CHAPTER 2

Public Blessing or National Curse?

A national debt, if it is not excessive, will be to us a public blessing.

—ALEXANDER HAMILTON

I consider the fortunes of our republic as depending, in an eminent degree, on the extinguishment of the public debt.

—THOMAS JEFFERSON

Government debt is every politician’s dream: it gives him the ability to buy votes by spending on government programs (with funds raised through borrowing) that will make him popular now, while putting the lion’s share of the cost on future taxpayers, who must pay off the debt through taxes. It is the ultimate political something-for-nothing scheme. Furthermore, the costs of servicing the debt are so widely dispersed among the taxpayers that hardly anyone realizes that his taxes are higher because of the debt service. Government bondholders are typically paid out of general revenues, and there is no way of knowing how much of your taxes are for debt service rather than national defense, the judicial system, and so forth. American taxpayers have never been presented with itemized federal tax bills.

This creates what contemporary economists call a “fiscal illusion”—namely, it makes government appear to be less costly than it really is. Consequently, the taxpayers are duped into acquiescing in bigger government than they would if they had a clearer picture of the true costs of government. And the chickens eventually come home to roost: at this writing American politicians have accumulated so much debt that every baby born in America has as his or her share of it a six-figure sum, payable over his or her lifetime in taxes.

In his 1997 book on the history of the national debt, John Steele Gordon calculated that, as of that moment, the $5.1 trillion debt “laid out in silver dollars…would be about 120 million miles long, wrapping around the equator 5,000 times.”¹ As of 2007 the national debt exceeded $9 trillion. And if one counts the unfunded liabilities (i.e., promises to pay) of just the government’s Medicare, pension, and Social Security programs, the government debt is in the range of $70 trillion.

Taxpayers can occasionally be tricked into supporting even the biggest government program of all—war—if the direct costs to them can be hidden well enough through borrowing. There would not be as many wars, and the ones that do occur would likely be shorter, if they were paid for through direct taxation. Taxpayers feeling the sting of gigantic wartime tax increases would be much more inclined to pressure their governmental representatives to limit their military adventures to national defense purposes, as opposed to imperialistic ventures based on more dubious motives. Americans may agree with the goal of “spreading democracy around the globe” as long as they believe that it won’t cost them much (or anything). Present them with an explicit tax bill for it, however, and many of them will reverse their opinion.

All of this was understood in Hamilton’s time, which is why so many of his contemporaries opposed the accumulation of government debt. In response to an inquiry about the use of debt to finance the War of 1812, Jefferson wrote on June 24, 1813, that “the perpetuation of debt, has drenched the earth with blood.”² He was referring to the fact that use of government debt to finance wars had made it all too easy for European monarchs to engage in perpetual wars of conquest. He believed that if government was to borrow money during an emergency, such as a war, it should simultaneously tax current taxpayers to pay off the debt and not impose the burden on future generations: “It is a wise rule…never to borrow a dollar without laying a tax in the same instant or paying the interest annually, and the principal within a given term.”³ In such instances he favored limiting the government debt to nineteen years so as not to burden the next generation. As president he oversaw a significant reduction of the national debt.

Hamilton, meanwhile, championed the creation of a large national debt. He viewed it as an indispensable instrument for growing the state in general, not just as a mechanism for paying off war debts. It would give the government infinitely more “energy.” Of course, Hamilton qualified his praise for a national debt by saying “if it is not excessive.” But could a man of his intelligence and understanding of government, one of the authors of The Federalist Papers, seriously believe that government debt, once established, would not inevitably become “excessive”? Indeed, he devoted most of his adult life to promoting excessive government. It is a red herring argument to say that Hamilton was in favor of only “nonexcessive” government debt. Once the floodgates of government borrowing were opened, there would be no shutting them. History has borne this out, and had borne it out for centuries as of Hamilton’s time.

