of the

King and kings are notoriously. Good at simply refuting their debt just defaulting on their say sorry I ain't paying. And bankers would go broke and the country where the king would find it more difficult to borrow the next time of course. What Britain did is they started issuing government bonds that were negotiable in the marketplace. In other words you could take them and sell them to somebody else and he would then have the credit on the government. And so Britain was able to finance it. The 18th century wars of which there were a large number and by the end of the 18th century Britain was the foremost power in Europe. And you know its empire had vastly expanded from a few colonies along the Eastern Seaboard of the United States or what became the United States and. It was the national the British national debt which was by the standards of the late 18th century enormous It was two hundred seventy two million pounds.

And a British journalist said that if you laid them lay the British national debt out in guineas it would extend to a line of four thousand three hundred miles long. But it made Britain the foremost power in Europe without too much damage to the British economy. You know the British economy fine the British economy soared during the 18th century British wealth and increased enormously important that was not necessarily due to the debt but the debt did not prevent that in any way. So at the time of the founding Can you give us some sense of how much debt the country was in. Well we don't have very good statistics we have GDP or we used to call GNP gross national product the two are almost identical. Was the government started keeping GNP statistics only in one thousand twenty nine. Just in time so the country could watch it go straight down the tank. Economists are economic historians have. Trace GDP back to the 1860s and before then we have only guesstimates but it was the national debt when it was first

established with something on the order of 80 percent of the gross domestic product of the thirteen colonies. That's a myth which is actually higher than its percentage of GNP Now yesterday and now it's now about someone that has 70 percent little shy of 70 percent and was the debt held internally or externally I guess both we talked about bonds in Europe. But how what was the mix like. It was but it was mostly internal. But Europeans thought after the bombs that they were selling at a premium in Europe 10 percent premium. Well let's move forward and talk about some of the things that the national debt has done for us over the years. I suppose we could jump to the War of 1812 when right in the middle of the war the government went completely broke flat broke in the middle of the war and the treasury secretary who turns out to be the hero so often in this book. Boy if it comes it comes to the rescue of the country. Right well what happened was that in 1811 the Congress failed to renew the charter of the bank of the United States that Hamilton had set up. This

was the government's primary fiscal agent and the only means the government had of borrowing money. So in 1811 they effectively abolished the bank of the United States and in 1812 they declared war on the strongest military power in the world. The abolishment of the bank was perhaps the most feckless act in the history of the United States Congress and believe me there's a lot of competition for that title. By early 1813 the United States government was dead flat broke it couldn't pay congressman's salaries let alone the army and the Navy. And they tried to issue bonds and there had been a very poor response and Albert Gallatin who was then the secretary of the treasury went to Philadelphia and called on Stephen Girard who was a banker and and merchant. And in effect asked Stephen Girard to write a check for several million dollars to guarantee the sale of the bonds out of his own personal fortune out of his own personal fortune out of his bank

and he would Steven Gerard was the richest man in the United States at that time. Enormously rich by the standards of the day. And fortunately although we had several severe disputes with the government over the embargo act and whatever he immediately agreed. And people then bought the bonds actually laid they had. They trusted Stephen Girard much more in the trust of the United States government to pay back these bones. And you know as of today imagine Robert Rubin getting on a plane flying out to Seattle and going to Microsoft and saying Hey Bill could you do us a great big favor. But that's exactly what the secretary of the Treasury had to do in 1813 and fortunately the bill gates of his day said yes. And he Stephen Girard to Bill Gates of his day. Did he manage to make a fair amount of money off of this deal. Oh yes he made a profit. That for him. Good for you. For him good for the country. OK then along comes Andrew Jackson who is who is anti-debt down to his toes he is a pay as you go man doesn't believe in the debt

