As pundits and bloggers over the coming months celebrate, deprecate, or otherwise pontificate about the secession of Southern states from the Union 150 years ago, it would be well to remember Alexander Hamilton’s claim that the “national debt, if not excessive, will be to us a national blessing; it will be a powerful cement of our union” because both of those claims have been proven correct time and again.
The young republic stayed together in large part because its national debt, after being consolidated and restructured under Hamilton’s brilliant funding and assumption plans, traded actively across state and national boundaries, especially among the wealthier, politically active part of the population. As I showed in One Nation Under Debt, many of Virginia’s planter and commercial elites owned federal governments bonds and hence remained loyal to the new regime even in rocky periods. The hubbub over the Alien and Sedition Acts (1798), for example, resulted in resolutions (1798-99), not revolution. Large bondholders in New England also helped to prevent the Hartford Convention (1814-15) from spiraling into secession.
In the early 1830s, by contrast, the national debt was almost completely paid off and it seemed clear that federal tariff receipts exceeded federal expenditures in South Carolina. Nothing therefore stood in the way of the Nullifiers (1832-33) except Andrew Jackson’s iron will and moderate states’ rights ideology. Between then and the Civil War (1861-65), the federal government contracted new debts but not enough for its bonds to trade outside of the Northern money centers (New York, Philadelphia, and Boston). Continued controversy over the redistributive effects of the tariff, combined with fears of the loss of slave property, dissolved what little cement held the South in the union.
Today, cement abounds. There is so much of it, in fact, that many foreigners have significant stakes in the continuance of the U.S. government. (As of October’s TIC report: China $906.8 billion; Japan $877.4 billion; U.K. $477.6 billion; Brazil $177.6 billion; Russia $131.6 billion). Domestic ownership of U.S. government bonds is wider than in the nation’s early years but is less powerful because most Americans do not realize how many Treasuries they own indirectly through intermediaries like banks, credit unions, and money market mutual funds.
The cement of today’s union, therefore, is no longer bond ownership per se. What holds the states together is the federal government’s credit, its ability to spend significantly more than it brings in via taxes year after year. That allows almost every state almost every year to receive more federal money than each respectively contributes to the national coffers. That powerful cement marginalizes secessionist sentiments in Alaska, Texas, and elsewhere and induced me to wager an ounce of gold that Igor Panarin was wrong about America’s imminent dissolution.
Longer term, however, Panarin’s prediction becomes more plausible. America’s fiscal orgy will have to end at some point, when economic and political forces mandate smaller federal deficits, perhaps even to the point of balancing the budget or, gulp, running surpluses. Advocates of nullification are already gaining strength. Secessionists won’t be far behind if policymakers don’t pay careful attention to the regional effects of their taxing and spending decisions. A lone small state probably won’t strike off on its own, but a larger one or a contiguous block of smaller ones might, whether they have a Constitutional right to do so or not, if they find themselves consistently paying Washington more than they receive in return.
Clearly, Hamilton would consider today’s national debt excessive. He would caution, however, to be careful how we reduce it because patriotism only goes so far.
Robert E. Wright is the author of Fubarnomics: A Lighthearted, Serious Look at America’s Economic Ills (2010), One Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe (2008), and a dozen other books. He is also the Nef Family Chair of Political Economy and the Director of the Thomas Willing Institute for the Study of Financial Markets, Institutions, and Regulations at Augustana College in South Dakota.