HAMILTON’S FIRST FINANCIAL CAPER

Upon becoming the nation’s first treasury secretary, Hamilton “speedily made [the Treasury Department] the most important office in the government,” in the words of William Graham Sumner.⁴ He frenetically wrote several major “reports” to Congress urging it to adopt a policy of debt, higher taxation, central banking, protectionism, and tax-funded subsidies for businesses (i.e., “corporate welfare”).⁵

Hamilton wrote two separate reports advocating government debt. The first called for the new government to assume all the old government debt, something that hardly anyone disagreed with. New bonds would be issued, backed by revenue from the new tariff that Hamilton was instrumental in putting into place. The old war debt was to be cashed out at full face value. This plan “immediately became public knowledge in New York City,” wrote John Steele Gordon, “but news of it spread only slowly, via horseback and sailing vessel, to the rest of the country.”⁶ This in turn created tremendous speculative opportunities for Hamilton’s New York City and New England friends and supporters, including the financier Robert Morris (who was Hamilton’s legislative liaison in the U.S. Senate) and Hamilton’s father-in-law, Philip Schuyler, among many others.

New York speculators, having been given this inside information, embarked on a mad scramble up and down the eastern seaboard to purchase government bonds from hapless and unsuspecting war veterans at prices as low as 10 percent of full value. As Claude Bowers described in Jefferson and Hamilton, “[E]xpresses with very large sums of money on their way to North Carolina for purposes of speculation in certificates splashed and bumped over the wretched winter roads…. Two fast-sailing vessels, chartered by a member of Congress who had been an officer in the war, were ploughing the waters southward on a similar mission.”⁷ John Quincy Adams would later write to his father of how “Christopher Gore, the richest lawyer in Massachusetts, and one of the strongest Bay State members of Hamilton’s [political] machine, had made an independent fortune in speculation in the public funds.”⁸

War bonds that war veterans had “held for years” were “coaxed from them for five, and even as low as two, shillings on the pound by speculators, including the leading members of Congress, who knew that provision for the redemption of the paper [at full value] had been made,” Bowers wrote.⁹ “Everywhere men with capital…were feverishly pushing their advantage by preying on the ignorance of the poor.”¹⁰ New York newspapers speculated that Robert Morris stood to make $18 million (more than $300 million in today’s dollars), while Governor George Clinton of New York would pocket $5 million.¹¹ Hamilton himself purchased some of the old bonds through buying agents in Philadelphia and New York but insisted that they were “for his brother-in-law.”¹² For Hamilton, it would seem, the “blessings” of a national debt were personal.

To pay off the bondholders, the government needed a steady revenue stream. Thus it is perhaps not surprising that Hamilton relentlessly campaigned for a mechanism to ensure sufficient revenue and eliminate the risk of investing in government bonds: higher taxes. Hamilton was as responsible as anyone for the tariffs and various excise taxes, including the notorious tax on whiskey, a carriage tax, and a national property tax (which spawned a tax revolt in Massachusetts—the Fries Rebellion). Plundering the working class with onerous taxes would supposedly “be a valuable spur to them,” forcing them to work even harder, said Hamilton. This would be good for them, as Americans were too “indolent,” he claimed.¹³

Hamilton was no “supply-sider,” to use the language of modern economics. One of the tenets of supply-side economics is that it is higher wages—as a result of income tax cuts, for example—that lead to greater work effort. Faced with higher taxes, workers will have to work harder just to maintain their standard of living, or they will simply work less, since the rewards to work have been reduced. During the Reagan administration some of the liberal opponents of the supply-siders (such as the MIT economist Lester Thurow) adopted Hamilton’s argument that higher taxes would be good for the economy.¹⁴ But after the Reagan income tax cuts, the economy prospered; federal tax revenues were almost a third higher (in real, inflation-adjusted dollars) in 1990 than in 1980, since people responded to the increased rewards by working more.

