Hamilton’s Financial Thoughts and the Strategy of “Debt Powerful Nation”

In ancient and modern times, at home and abroad, people have always advocated the virtues of diligence and frugality, and despised the vice of eating food. Debt is considered to be very harmful to life. Just look at the proverbs that represent the wisdom of life: no debt is light (China); once a family life is based on borrowing, it is no longer free and beautiful (Norway); the poor is no debt than the prince (UK); debt-free is escape from danger (United Kingdom); Debt is a bottomless ocean (United Kingdom); instead of getting up in debt, it is better to go to bed on an empty stomach (United Kingdom)…

However, in real life, things seem not that simple, or even the opposite. Looking back at the world economic development since the Industrial Revolution, we will find that debt plays a vital role. Not only is it not a burden to the country and the people, but it is one of the main drivers of the country’s prosperity and the people’s happiness. If there were no debts, the world’s development would be much slower, and national and personal wealth would be greatly reduced.

Hamilton was one of the first to gain insight into the benefits of debt. In the 18th century he lived in, people’s concepts were generally conservative. Debt was regarded by most people as a scourge, a devil who brought the country and the individual into disaster. Hamilton was under tremendous pressure and wrote a large number of articles expounding his views and explaining the benefits of debt to the public and Congress. The rapid development of the global economy later proved Hamilton’s foresight and far ahead of the times. The famous American politician Webster once commented on the importance of Hamilton’s financial strategy to the United States: “The financial system created by Hamilton is the magic code for the prosperity and strength of the United States. He opened the door of credit resources, and the flood of wealth immediately surged. American people. Full of gratitude, the people of the world are full of awe…. His incredible brain was inspired, and the entire American financial system was born.”

Alexander Hamilton (1755-1804) was born on the island of St. Crowe in the British West Indies and was an illegitimate child. When he was a child, he relied on a small shop run by his mother. When his mother died at the age of 13, his family friends helped him find a job as an assistant to the accountant.

Once, a storm hit the West Indies. Little Hamilton wrote a related report to a newspaper. The article was fascinating, and it was very well received after it was published. Some of his friends thought he was a talent, so they decided to subsidize him to receive a good education. Little Hamilton took their money and came to New York and applied to study at King’s College (now Columbia University), but because of his insufficient education, he was not admitted for the first time. He decided to study first at a school in Elizabethtown, New Jersey. Hamilton was one of the most diligent students in the school there. At the same time, he wrote a lot of articles and tried to improve his style every time. A year later, he was admitted to King’s College.

While studying at King’s College, Hamilton’s quick intelligence, clear thinking and outstanding expression skills surprised teachers and classmates. Hamilton was also very concerned about the future of the American colonies and participated in protests against British rule. After the outbreak of the War of Independence, 18-year-old Hamilton joined the North American militia and made numerous contributions in the war. Later, he served as an aide-in-command of the George Washington Staff for 4 years and became George Washington’s most trusted man. In April 1781, his request to Washington for the appointment of a key position in the army was rejected, and he left the staff. In July of the same year, he gained fame for commanding an infantry battalion to capture a British fort in the Battle of Yorktown.

After the war, Hamilton became a representative of the United States Constituent Assembly and drafter of the “United States Constitution”. On September 17, 1787, he was one of 39 representatives of the Constituent Assembly and signed the “Constitution of the United States of America” ​​on behalf of the State of New York. After the birth of the new constitution, he devoted great enthusiasm to the movement to ratify the constitution. Hamilton, along with James Madison and John Jay, successively published 85 articles propagating and explaining the new constitution in newspapers, 51 of which were written by him. These articles were later compiled into the “Federalist Collection”. This collection is considered to be “the most important work of American political science so far”, the “classic work of political theory” in the United States, and is “second only to the “Declaration of Independence” and “U.S. Constitution”, ranking third in American political literature. literature”.

During the presidency of Washington, Hamilton was appointed the first Secretary of the Treasury of the United States (1789-1795). From the hardships and hardships he experienced in the war and the weakness of the federal government he experienced after the war, he realized that in order for the United States to become a prosperous and powerful country, it must establish a strong alliance of states and a strong central government. . After the war, he has been fighting tirelessly to achieve this goal.