and his promise when when he was first elected is to pay down the debt which he thinks is out of control which he does he manages to pay it down nearly to zero. I believe it goes down as low as thirty eight thousand dollars which is why I might as well be zero. It was yes in fact it was not immediately so hardly even a rounding error. And it turns out to be turned out to have disastrous consequences. Paying off the debt. Yes it did and the effect was to contract the money supply. Because he also Jackson there was a great deal of land speculation in the early 1830s. In fact that's the origin of the phrase to do a land office business because the US Land Office was selling land so quickly in the 1830s but they were taking banknotes issued by state banks paper money in effect and the paper money had been issued because the government surpluses that they had in those days. Jackson also killed the second bank of the United States and he distributed the surplus among his political enemies called The Pet banks the banks

that Jackson favored and these pet banks then issued bank notes based on the Federal Deposit. And so Jackson issued what he called Species circular which required that all land be paid for in gold or silver which is specie in the economics terms. And this had the effect of radically contracting the money supply a lot of banks went broke and the panic rolled eastward from the from the less developed areas in the West. And the first great panic on Wall Street was 1837 April of 1837 Jackson with the. Timing that every great politician has had retired from the presidency in March of 1837 and therefore it was his successor Martin Van Buren who inherited the world when that Jackson had quite unintentionally set in motion. And how did it how did Van Buren and his successors manage to get us out of that problem with with more debt. Well the debt ran up not because they were trying to use the debt as a instrument of economic policy but because the tax revenues fell so drastically that

the federal government was in was in deficit for several years thereafter. So then if we if we can we can jump ahead to the Civil War. Another major major event that was affected by America's ability to borrow and to use its national debt effectively the debt plays a significant role in the outcome of that war. Indeed it did. We financed about two thirds of the war with bonds. The national debt went from around 60 million in 1860 to 2.7 billion. By 1865 we invented the war drive for the war bond drive and sold bonds to many many people who had never even had a bank account before. By the end of the war they all owned federal war bonds. What were what other options did the country have to the north have in terms of raising money to to fight the war and why was the issuance of bonds a good choice. Well taxes were very steeply raised that they

tax virtually everything that moved in quite a few things that didn't. They also taxed income for the first time. But there's a limit to how much you can tax because people have to live in the economy has to operate. And so by borrowing the money they were able to in effect to throw the cost of the war upon the future. The Confederacy did not have that option nearly to the same extent the Confederates did issue bonds they were sold in London and to Confederate citizens but not nearly as much of the South was money poor. It didn't have the banking assets in the banking. The developed banking system that the North and therefore the South had to in effect pay for the war by printing money and the Southern economy spiraled out of control of the inflation of several hundred percent. The North printed some money covered some of its cost by printing money yes they've they've printed about four hundred fifty million dollars in greenbacks as they were called because they were the back of the bill was green in color and

these were legal tender in that you had the private citizen had to accept them and payment of debt. But actually the federal government did not have to accept them in payment of taxes and did not they want to go. How can you compare between the north and the south. What percentage of of their war expenses they covered through printing money. Just just to give us a comparison of the mix of strategies that were you. I believe if I remember the figures correctly the north financed about 13 percent of its war costs with printed money in the and the Confederacy printed over two thirds. Quite a difference quite a difference. So how long into the future was the country still paying off the debts of the Civil War. Well the debt peaked in 1066 a 2.7 billion by the turn of the century it was down to under a billion. When the. And by that time of course the American economy had grown enormously in the 35 years since the end of the Civil War and so the debt had been paid down to

virtually a nullity by the turn of the century because the American economy was very much larger. The jump in in the size of the debt that you described before between the beginning of the Civil War and the end of the civil war I think you said from 60 million to 7 million. Is that how does that compare with the rise in the debt that we've seen in the last 20 years or so. Well that was much bigger in percentage terms. I mean I can't quite do the math in my head but it was you know by a factor of 60 or so. And today We've quintupled the national debt in the last 18 years. We're at the end of the civil war at the height. Let me put it this way the height of of the debt in the Civil War era what sort of percentage of GNP were we looking at. Again it's hard to say but it was around two thirds something like that. Oh of GDP in two thirds of it was higher. You know OK so the civil war or other important turning point the civil war that you mention is that it's