Hamilton’s plan for commandeering resources through taxation would guarantee the government a high credit rating, which would lure investors in government debt from all around the world. This was how the European empires were financed, with endless debt that was never fully paid off. If one bond issue was finally paid off, the governments would issue new bonds. The debt was never-ending. It was this very system that caused all of the European empires to bankrupt themselves, eventually.

Hamilton spent seven years attempting to overthrow the Articles of Confederation and establish a powerful central government with a new constitution, in large part so he could finance his grandiose plans. The states were able to finance the Revolution but could not be counted on to tax their citizens to support Hamilton’s plans for imperial glory and national greatness. But a more powerful central government could do so, especially with a standing army of tax collectors—precisely what the response to the 1794 Whiskey Rebellion had promised. The ability to enforce such taxing and borrowing with a standing army was the most ominous aspect of the new Constitution, and it was one of the chief reasons why the Anti-Federalists never trusted Hamilton.¹⁵ A standing army of tax collectors could (and eventually would) destroy states’ rights altogether.

Hamilton’s onetime political ally James Madison led the opposition to Hamilton’s debt scheme and proposed to Congress that the original bondholders be paid at full value, just as the speculators were. But Hamilton’s New York contingent denounced Madison “as a dreamer and an enemy of public faith,” Bowers recounted, and his plan failed to pass Congress.¹⁶ Of the sixty-four members of the House of Representatives who voted on Madison’s proposal, twenty-nine were war bondholders.¹⁷ His plan never had a chance.

Hamilton argued that a government debt fully funded by tax revenues was a form of “capital” that was literally as good as gold and would be traded on the open market as such. Such talk led the great Yale University social scientist William Graham Sumner to comment, in the early twentieth century, that Hamilton was “completely befogged in the mists of mercantilism,” that his economic theories “show a remarkable amount of confusion in regard to money, capital, and debt,” and that his reputation in the area of finance has “been greatly exaggerated.”¹⁸

In reality, government borrowing reduces the productive capital of the private sector—the sole source of wealth creation—and diverts it to government spending programs. By shrinking the private sector in order to enlarge the state, government borrowing harms capital accumulation, investment, and economic growth. Hamilton had it all backward, as Sumner wrote.

Hamilton’s dubious and convoluted economic arguments for debt accumulation served as a smoke screen for what Sumner called the “controlling motive”: “political expediency.” As Sumner noted, Hamilton himself said he wanted a large national debt because of “its tendency to strengthen our infant government by increasing the number of ligaments between the government and the interests of individuals.”¹⁹ In other words, Hamilton wanted to tie the interests of the more affluent citizens to the state. Since they would be the primary government bondholders, they would have an interest in continued borrowing and continued tax increases to assure that they would be paid their principal and interest. Just as today’s welfare recipients are tied to government and can always be counted on to vote for its expansion, in Hamilton’s day he wanted to tie the wealthy to the state as a permanent, big-government lobbying class.

Douglass Adair, an editor of The Federalist Papers, explained:

With devious brilliance, Hamilton set out, by a program of class legislation, to unite the propertied interests of the eastern seaboard into a cohesive administration party, while at the same time he attempted to make the executive dominant over the Congress by a lavish use of the spoils system. In carrying out his scheme…Hamilton transformed every financial transaction of the Treasury Department into an orgy of speculation and graft in which selected senators, congressmen, and certain of their richer constituents throughout the nation participated.²⁰

This was how the Federalists became known as the “court party,” the party of governmental graft, spoils, and patronage.

HAMILTON’S SECOND FINANCIAL CAPER

Hamilton prevailed in getting the central government to assume the old government debt. He then embarked on a crusade to have the central government assume the war debts of the states. He must not have thought this would be very difficult, since much of Congress had become rich from his first financial caper with regard to public debt.

