The Origins of the Debt Ceiling (Hint: War)

Part 1: The Genius of Alexander Hamilton

Countries go into debt because of war. Indeed, immediately following the Revolutionary War Secretary of the Treasury Alexander Hamilton calculated that all the states and federal government had borrowed (by selling bonds) $80 million. National income was a fraction of that debt ($4.4 million).

What to do? If the new nation of the United States doesn’t pay then it could not borrow again, an unacceptable outcome for a fledgling nation. If the US paid its debts in full, it would require economy-killing, wildly unpopular taxes. Further, Hamilton insisted that the US government assume all the debts of the several states as the cost of a national economic regime.

Hamilton suggested that the United States look at debt not as a problem, but as an asset. He proposed to fund the debt through a gradual schedule of dependable tax resources and generate new revenue through western land sales and taxes on luxuries (whiskey). All of this would be managed and guaranteed by a new, United States Nation…