When Hamilton became Minister of the Treasury in 1789, he faced an empty treasury, almost overwhelmed war debts, and a country that was on the verge of collapse. He submitted a series of reports to Congress and put forward a program for fiscal rectification and economic development. A series of fiscal policies were implemented in accordance with this program, which resolved the long-standing debt problem, rebuilt the credit of the United States at home and abroad, improved the financial system, and established a complete fiscal management system. The country has a stable fiscal revenue, which has fundamentally put an end to fiscal chaos and created favorable conditions for the development of industry and commerce.

No founding father had such a foresight about the future political, military, and economic strength of the United States like Hamilton; and no founding father built an appropriate economic system like Hamilton did to lay the foundation for the later wealth and strength of the United States.

Hamilton is not respected in terms of character and personal morality. He has almost no friends, and he lost terribly in the competition with his main political opponent Thomas Jefferson. Later, he was also involved in an adultery scandal. In 1804, he simply duel with his political opponent, Vice President Alan Burr, was unfortunately killed at the age of 49. Among the founding fathers of the United States, there is no life and death more dramatic than Alexander Hamilton.

However, Hamilton’s political legacy, including the founding of an industrial nation, the establishment of a strong central government, a “power in debt”, etc., has played an increasingly prominent role in the subsequent American history. As Hamilton occupies an important position in the history of American finance, finance and industrial development, his head was printed on the $10 bill. In 2006, Hamilton was ranked fifth among the 100 people influencing the United States by the authoritative American journal The Atlantic Monthly.

Hamilton’s monetary and financial system for the United States has five pillars: 1. a unified national debt market; 2. a banking system led by the central bank; 3. a unified coinage system (gold and silver duplication system); 4. taxation based on tariffs and consumption taxes System; 5. Financial and trade policies that encourage the development of manufacturing. Hamilton’s five pillars jointly supported the towering trees of the US financial system, and eventually made it grow into a US dollar hegemony system that dominates the global economy.

Hamilton designed the five major policies and institutional arrangements from the perspective of overall national credit from beginning to end. He said: “The credit of a country must be a perfect whole. The various parts must have the most exquisite cooperation and coordination. The tree will decay, wither, and rot.”

In human history, there have always been a handful of geniuses whose thinking and strategies far surpassed his time. Hamilton is such a genius. He argued that debt is not a bad thing, but a major driving force for a strong and prosperous nation. Therefore, Hamilton devoted all his efforts to creating a national debt market. This proposition was the most subversive. In the eyes of people at the time, he simply touted the devil as an angel. There are very few people who can understand Hamilton’s genius and foresight.

Hamilton did not study economics systematically. His propositions for a “powerful country in debt” are derived from reading, thinking, and observation of reality. He believes that “credit can be called a new force in the operation mechanism of state affairs.” Debt is not only beneficial to the prosperity of the country, but also necessary. This view is based on his profound grasp of the history of economic development of various countries in the world, especially the experience of the rise of Britain. Before becoming Treasury Secretary, Hamilton wrote: “Beginning in the 1790s, the British Empire created the Bank of England, the tax system, and the government bond market. In the 18th century, the British government bond market developed rapidly. Not only did it not weaken the United Kingdom, but instead created data. The national debt helped the British Empire build the Royal Navy, supported the British Empire in winning global wars, and assisted the United Kingdom in maintaining the global business empire. At the same time, the national debt market greatly promoted the development of the British economy. Individuals and companies pledged by national debt For financing, banks use government bonds as reserves to expand credit, and foreign investors regard British government bonds as the best investment product. For the prosperity of the United States, in order to fundamentally get rid of the United States’ dependence on British and European capital and capital markets, the United States must quickly establish Own national debt market and financial system.”