During the American Revolution (and long thereafter) the colonies or states considered themselves to be free and independent. This is the exact language that was used in the Declaration of Independence. They considered themselves to be independent countries, just as Britain and France were independent countries. In the eighteenth century the word congress meant an assembly of sovereign countries. They individually taxed their citizens and borrowed as well to finance the war. When the war ended, King George III of England signed a peace treaty with each individual state, named one by one in the document, and not with some consolidated entity called “the United States government.”

Consequently, each state had accumulated an amount of war debt. Some states, like Virginia, were more diligent and responsible than others, like Massachusetts, in paying off their debts. By the early 1790s Virginia had paid off most of its war debt. But at that point Hamilton proposed socializing or nationalizing the debt, which would force the more responsible states to pay taxes to subsidize the less responsible ones.

To fund the nationalization of the war debt, Hamilton proposed the notorious whiskey tax and other excise taxes. Jefferson and Madison opposed his plan, as did the Pennsylvanian Albert Gallatin, who would later serve as Jefferson’s treasury secretary. Gallatin denounced the assumption plan as “subversive of the rights, liberty and peace of the people,” and his remark was endorsed by the Pennsylvania legislature.²¹ Gallatin also recognized that government debt actually drained productive investment capital from the private sector, did not “increase the existing amount of cultivated lands, of houses of consumable commodities,” and did not make “the smallest addition either to the wealth or to the annual labor of a nation.”²² He understood, too, that Hamilton’s tariff placed a disproportionate burden on the agricultural South, making a mockery of Hamilton’s talk of “national unity” and “the common good” through big government. (Most tariffs—sales taxes on imports—were on manufactured goods and benefited mostly northern manufacturers by keeping out European competition and thereby allowing them to charge higher prices. Very little was manufactured in the agrarian South at the time, so that the tariff was all cost and no benefit to most southerners.) During the Whiskey Rebellion Hamilton tried unsuccessfully to have Gallatin arrested and put on trial.

Other critics of Hamilton’s financial schemes were outraged that a tax burden was being placed on poor farmers in order to assure interest payments to the wealthy. Still others feared that the new taxes would “let loose a swarm of harpies who, under the domination of revenue officers, will range through the country, prying into every man’s house and affairs.”²³ They feared, in other words, a new army of tax-collecting bureaucrats, just like the ones with whom King George III had plagued America before the Revolution.

Senator John Taylor of Virginia pointed out that consolidating taxing and borrowing powers in the central government would lead to “a suppression of the republican state assemblies, by depriving them of political importance, resulting from the imposition and dispensation of taxes.”²⁴ This, said Taylor, would destroy the system of federalism that the Constitution created, replacing it with “a court-style English government” that would result in “the accumulation of great wealth in a few hands,” accumulated through “a political moneyed engine.”²⁵ It would create British mercantilism in America, in other words. Taylor was exactly right.

These arguments, and other criticisms by Madison, Jefferson, and others, led Congress to defeat Hamilton’s assumption plan five times, beginning in April 1790.²⁶ Hamilton then used one big bargaining chip. He and his supporters wanted the nation’s capital to remain in New York City; Jefferson and Madison wanted it to be located along the Potomac River in Virginia. Hamilton went to dinner with Jefferson and offered to eliminate the political opposition to moving the capital to Virginia if, in return, Jefferson (and Madison) would marshal the few congressional votes needed to get the assumption bill passed. The deal was struck; the central government assumed the state war debts; and Washington, D.C., was created. (To secure the support of Pennsylvania’s politicians, the national capital was located in Philadelphia for ten years.)