the first time that we have an income tax the income tax is not the hero of your book to say the least comes under intense scrutiny the entire income tax system. But if we can if we can jump ahead again making huge leaps in history will jump to the beginning of this century and the period leading up to and including World War One when not only do you have another instance of. Using the debt to finance the war but also a situation where the debt the holders of the debt. It's interesting you talk about the bond drives during that war the Liberty Bond campaigns and who was buying the debt whereas during the Civil War when the bankers the moneyed elite that it became much more of a popular enterprise to sell bonds during World War One. Well actually the during the Civil War they sold war bonds to about 5 percent of the population which was amazing at the time because

way under 1 percent of the population had a bank account. And during the Civil War era bank accounts were for rich people. And what they actually mean was people in ordinary circumstances were buying more bonds they could spy them in and in increments as small as $50 and they paid interest in gold not in greenbacks. And so it was a safe investment or savings investment again. And so actually the Civil War they did so well to a lot of ordinary people they did more so in the World War 1 era. OK but the actual the made the transition really comes during the Civil War and yes in World War one right. Ok my mistake. You're listening to WBEZ Chicago I'm Gretchen health. This is Odyssey and today we're talking with John Steele Gordon who is a business historian and the author of Hamilton's blessing the extraordinary life and times of our national debt which is just out in paperback we're talking to Tory Manor about the history of the national debt or just about of it World War 1 in a few minutes we're going to take a break and then we'll take some calls if you'd like to ask some questions but we're now in the 20th century were I have to admit the story gets more

confusing. Maybe because there's more information to sort through. But you have after World War One. Obviously we go into the 20s and head into the Great Depression where some of the most disastrous economic policy of all time is being made. Again we have a talented secretary of the Treasury Mellon who was secretary of treasury in the late 20s and early 30s. Right. But who then who. Who. Well you can tell a story about who ends up. He does all sorts of brilliant stuff and then leaves office raising taxes at just the worst possible time to be doing that. Right well what happened in the Great Depression. Head of the Federal Reserve was a man named Benjamin strong who had been a New York banker and had been. President of Bankers Trust Company which was then owned by the mortgage interest. And when the Federal Reserve was set up they had 12 different federal reserves around the country. And he was the only one who was a real banker the rest were mostly political appointees.

And he by 900 20s he was in effect the central bank of the United States what he his policy suggestions were invariably adopted by the other Federal Reserve banks. And unfortunately he died one thousand twenty eight of tuberculosis. And the Federal Reserve was effectively an on auto pilot for the next five years or so. And. When he died he had been raising interest rates in order to try to slow down the gathering speculative mania on Wall Street. He saw it coming. He saw it coming. But then the Federal Reserve did nothing. I mean for instance in early of one thousand twenty nine banks were borrowing money from the Federal Reserve at 4 and 5 percent. And lending it out on them what's called the cold money market to Wall Street speculators at 12 percent. In other words they were making 7 percent other people's money which is nice work if you can get it. And the Fed kept asking them to stop

doing that but of course self interest a self interest and they didn't stop. Ben a stong almost certainly would have stopped it. Which This had the effect of greatly inflating the bubble on Wall Street in the stock market crashed. And what you needed was liquidity to lower interest rates to flood the market with money. And the Fed did nothing. And that was the first great mistake in fact the the the Fed kept in fighting inflation long after deflation had set and the money supply of the United States shrank by over a third in the Great Depression. And you know in effect the Federal Reserve kept treating the patient for fever long after the patient had started to freeze to death. The second mistake was the Smoot-Hawley Tariff of 1930 and when we tried to isolate the American economy from the global economy by raising tariffs you know the idea was to keep American jobs for American workers. The result of course was the collapse of world trade. We had exported over