During the War of Independence, the New World owed considerable domestic and foreign debts, partly borrowed by the federal government and partly borrowed by the states alone. Relying on huge loans, the Continental Army paid military salaries, prepared food and grass, and purchased weapons, and finally won the war. So Hamilton calls debt the “price of freedom.” He pointed out that war in the modern system can only produce two results-debt or the destruction of private property. It is impossible to sustain a serious war if we only use the money saved from the citizens’ living needs, convenience, and spending on the pursuit of happiness from the country’s income. Credit must be involved, and the state must raise capital instead of relying on private savings to fight wars.

The significant advantage of a strong national credit system is that it enables the government to wage war without infringing on property, destroying industry, or unreasonably interfering in personal enjoyment. Citizens can keep their capital for business activities and keep a certain percentage of products to meet the needs of life. Agriculture, commerce and manufacturing will not be seriously harmed. Their vitality remains, and once peace is restored, they will soon return to their usual levels. Due to the use of credit, the scourge of war has become less serious. If there is no credit, it is tantamount to putting all the resources of a country into war. Citizens go hungry, industry and commerce are suffocated, and the country will be easily defeated.

Credit not only enables the government to use powerful resources to win wars, it can also stimulate economic development. Hamilton stated that credit is playing the role he described: “Whoever looks around with an impartial and objective eye will find that the new capital created by public debt promotes the expansion of commerce, agriculture, manufacturing, and other improvements. Our maritime transportation has been greatly increased. Our foreign trade has begun to rely more on our own capital. Our manufacturing industry has increased in number and scale. We are expanding our territory with unprecedented vitality Our towns are rapidly increasing due to the completion of new high-quality housing. Canals are being excavated and bridges are being built. Their operation and effectiveness are stronger than ever before. Land is increasing in value everywhere.”

Stimulated by public and private credit, the American economy was restarted in 1795. This rapid development continues to this day, making the United States the undisputed number one power.

Hamilton encourages a “powerful country in debt”, not only knowing that it encourages borrowing money, and then irresponsibly relinquishing the debt. He always emphasized that borrowing should be based on abiding by the obligation to repay the debt and making overall arrangements for debt repayment. The most important thing is to carry out financing and prepare enough funds for debt repayment.

Debt can help countries win wars and promote rapid economic development, which deserves encouragement. So how should debts be handled? If the borrowed money is not repaid, then this approach will become an engine of violence, oppression, blackmail and suffering. The property of creditors will no longer be safe, nothing is safe, everything will be a matter of power, and freedom will not be guaranteed. The original intention of borrowing will be counterproductive.

After seeing that credit is so important to the country’s strength and security, he strives to achieve the most perfect state of his country’s credit in the most effective way. The government, like the individual, should take a sacred attitude towards debt repayment. Among moral and political obligations, debt repayment obligations have a prominent position. The government must make reasonable financing for debt repayment and unwaveringly provide sufficient funds to fulfill the obligations promised when borrowing. When borrowing every debt, arrangements must be made to repay the debt.

There are various benefits to borrowing, so it makes no sense to fully repay the principal and interest. Hamilton put forward the concept of “perpetual debt”. What the federal government can control are import taxes and consumption taxes (the export tax was not required at that time), as well as the income from the sale of unowned land. After the income is supplied to the federal government’s operating expenses, it is mainly used to pay the interest on the debt owed; if there is remaining, a certain percentage (such as 10%) of the principal can be repaid every year. As debt promotes the development of all walks of life, taxation will continue to increase; unowned land will also continue to increase in value, and land transfer fees will also increase. At the same time, it can also raise funds by issuing new bonds. After economic development, capital becomes sufficient, and interest rates will show a downward trend. For example, the old bond interest rate is 6%, and the new bond interest rate may only be 5%. At this time, the financing obtained from the issuance of new bonds can be used to repay the principal and interest of the old bonds and reduce the cost of borrowing. This kind of operation similar to “removing the east wall to make up the west wall” is a kind of “perpetual debt.” It can always maintain a certain amount of debt, but also abide by the credit of debt repayment, so that creditors can obtain benefits, and it can continuously reduce the cost of borrowing. Now that the United States is the world’s largest debtor country, many people criticize Americans for eating more food, and even assert that the United States will be destroyed by heavy debts. If they truly understand Hamilton’s debt strategy and the facts of the US economic development over the past 200 years, should they re-evaluate their views?