With Hamilton’s Federalist Party in power, Congress’s spending skyrocketed, as did taxation and governmental borrowing. Indeed, Hamilton and his fellow Federalists accumulated much more government debt than was necessary for any government expenditure programs. After all, Hamilton’s objective was, first and foremost, “concentrating economic and political power in the Federal government,” John C. Miller wrote in his history of the Federalist era. This would effectively abolish federalism and states’ rights.²⁷

Miller chronicled the results of the assumption legislation:

[T]he national debt soared to a total of over $80 million. To service this debt, almost 80 percent of the annual expenditures of the government were required. During the period 1790–1800, payment of the interest alone of the national debt consumed over 40 percent of the national [tax] revenue. For a nation whose government had been tottering on the brink of bankruptcy a few years before, this might well be regarded as a staggering burden of debt.²⁸ (emphasis added)

The Party of Hamilton also used its power to make it illegal to criticize the government—the Federalist-controlled government, that is. With the Federalist John Adams as president, Congress passed the notorious Sedition Act, which was written so that it would expire the day Adams left office. Journalists, ordinary citizens, and even a member of Congress—Matthew Lyon of Vermont—were imprisoned for merely criticizing the government. A Revolutionary War veteran named Anthony Haswell, who was the editor of the Vermont Gazette newspaper, was imprisoned for placing ads in Vermont newspapers requesting donations to help pay Congressman Lyon’s fines.²⁹ The Reverend John C. Ogden carried a petition to Philadelphia for the release of Congressman Lyon and was himself imprisoned for doing so. At least twenty-one newspaper editors, all of whom supported Jefferson, were imprisoned. No Federalists were harassed by the Sedition Act. “Everywhere men were being intimidated into silence” by what the historian Claude Bowers called the Federalists’ “reign of terror.”³⁰

Hamilton apparently did not lobby for the Sedition Act, but he did support it once it became law. Jefferson and Madison were again his foremost opponents, as authors of the Virginia and Kentucky Resolves of 1798, which were declarations by those two states that they did not intend to allow the Sedition Act to be enforced within their boundaries.³¹

Congressman Lyon enjoyed sweet revenge in 1801 when, after being released from prison and reelected to Congress (while still in prison), he cast the decisive vote that made Thomas Jefferson president of the United States in an election that had been thrown into the hands of Congress.

Perhaps one of the most important aspects of Hamilton’s political legacy is that his policies led to the disintegration of the Federalist Party. Heavy taxation, out-of-control debt, a menacing standing army of tax collectors, and the Federalist Party’s attack on free speech led to the election of President Jefferson in 1800 and the eventual demise altogether of the Federalist Party by the 1820s. America had revolted once again against a government defined by acts of tyranny and economic exploitation. (The party died, but as we will see, its statist ideas lived on.)

President Jefferson reversed Hamilton’s debt-financed spending profligacy. By 1807 his party had abolished all of Hamilton’s excise taxes and had cut the government debt from $83 million to $57 million.³² Jefferson adhered to his conviction that the government could borrow for such reasons as financing a defensive war, but only if the current generation was taxed to service the debt.

The Jeffersonian philosophy of government debt prevailed, more or less, for decades. Because of the War of 1812 the debt increased to $127 million by 1816, the last year of the Madison administration. Then James Monroe and John Quincy Adams reduced the debt to $58 million by 1830. President Andrew Jackson campaigned for reelection in 1832 on a platform of paying off the national debt, and he succeeded, paying off the last treasury bond in 1835. The United States was literally debt free, running a surplus, for two years. Jackson believed in the Jeffersonian dictum that government debt was dangerous to peace itself. After announcing that the government would have a positive balance of $440,000 on January 1, 1835, he said that “free from public debt,” America would be “at peace with all the world…. The present may be hailed as the epoch in our history the most favorable for the settlement of those principles in our domestic policy which shall be best calculated to give stability to our Republic and secure the blessings of freedom to our citizens.”³³

The economic depression known as the Panic of 1837 led to an increase in deficit spending and a $16 million debt by 1845. Then President James Polk decided to start a war with Mexico in order to acquire California and other parts of that country, which drove the national debt back up to $63 million by 1848.