five billion dollars worth of of goods and in one thousand twenty eight by 1932 we're exporting under 2 billion. And the result of this of course was the tariffs the revenue from the tariff didn't go up it went down. And this cost American jobs as every other country of course immediately had to do the same thing to protect their workers and everybody had to adopt a beggar thy neighbor policy. And that was the second great mistake and the third was that Herbert Hoover. Tried to raise taxes in 1032. The idea being to help. The taxes for the purpose of paying to in part bring Why didn't you try to bring the budget into balance. And you don't want to do that in the midst of a rapidly falling

economy. Because all you do is make the fall that much deeper and that much deeper. But there's always been it's seems throughout the book as you describe it there's definitely always been at least up until I will say the New Deal era the reigning philosophy has been pay as you go that you should attempt to pay the debt down when you can for example after I guess after the War of 1812 it was sort of OK a priority was pay down the debt after the Civil War pay down the debt you know this was this was the mindset was that that was something you should set about doing whenever you can although obviously in this case. Well indeed it is but you could. But you want to pay down the debt after the war not in the middle of the war. And Hoover in effect tried to to pay the debt in the middle of the war at least the economic war and the result was that the Great Depression and to give you an idea of just how serious matters had become by late 1932 in October of 1932 Treasury bills which are the short term

treasury instruments that are sold to borrow money. I'm actually sold at a premium Treasury bills don't pay interest. You buy them at a discount and they mature at par so you buy them at say 98 and they pay off at 100 so you make a little over 2 percent on your money. But in October 1032 they are selling for like a hundred one hundred two in other words people are paying for the privilege of having their money in the safest possible form which was the short term obligations of a sovereign state. Somehow that strikes me as paradoxical that while the government is taking all these actions that are ruining the economy leading the economy into into the Great Depression that at the same time it's government bonds that are the safest investment. Well it's a story and you realize in retrospect these three great mistakes and there are liberal historians who do not accept them because liberals tend to find fault with almost everything except government. But

they still mean that is by definition the safest possible investment many companies can go broke but sovereign states can't mean they can always have worse comes to worst print the money to pay off the debt. But and that to me it is amazing that people were paying for the privilege of lending the Treasury money. We're talking with historian John Steele Gordon his book Hamilton's blessing the extraordinary life and times of our national debt is just out in paperback. We're going to take a break when we come back and we'll take your calls if you want to ask a question join in the conversation please do so. Our phone number is 3 1 2 8 3 2 3 1 2 4 3 1 2 8 3 2 3 1 2 4. This is Odyssey I'm Gretchen Helfrich And you're listening to WBEZ Chicago. Support for programming on WBEZ is provided by the DePaul Opera Theatre presenting an operetta of revenge revelry and champagne. Johansson Jr's deflator mouse for one weekend only Friday through Sunday February

6th 7th and 8th at the mo reskin Theater in Chicago to get information is available through the box office. 3 1 2 9 2 2 Nineteen ninety nine a month ago 25 Mexican men mostly women and children were massacred in Mexico's southern state of Chiapas yesterday some twelve hundred of the country's indigenous people gathered at Mexico's holiest site for a mass. Hello I'm Tony Cox and we'll have a report on the troubles in shaa past. Along with an update on the pope's visit to Cuba today on the world. The world at 7 p.m. on WBEZ Chicago this is WBEZ Chicago ninety one point five FM AM Chicago's Public Radio station. I'm Gretchen health. You're listening to Odyssey and my guest today is John Steele Gordon he is a historian and he's the author of Hamilton's blessing the extraordinary life and times of our national debt. It has just come out in paperback He's also a columnist for American heritage and you might hear commentaries from time to time on Marketplace on your fine public radio

station. So let's go to the phones let's take a call. We'll talk with Chet Good morning Chad. Good morning Professor observations based on memory or military character. It occurred to me with your time. Talking about the first bankruptcy then it must have happened after Ehrenberg. So I would be able to get in. So I guess my question is if that's accurate. Did the bank go down because Hamilton wasn't there to fight for it. Interesting question. Well yes I mean the duel took place an 18 0 4 in the bank went out of existence in 1811 when its 20 year charter expired. By that time Hamilton was long out of government. I mean the Democratic Republicans under Jefferson had taken control of the government in 1900 and they kept it for the next. Well actually until the 1840s. But he but if Hamilton had been around if you'd still been alive at that time would he still have been in a position