The key to economic development is the most effective mobilization and allocation of resources, and the best way to do this is the credit system. If a person, an enterprise, and a country have the highest credit, it can mobilize as much funds and resources as possible to develop itself. Hamilton had a deep insight into the nature of finance and credit. History quickly verified Hamilton’s foresight and foresight. Hamilton has spared no effort to build a credit system for U.S. Treasury bonds, the core of which is: the government guarantees the repayment of the debt and actually finances the repayment of the debt. Before he became Treasury Secretary in 1789, the US debt system was still miserable. In 1794, a year before the end of his tenure as Treasury Secretary, European investors gave the highest credit ratings to US Treasury bonds and the entire financial market. At the time, French Foreign Minister Talleyrand declared: “U.S. Treasury bonds are functioning well, safe and reliable; the management of the Treasury bond market by the U.S. government is so regulated, and the U.S. economy is developing so rapidly that we never worry about the safety of U.S. Treasury bonds.” It is the perfection of national credit that stimulates the steady flow of European funds into the United States and promotes the rapid economic growth of the United States.

In response to the large number of concerns in Congress and society about the negative consequences of debt and debt repayment financing at that time, Hamilton not only acknowledged the rationality of their concerns, but also defended the debt strategy.

The core argument of opponents of the financing system is that financing credit will encourage companies to replace sales revenue with loans for expenditure; and the government will avoid certain current taxes that are perfectly reasonable (because taxes are always unpopular) and turn to borrowing. Both will lead to the tendency of debt management, and eventually debt will gradually accumulate and continue to continue; until the country is finally overwhelmed by heavy debt.

After analyzing their claims, Hamilton pointed out that this is just an inherently good thing that has been abused. Credit, like all good things, has the risk of being abused. But you can’t just “pour the bath water and the baby together” because they will be abused.

Agriculture, commerce, and manufacturing will bring prosperity and enrich the means to enjoy life, and will naturally raise the requirements for life. But they can also contribute to the disorder of luxury, profligacy, debauchery, vanity, morality and politics, leading to turmoil, revolution, and the destruction of the country. Should we abandon the improvement of agriculture, commerce and manufacturing?

Freedom, science, technology, learning and knowledge will promote invention, creation and improvement, thereby promoting the accumulation of wealth; but once they are abused, they are the source of disaster. For this reason, should we ban them?

Credit is regarded as an emerging force in the national operating mechanism. It is great and useful; but how to control it correctly, like every new great device, is still being explored. The abuse of debt can be avoided through “appropriate supervision”. We urgently need to find the law of debt operation in order to make full use of its benefits and avoid its abuse.

Taking a step back, even if people think that the credit system is a bad system, it does not mean that when other countries are using credit, the United States can discard it. It is particularly useful during the war, so that a country without credit can easily be defeated in a war with a country with a flourishing and prosperous credit system.

The second concern of those who oppose financing debt is that they will make it easier to borrow money. Hamilton said: No. Financing debt will provide a solid guarantee for a country’s credit, and the rich will be able to lend money to the government with confidence-they can ensure that the country can obtain what it needs at any time and in large quantities when facing a major and dangerous emergency. Supply of money to achieve the purpose of defense, security, and maintenance and promotion of interests. Financing is to prevent citizens from being overwhelmed by unbearable taxes, not to squeeze the resources necessary for industry’s own development from industry, not to invest all private property in the public domain, and not to disrupt the foundation of social order.

The third concern of those who oppose debt financing is whether allowing foreigners to invest in US bonds will allow foreigners to take advantage of the United States. This kind of grabbing can be divided into two forms: First, foreigners receive interest paid by the US government, which causes this part of American wealth to flow into foreigners’ pockets. The second is that part of the money the United States borrows from foreign countries is used to purchase foreign goods for pleasure, which in turn increases foreign wealth.

In order to prevent foreigners from receiving the interest paid by the US government, some people have proposed prohibiting foreigners from subscribing to bonds and forbidding the transfer of bonds to foreigners; in other words, foreigners are not allowed to hold creditor’s rights.