President Franklin Pierce, a Jeffersonian Democrat, reduced the debt back down to $28 million. With the onset of the War between the States the Lincoln administration exploded the national debt to dimensions that might have been unimaginable to Jefferson: $2.8 billion by 1865. But no matter how hard Lincoln tried, and how much the Republican Party was inspired by Hamiltonian economics, Republicans could not snuff out the Jeffersonian mentality among the American people. Postwar presidents such as Grover Cleveland, who vetoed more than four hundred spending bills—more than all of his predecessors combined—succeeded in whittling down the debt from $2.8 billion to $1.2 billion by the turn of the century.

It was Woodrow Wilson, whose philosophy of government was the opposite of Jefferson’s in so many ways, who abandoned once and for all the Jeffersonian opposition to deficit spending and ballooned the debt to $26 billion. A case can be made that Wilson would not have been able to plunge America into the disastrous First World War without the “magic” of massive governmental debt.

The Coolidge, Harding, and Hoover administrations increased the national debt modestly, but FDR exploded it again, to $260 billion by 1945. Despite years of massive deficit spending, FDR’s New Deal not only did not end the Great Depression; it actually made it worse and longer lasting. Draining billions of dollars from the private sector for the sake of expanding the government was a major reason why. The private sector is the sole source of production and wealth creation; government produces nothing at all.³⁴ Expanding government by shrinking the private sector is a perfect recipe for economic stagnation and depression.

The year 1960 was the last year in which the national debt actually declined. Hamiltonianism has prevailed ever since, due mostly to the efforts and legacies of big-government presidents like Lincoln, Wilson, FDR, Johnson, and George W. Bush.

A CURSED LEGACY

Perpetual government debt—as opposed to the mere emergency borrowing that Jefferson acquiesced in—essentially relies on forced labor. Citizens are forced to work to pay taxes to pay off the principal and interest on the debt. Not only are today’s citizens turned into tax serfs by a large national debt, but so are future generations, who are of course politically defenseless. This is why a “good bond rating”—whether it is for bonds issued by federal or by state and local governments—does not necessarily denote a healthy economy, but merely the willingness of a governmental jurisdiction to enslave its taxpaying citizens.

To make matters worse for the average citizen, governments have historically “paid off” their debt by creating inflation with a central bank that can print money, just as any counterfeiter would. (A central bank was Hamilton’s third financial caper, to be discussed in the next chapter.) Inflation constitutes a hidden tax in that it reduces the value of all privately held wealth. It is also a source of economic stagnation and political conflict, as will be discussed in more detail in the next chapter.

It is also worth noting the stark differences between private and governmental debt. When an individual borrows money, he is obligated to pay it back. If he fails to do so, he can be held financially responsible by the legal system. And the market system comes into play as well: individuals and businesses that renege on their debts will become less creditworthy (or totally uncreditworthy) and will have to either face higher costs of future borrowing or forgo borrowing altogether.

Politicians, on the other hand, have no personal obligation to pay anyone anything when they vote to spend more than the tax revenues that are available. They are spending other people’s money and face little or no consequence if they spend it foolishly. In fact, they are rewarded by their financial profligacy and irresponsibility: they make themselves popular by spending money today on programs that benefit their constituents, while the bill—paid almost exclusively by someone else—comes due much later, perhaps even after they are retired (or dead).

Debt finance also makes it easier to devote more and more of the taxpayers’ money to special-interest politics, as opposed to things that might conceivably benefit at least the majority of the public. With tax finance, politicians at least have to present a case before the voters as to why they need to pay more taxes. In doing so they need to convince the voters that what is being proposed will somehow benefit them and not just some special interests. With deficit or debt finance, no such case even needs to be made to the voters. It’s spend now, pay later—much later.

Thus debt finance not only corrupts politicians; but also corrupts the voters, who become complicit in a grand scheme to stick future taxpayers with the bill.