of enough influence to have persuaded Congress to renew the charter of the bank. Or possibly I mean that well obviously we can never know what would have happened had you know the Titanic missed the iceberg. But yes I'm. I have no doubt whatever that Hamilton would have fought very hard for the. Renew newel of the charter of his bank and failed in the Senate by only one vote in fact it was the vice president of the United States whose vote killed the bank. It is perhaps the only time in American history when the vice president was politically relevant. But even even a Hamilton's detractors or I should say opponents on the issue of National Bank most notably Jefferson came around to his point of view after Jefferson became president he came around and recognized the importance of the bank and realized that Hamilton had been right in quite a number of ways about the structure of the economy but still that that wasn't enough to raise a general consensus in support of the bank.

No well Jefferson never accepted the bank of the United States. He used it. I mean Jefferson believed what is now called strict construction although that phrase didn't exist in Jefferson's day where you want the powers of the federal government really meant to those expressly given to it by the Constitution. And he said that the Constitution did not expressly give it the power to create a central bank and therefore it was unconstitutional. On the other hand in 1903 when France offered to sell the United States a million square miles of what turned out to be the finest agricultural land on the face of the earth for a mere fifteen million bucks Jefferson did not hesitate for one second to acquire land from a foreign power although the Constitution doesn't give that power to the federal government either. In fact he borrowed the money in order to buy it. So interesting how our views change when we're no longer in office. It certainly is a worry. Thanks Jack thanks for your question. Let's talk with Adam. Good morning Adam you're on WBEZ. I was wondering if I ever get your book yet but was there ever a time in our nation's

history when there was serious consideration given to paying off with taxes based on the value of oil. Well Henry George the economist of the late 19th century thought the only tax should be on the value of land but not that I'm aware of that it was ever expressly to be used for paying off the debt. It has it has your talk a lot about the income tax system and other taxation questions in your book and you talk about different purposes of taxation and has the tax or taxes ever imposed specifically for the purpose of paying off the debt or just more generally raising revenue. Balancing the budget. No there was no tax mean all taxes are paid into the United States Treasury and they can the monies can be used for any purposes whatsoever there are trust fund such as the Highway Trust Fund which gas taxes are paid into and they're supposed to be used exclusively for the building of highways. You know lately they've been used for mass transit to some extent but no far as I know there's never been

a tax passed with the express purpose of paying down the debt. There was one in 1898 the if you look on your telephone bill you'll see a federal tax on long distance calls and that was imposed in 1898 in order to fund the Spanish-American War in 89 1898 Here's a hundred years later in the Spanish-American War which only lasted two months. Get on Bill and I didn't I didn't know actually there were quite a few mostly businesses not many domestic or none they residential households had telephones in that time but there were a lot of telephones in business by 1898 and that was that the taxes earmarked earmarked for war expenses but of course the war is long over and hardly cost anything you know. Terms of what wars cost and but the tax is still with us. It's just taking our phone number here is 3 1 2 8 3 2 3 1 2 4 3 1 2 8 3 2 3 1 2 4. Let's talk to Bob. Good morning Bob. There never a question about policy toward for a lot of apologists for a deficit. I mostly

seem to be liberal but I don't know if you know anything. That having a little bit of debt or even a lot of debt isn't that bad because as a percentage of GNP you know it's sort of like we all have home mortgages and things. But it occurs to me that what our government is doing on our behalf is spending up the national credit card and we're getting more and more interest. Are there any government or any time in history when governments have used operating budget and capital budget like a lot of corporations do because it seems to me if we're going to borrow money. Yeah like for the Highway Trust Fund if you want to have it for specific capital projects or for a specific program that's one thing but to just borrow money willy nilly and then spend more because you know you have the ability to spend as much as you want. Doesn't seem to be like something that would work in the long run. I'm just wondering if any. Having tried a capital one operating budget

