‘Lessons of the past’
What were these ’lessons of the past’ that may suggest significantly less than rigid compliance to previous promises? Before the Civil War, the united states had fought three major wars. Two of the wars, the brand new War and The War of 1812, had also resulted in fiscal crises.
In 1790, through the US’ first fiscal crisis, then Secretary of the Treasury Alexander Hamilton crafted an idea to restructure the Continental and state debts incurred throughout the brand new War. Under this course of action, Hamilton gave first priority to foreign creditors, paying down Dutch creditors completely (see Table 9 of Garber 1991). Hamilton then reduced the promised interest payments to domestic bondholders while preserving their promised principal payments. This decrease in the interest was a kind of repudiation, though perhaps Hamilton repudiated significantly less than had been expected through the 1780s, earning him substantial gratitude from 1780s speculators. However, not all government creditors fared so well. Holders of Continental Dollars received only 1% of their face value.
Clearly Hamilton’s plan enhanced the credit of the brand new nation, but it had not been before resolution of the next US fiscal crisis that government debt would consistently trade at par. And it could not be for another 70 years that the Treasury could credibly issue paper money.
Fast forward 25 years and the government faced another fiscal crisis through the War of 1812. In this conflict, the value folks Treasury bonds fell to 75 cents on the dollar as much creditors were unwilling to aid an unpopular war and saw the nation’s capital burned to the bottom. Not surprisingly difficultly in borrowing, President James Madison resisted resorting to the mainstay of the American Revolution – an inflation tax – in financing the war and, in years following war, awarded outsized positive returns to all or any holders folks debt.
Late 1860s advocates of `lowering ex post interest rates’ to be paid to Union creditors might legitimately appeal to Alexander Hamilton for example; but they cannot appeal to the precedent set by the Madison administration and its own successors.
While President Johnson advocated prioritising government obligations in order that bond holders would receive less then was promised, the 1868 Republican presidential candidate and former Union general Ulysses S Grant argued that to safeguard the nation’s honour, every dollar of government indebtedness ought to be paid completely. After winning the presidency, Grant stated: “no repudiator of 1 farthing of our public debt will be trusted in public areas place”. And as its initial act following inauguration, the Congress passed ‘An Act to Fortify the Public Credit’ committing the Treasury never to discriminate among different classes of creditors.
The actual fact that the government honoured in full most of its obligations following the War of 1812 – including those to British creditors – established precedents that led President Grant and the Congress to preside over an interval of post-Civil War deflation. This deflation had the result of rewarding individuals who held Union obligations through the entire war, and by 1879, people trusted US government nominal promises to be ‘as good as gold’ for the very first time in the country’s history.
Alexander Hamilton discriminated among different classes of federal obligations – paying some completely while partially repudiating others. After Hamilton’s restructuring, Treasury debt traded at a discount in accordance with its par value for pretty much 30 years.
Contemporary advocates of participating in fiscal discrimination might ponder the actions of Presidents Madison and Grant, who honoured all existing federal obligations despite challenging economic conditions.
Garber, Peter (1991), “Alexander Hamilton’s Market Based Debt Reduction Plan”, Carnegie-Rochester Conference Series on Public Policy 35, 79-104.
Hall, George J and Thomas J Sargent (2013), "Fiscal Discriminations in Three Wars", NBER Working Papers 19008, National Bureau of Economic Research, Inc.