There is an even more insidious effect of government debt, as the economist Hans-Hermann Hoppe explains: “[W]ith the expectation of a higher future tax burden [to pay off today’s governmental borrowing], the…public also becomes affected by the incubus of rising time-preference degrees, for with higher future tax-rates, present consumption and short-term investment are rendered relatively more attractive as compared to saving and long-term investment.”³⁵

“Rising time preference” is the language economists use to describe preferences for spending more of one’s income now as opposed to saving more at the present time and spending more later. A high rate of time preference denotes a penchant for being more present-oriented and for saving less. Each individual has his or her own rate of time preference, although government policy can cause shifts in these preferences, as Hoppe describes: if individuals anticipate higher taxes in the future, they will be encouraged to consume more now. Government policy can affect the rate of time preference of investors as well as consumers. If investors expect higher taxes to come, they will invest in shorter-term investments (before the tax increases take effect).

The problem here is that saving and investment are necessary for economic growth to occur. The economy cannot grow in the future if there is no capital investment today. By reducing the amount of private capital investment, governmental borrowing and the attendant tax increases that are used to pay off the principal and interest on the borrowing are detrimental to economic growth. The entire nation becomes poorer.

HAMILTONIAN VOODOO ECONOMICS

With the exception of the War between the States and the Spanish-American War periods, the Jeffersonian view of government debt (which was also Adam Smith’s view) prevailed into the twentieth century. But beginning in the 1930s it was repudiated by the economics profession, particularly the followers of the British economist John Maynard Keynes.

Writing during the Great Depression, Keynes made the case that debt-financed government spending could, after all, stimulate the economy and end the depression. Since he was a distinguished Cambridge University professor, governments all around the world, including the U.S. government, used his theory to justify deficit spending. It didn’t work, of course. The Roosevelt administration spent record amounts and amassed record deficits between 1933 and the U.S. entry into World War II in 1941, but it failed to end the Great Depression in America. The unemployment rate was still in double digits (14.6 percent in 1940) on the eve of the war, whereas it had been about 3.2 percent prior to the onset of the depression in 1929.

Such realities exposed the glaring inadequacies of Keynes’s theory. Keynesians argued that fiscal irresponsibility on the part of government was not subject to the same principles as similar behavior on the part of individuals or families. Of course, nearly two centuries earlier Adam Smith had written that just as a family that spends more than it earns, year in and year out, will end up in bankruptcy, so will a government. Smith’s view was essentially the Jeffersonian view of government debt.

Despite the obvious problems with Keynes’s neo-Hamiltonian arguments, politicians welcomed Keynesian theory, which would be widely accepted for some forty years. According to Keynesians, the political class could, in effect, give the public something for nothing. All the government needed to do was to finance spending with borrowing. Government debt did not transfer the costs of government to the future, Keynesians argued, because “we owe it (the debt) to ourselves.” This slogan was repeated endlessly in economics textbooks, in politicians’ speeches, and on editorial pages, and it became part of the accepted public dogma with regard to government debt. But it was always nonsense.

The implication of this neo-Hamiltonian, mercantilist theory was sarcastically stated by the Nobel laureate economist James M. Buchanan and Richard E. Wagner in their book, Democracy in Deficit: “[T]he benefits of public spending are always available without cost merely by resort to borrowing…. If there is no transfer of cost onto taxpayers in future periods…there is no cost to anyone in society at the time public spending is carried out. Only the benefits of such spending remain. The economic analogue to the perpetual motion machine would have been found” (emphasis added).³⁶

The result of the Keynesians’ resuscitation of the Hamiltonian worship of government debt, Buchanan and Wagner continued, was that “after 1964, the United States embarked on a course of fiscal irresponsibility matched by no other period in its two-century history.”³⁷ The year 1964 is significant because it was during the Kennedy administration that Keynesian economists achieved their greatest influence. Once the “old fiscal religion” of Jefferson and Adam Smith was forgotten, there was literally nothing—certainly not the U.S. Constitution—that restrained politicians from spending billions more than the federal treasury could afford year in and year out, creating the Leviathan State and the “empire of debt” under which Americans now slave.³⁸