and have your taxes for specific purposes. Well the federal government is not most states and perhaps all States Constitution is require that their operating budgets be balanced and that the capital budget they can borrow bonds often with the the people have to vote on bond issues before they can take effect. But the federal government has never separated operating from capital expenses it will be a very good idea if it started doing that. That also raises another interesting point that argument that you make at the end of the book about the period of debt explosion that we've seen in this country since the 1960s that we've seen this massive rise of quadrupling in the debt in a short period of time. But for essentially nothing in the sense that you know previous periods when the debt has skyrocketed it's been to pay for a war or you know some crisis to get the country out of some crisis whereas you argue that this particular period of debt increase has not has not yielded anything that the increase in the debt has not been an investment.

No it is not it has been invested in the in the re-election prospects of politicians and that is basically the the sole reason for the explosion of the debt is that you would call that a low yield investment very low yield investment negative yield perhaps. But that this if we compare because I've been asking you all along to sort of compare periods where the debt went up a lot to this period but. But you argue that there's a substantial difference between you know going into debt to pay for some particular thing and going to that as Bob is raising just to sort of go along in a debt operating or operating on a deficit in a deficit situation for years and years for with no goals. Right. I mean World War 2 we enormously ran up the deficit. But the purpose to which we put that borrowing was the destruction of Hitler and all that that Hitler stood for. I think that was worth every penny. But since 1980 when We've quintupled the national debt what if we use that money for

basically so that no politician in Washington ever had to say no to anybody who might write a check to his next campaign. You also point out that I didn't know it had really thought about that the federal government is one of the few lingering operations that still uses single entry bookkeeping that keeps its books in a in a in a way that no corporation could get away with. Right. The federal government keeps its books the same way a individual keeps a checkbook and they record deposits into the treasury and they record the checks as they write them. But if Congress passes a new program. They don't anticipate those expenses in the books again because there that's called a cash basis they can also be kept on an accrual basis where corporations have to do that where they incur an obligation that has to be reflected on the books immediately even though they don't have to write the check for months or years or whatever. For instance we have several trillion dollars in budgetary obligations in the out years as they call them that are not reflected in the current budget at

all. And these things when they come due they're going to have to be paid military pensions Social Security what have you. I actually years ago I used to work in the Office of Management Budget as an intern although nothing bad went on. I want to say that right up front. And we would occasionally get letters from congressmen saying you know why don't we put ourselves on sound financial footing why don't we adopt generally accepted accounting practices you know this would all become so much clearer would be so much easier to manage these issues. And it went nowhere. Complete nonstarter. There was just no interest in doing that at all. Well and the reason is that Congress and the president find it very convenient to be able to keep the books in ways that suit them politically. I mean New York State to give you a wonderful example. Has a constitutional provision that the operating budget must be balanced and about five six years ago the government estimates were that the balance would be about 200 million dollars out of balance. Too much expenses. Now the legislature and the governor could have

raised taxes or they could have cut expenses to bring the operating budget into balance. They didn't do that. Instead they sold Attica State Prison to themselves. The UDC the Urban Development Corporation a state agency went out and borrow 200 million dollars in the bond market took title to Attica State Prison and the government declared that two hundred million dollars to be income and that the operating budget was now balanced and it now rents Attica State prison not a yearly cost of what it cost to service the buns. Now imagine what would happen if a corporation sold its corporate headquarters to a wholly owned subsidiary and declared the money it received from that subsidiary to the income. I mean the FCC and the Justice Department would be down on them like ducks on a june bug. But you know having it happen to Mario Cuomo is no longer governor you know on the radio. Bob thank you very much for your call very interesting proposal Our number here is 3 1 2 8

