10/21/09 - population growth and national debt

In today's excerpt - modern governments that arose with the Industrial Revolution and after have had an uninterrupted tendency to overspend and accumulate large debts. However, since populations have increased almost ten-fold since then—and economic growth rates had been even higher—Western governments have routinely been 'bailed-out' by population and economic growth. Simply stated, if a government that had amassed staggering debts could simply avoid increasing spending and the population doubled the effective debt would be cut in half on a per capita basis. It remains to be seen what other debt reduction strategies governments will need to employ now that global population growth rates are slowing

"Although Hamilton saw a properly funded debt as a blessing, he did not see a big debt as one. He warned that transferring heavy financial obligations to coming generations threatened the nation's future creditworthiness. In his view, debts incurred during wartime should be paid down during periods of peace. In his First Report on Public Credit, Hamilton wrote that he wished 'to see it incorporated as a fundamental maxim in the system of public credit of the United States that the creation of debt should always be accompanied with the means of extinguishment.'

"In December 1791, he further pointed out that 'as the vicissitudes of nations beget a perpetual tendency to the accumulation of debt, there ought to be a perpetual anxious and unceasing effort to reduce that which at any time exists, as fast as should be practicable consistent with integrity and good faith.' ...

"Revenues increased significantly through the later part of the 1790s. However, Washington and John Adams after him incurred significant expenses: building the new national capital financing the army and the navy during what came to be known as the Quasi-War with France, fighting Indians and paying tributes to the Barbary pirates. These expenditures thwarted their administrations' ability to reduce the federal debt despite their intentions. Government debt rose from $77 million in 1790 to $83 million in 1801, although it was offset in part by cash balances in the Treasury and the value of the stock the government held in the newly chartered Bank of the United States.

"The United States enjoyed rapid economic growth during the 1790s. On a per capita basis, its wealth rivaled that of Great Britain. Because the economy grew more rapidly than borrowing, debt declined as a portion of GNP from 40% at the very end of the Revolution to 18% in 1795 [editor: a period in which the population grew by almost 30%]. Robust revenues enabled the government to service all of Hamilton's bonds on time and U.S. government securities came to enjoy a high degree of investor acceptance in Europe. By 1795, the United States was able to borrow $8 million in Dutch florins from private bankers in the Netherlands, a strong testament to the financial credibility the nation had achieved in its brief history. It was the last time the federal government borrowed in a foreign currency until the late twentieth century."


Robert D. Hormats


The Price of Liberty: Paying for America's Wars from the Revolution to the War on Terror


Times Books, Henry Holt and Company, LLC


Copyright 2007 by Robert D. Hormats


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