In response to this concern, Hamilton asked: Would anyone benefit from not allowing foreigners to hold bonds? If foreigners paid for our fund in full, what harm would their speculation do? The funds they buy from our bonds are used to develop our commerce, agriculture, manufacturing, roads, canals, and other useful goods. Isn’t it enough to compensate them for the interest they receive from our national debt until the principal is repaid? In an emerging country like ours, there are many things that need to be developed urgently. There is no doubt that the capital used in those areas will bring us far more benefits than the interest we pay for those capitals.

Others suggest that even if foreigners are allowed to buy bonds, they should not finance debt, which is tantamount to saying that the government does not guarantee that the debt will be repaid. In this way, bond prices will fluctuate, and their instability will prevent debt from flowing abroad (to deter foreigners from buying bonds).

In response to this suggestion, Hamilton responded: Debt financing can allow debt funds to appreciate rapidly under the same security conditions. This can save the country a large amount of borrowing costs. Otherwise, foreigners will buy bonds at extremely low prices, causing millions of dollars in losses to the country.

There are also people who worry that the money from selling debts to foreigners will not be used to develop industry, agriculture and manufacturing, but will be squandered in extravagant material comforts and flow back to foreign countries to buy luxury goods, which will further increase foreign countries. Income.

For this fourth question, Hamilton believes that the facts are not so serious. It is true that the massive increase in active capital and private wealth will cause some increase in private consumption, and part of the expenditure is indeed used to buy foreign luxury goods. However, the amount of new capital used for luxury goods consumption is insignificant compared to the amount used for useful and beneficial projects. Anyone who is unbiased only needs to look around and see that the large amount of new capital created by debt has been used to develop commerce, agriculture, manufacturing, and other improvements. They can also prove that the new capital has been used in large amounts. The argument of luxury consumption is unrealistic. Even if a small part of it is indeed used for foreign luxury goods, the amount of loss is not small enough to undermine the argument in favor of lending.

Hamilton insisted on treating U.S. and foreign creditors equally. No matter who the creditor is, fulfilling contractual obligations is the basic criterion of social justice and the foundation of national credit.

In view of the situation at the time, some so-called patriots proposed that Americans and foreigners among US bondholders should be treated differently. They proposed that in order to protect the wealth of the United States, the interest paid to foreign creditors should be lower than that of US creditors; if there is a war, the US government has the right to stop paying interest on US bonds held by citizens of hostile countries until they deprive them of their bonds.

For this seemingly “patriotic” suggestion, Hamilton retorted: If you pay foreign investors a lower interest rate than domestic investors, it is not conducive to expanding the source of US credit and is blocking a large part of the capital abroad. As a result, it will either increase the cost of the US government’s issuance of bonds, or give foreign investors the opportunity to buy bonds at a lower price than domestic investors, which will cause a loss of capital.

The proposal to deprive the creditors of the enemy country of their own interests and interests is even more confusing. Hamilton believes that even if citizens of an enemy country buy US bonds, their relationship with the United States should be regarded as a relationship between creditors and debtors, and should not be regarded as members of the hostile camp. This relationship is regulated by the contract—not by anything else. Only in this way can we establish a good reputation for American debt and make investors always willing to lend money to the United States in the future. The government and individuals should treat all creditors equally and fulfill the obligation to repay the debt and interest stipulated in the contract. This essence is undeniable by the most shameless politicians.

Hamilton is generally regarded as the greatest Treasury secretary in American history. His thinking is far ahead of his time. His political heritage was ignored or even attacked by mainstream politics at that time, but gradually showed its far-sighted significance in later generations, and later generations continued to re-understand and evaluate it in the contemporary sense.

Even today, more than 200 years later, only those financial elites in the world may truly understand the extreme importance of Hamilton’s “financial strategy.” Today, when we vigorously debate major issues concerning the highest interests of all countries, such as the US current account deficit, the US dollar exchange rate, global imbalances, US dollar hegemony, and the reform of the international monetary system, it is absolutely necessary for us to rethink Hamilton’s financial thinking more than 200 years ago.