3 2 3 1 2 4 3 1 2 8 3 2 3 1 2 4. Jason you're on WBEZ. Hi thanks for getting to me. You touched earlier on a V civil war and the differing economies between the north and south. I grew up in Georgia and when I recently went home I was surprised to learn from my dad that he seemed to remember in the 50s when some of the final reparations were lifted in terms of like well road taxes and things along those lines. But I don't know that history very well at all and I'm wondering if you. It sheds some light on how long those reparations and punishments exacted on the south left and kind of contributed to their lagging economy until the post-war. Well I'm a friend an expert on that by any means the federal government withdrew its troops in 1877 and the 11 Confederate States became again sovereign states within the union and

so there were no fiscal reparations that I'm aware of that the federal government imposed on certain states that the constitution expressly forbids imposing obligations on certain states but not other states. Interesting question. Thanks Jason thanks for your call. Thank you. You're listening to WBEZ Chicago ninety one point five FM I'm Gretchen health rich and this is Odyssey Today we're talking with John Steele Gordon business historian and author of Hamilton's blessing the extraordinary life and times of our national debt. It's just out in paperback. Mr. Gordon is also a columnist for American heritage and a commentator for Marketplace. Our telephone number if you'd like to give us a call is 3 1 2 8 3 2 3 1 2 4 3 1 2 8 3 2 3 1 2 4. Let's talk with Mark. Good morning Mark and WBEZ. Hi thanks for taking us. Just wondering if you could talk for us. The recent national debt just started and one of the last four have 60 years as a senator. And why was it at a slower pace believe it could make. The

interest rates quite low and the sky rocketed. Secondly the authorities keep raising the net and we really owe it to the world and if they don't get a chance to question and one other thing further with the president the interest rate skyrocketed to the national debt. You know that that money that was due mainly to the galloping inflation of the late 1970s when the inflation rate actually exceeded the inflation rate of the Civil War. Answer your question the debt reached its lowest point as a percentage of GDP in around 1070 when it was under 40 percent of GDP. That was in the Nixon administration no I don't think the Nixon administration had much to do with it. It was just fortuitous like the the last time there was a budget surplus was in 1969 which was also a Nixon year barely hear Mark.

Sorry Mark we didn't hear you. Oh I'm sorry. During the Vietnam war wouldn't that be an. Go vote go vote vote vote. Well it was the Vietnam War with a relatively small war relative to the size of the American economy if no other way. And actually Lyndon Johnson tried to make it to some extent a pay as you go war like the Korean War was a pay as you go war so there were no bonds no war there were no war drive war bond drives or anything like that that was the last time that happened was World War 2. So when you say that nine hundred seventy is the lowest that the debt has been in recent years and what sort of timeframe since the end of the war since yes since in the modern era it was much lower of course. In the 1920s and before the First World War it was virtually trivial as a percentage of GDP. So 1970 what approximately what was it as a percentage it was under 40 percent I think it was thirty eight point seven or something like that. OK. And again now it's somewhere that's about it. Since then him. OK. Mark thanks a lot for your call appreciate it. Phone number here again is 3 1 2 8 3 2 3 1 2 4. We're going to talk about

Keane's in Syria a little bit. Got a call here but I'm not sure your name Hello you're on WBEZ. Hi this is Kathleen Freel. Hi Kathleen. Hi how are you. Fine thanks. I just wanted to say thank you for the book because it was a wonderful piece of history really brought it to life for me. And. I was really interested there was a lot of I think a lot of people still holding on to the theory that Keynesian that it doesn't matter how much we borrow because we know it to ourselves. Well that's not really true because we know about almost a third of the national debt is now held by foreigners and by foreign governments. Right I believe that but I also don't really believe that. I don't know how people can justify the fact that Americans also own some about that that it's a good thing. But I think a lot of people are still holding on to that theory. I mean the idea that it's a good thing to owe this debt to our own citizens. Well but it's a wash. But if we if we're borrowing money and our citizens are the ones. Oh not it's essential for our citizens. Well this is this gets right back to Hamilton who said you know that you know having a moderate national debt could actually increase the money supply get more capital

moving around does it still have that effect in more borrowing internally. No not really I don't think. Because the way the money system operates today is so completely different from it wasn't in Hamilton's day. But I think the well why is that why isn't it a spur to capital or to more liquidity. Well it certainly is a spur to more liquidity. What happens is that of course when the federal government borrows it increases the demand for capital which increases the price of capital and therefore interest rates which is the price of capital go up. And if we somehow paid off the national debt and the federal government operate on a pay as you go basis it would be interest rates to be much lower than they are and therefore people would borrow capital for creative wealth producing purposes much more because the government doesn't create wealth. It's it's very good at spending it but not very good at creating it. Well how how do we know what would constitute a moderate national debt or I guess what I'm asking is Is there any truth left to Hamilton's original idea that there might be some benefit

from having a moderate national debt. Well certainly if we get into a another great power war God forbid. Having a national debt as will be essential to winning that war or a great national trauma like a return of the Great Depression. But of course having already borrowed that money can't borrow a dollar twice unless you pay it back in the meantime and at some point the markets nowadays we used to have the gold standard now we have the currency market standard as as SE Asia has discovered in the last few months of the currency market doesn't like your currency it loses value very very rapidly. So it's a whole it's not even you can really compare to the debt situation now to what Hamilton was talking about the economic principles that he was operating on. Not really because we live in such a different economic world the velocity of money is increased so much. The money supply is of course much larger now than it was in in terms of the size of the economy even. OK well we've got just a few minutes left but I definitely want to try to get another call in Kathleen thanks very much for your

question. Let's talk with Barbara on WBEZ. Yes hi. Wonderful program I can't wait to read your book Mr. Gordon. Thank you. I'd like to ask about how the federal that is really being paid day is I understand the Grace Commission appointed by Reagan in 1984 came out with the fact that not one nickel of the income tax is actually being going towards anything like programs and benefits that most good citizens paying believe. But it's actually totally going to pay the private organization the Federal Reserve for the national debt. Well been a member all federal tax revenues except those that go into a separate trust funds are dropped into a common pot so you can't really say that the income tax are very substantial in the I forget what the income tax brought in last year but it was a very substantial portion of it at least certainly goes to pay the the interest on the national debt the interest is now somewhere in the vicinity of three hundred fifty billion dollars a year. Wow Wow pretty amazing. So I tell you. OK thank you Barbara thanks very much

for your call. We're just about out of time just a couple of minutes left we didn't really get to talk too much about between World War 1 and now which I'm sorry about because of course there's the New Deal and World War 2 if you do some major events in the in the financial history of the United States. But alas it's only an hour program. My guest today has been John Steele Gordon he is the author of Hamilton's blessing the extraordinary life and times of our national debt. The book is just out in paperback He is the also a columnist for American heritage and he's a commentator for Marketplace so you can hear him on WBEZ sometimes weeknights. Thanks very much for coming in and talking about this. Do you have any particular. I was really intrigued by the accounting part of your book I never really thought about accounting but do you think. You seem to talk about that as if that is a major major step forward almost as you know qua non of budget logic or rationality. Do you see that going any place. Only if the people put enough pressure because the politicians the

government would much rather be able to keep the books as they see fit to make themselves look as good as possible Meanwhile straight discovered 100 years ago that you could let the managers of corporations keep their own books. They needed independent certifying accountants that's when the CPA was invented was in the 1890s and the federal government needs the equivalent of a CPA to say these are the way the books should be kept and that they have been honestly and fully kept. Until then you you'll know when Washington is serious about fiscal reform when it has an independent authority that keeps the books and determines how those books shall be kept. Well we'll hold our breath. I wouldn't buy that if I'm still Gordon thank you very much for coming to thank you. I think my thanks also to Joshua Andrews for producing and directing to Carol Fraters and Steve Warren ask is for engineering Don't forget tomorrow film club here on Odyssey we're going to be talking about the films and the life of Mary Pickford America's sweetheart who was also a promoter of Liberty Bonds in World War 1. We're overlapping one show

to the next. You're listening to Odyssey this is WBEZ Chicago. In. Our sky.