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July 20, 2011

Mr. Jefferson’s Dinner Deal

Kevin E. Dayhoff

As the August 2 deadline looms for the U.S. to raise the debt ceiling, many avid Washington-watchers are passing the popcorn as the drama continues to unfold. For those who study economic history, this fight is as old as the Republic itself.


As to whether or not a compromise will be made by the warring Republicans and Democrats – well, that remains to be seen, now doesn’t it. Mega-barrels of ink are being spilled over the issue; wade into it at your own peril but carry a large bottle of aspirin.


Taegan Goddard’s Political Wire calls to our attention some recent commentary by Warren Buffet, who was quoted by NBC News: “‘That's a level of immaturity that I don't believe even this Congress is up to’ – ‘predicting Congress will not allow the United States to default on its debt after this ‘little fight in our sandbox.’ ”


Many agree with Mr. Buffet’s comments, according to Kristen Weller: “We cannot go to Aug. 2 and tell the rest of the world, ‘Look because we're having this little fight in our sandbox back here, that we're going to essentially default on obligations of the United States for the first time in our history.’ ”


And just what is the history of the national debt?


Well, first things first. According to the New York Times, “… in 2011 the debt limit has emerged as a central point of conflict between President [Barack] Obama and House Republicans who are intent on big cuts in government spending…


“On May 16, Treasury Secretary Timothy F. Geithner formally told Congress that the government would have reached its $14.294 trillion debt limit that day, but for what he called ‘extraordinary measures’ to manage the nation’s money and to buy time for lawmakers to increase the limit on borrowing. He put Aug. 2 as the rough date on which those expedients would have run their course.”


So, what is the legislative history of Congress being involved in the national debt ceiling?


The Congressional Research Service says, in an extensive report written January 28, 2010: “The statutory limit on federal debt began with the Second Liberty Bond Act of 1917.”


H. J. Cooke and M. Katzen wrote in The Journal of Finance, “The Public Debt Limit,” in September 1954, that the Bond Act of 1917, “helped finance the United States’ entry into World War I.”


However, debate over the national debt dates to the beginning days of the United States and really marks one of the first instances of acrimonious deadlock in the history of our government.


The year was 1790 and the flashpoint of contention was Treasury Secretary Alexander Hamilton’s “Assumption Plan.”


On September 21, 1789, Congress asked Secretary Hamilton to prepare what has become known as the first “Report on Public Credit” in reference to the huge amount of debt individuals and particular states had run-up during the American Revolution. Just as with today, some of the debt was owed to American citizens; however, much of the money had been borrowed from foreign governments.


Secretary Hamilton’s was “[a] believer in strong central authority,” says a historical account of the controversy by PBS. “Hamilton was convinced that the Constitution gave him the implied power to pursue fiscal policies that increased the national government's strength. One such policy was a federal assumption of all state debts, then estimated at about $25 million.”


For comparison, estimates vary greatly, but the huge American debt in 1790 amounted to – according to various accounts – anywhere from $4.1 trillion to $1.7 trillion in today’s money.


This staggering debt and the political stalemate, in addition to a severe agricultural famine in Europe in 1789, and the collapse and demise of the French reign of Louis XVI, all came together for a perfect storm. It resulted in a global recession in 1790, the French Revolution and eventually the Napoleonic Wars.


In 1790 there was concurrently a great debate raging as to where to locate our nation’s capital. None of the key players of the time, Secretary Hamilton, President George Washington, Secretary of State Thomas Jefferson, and Congressman James Madison, were on the same page and gridlock ensued.


All were neighbors in New York City, which at the time was the capital of the United States. Heritage has it that the impasse was resolved by the “dinner table bargain of June 20, 1790,” or what many historians refer to as one a series of “Grand Compromises” which saved the nation.


PBS relates the story. “Jefferson offered to host a dinner that would bring Hamilton and Madison together to discuss the situation. On the evening of June 20, they reached an accord; in exchange for Hamilton supporting the Potomac site, Madison would no longer block assumption in Congress and indeed would deliver crucial Virginia votes for the measure.”


With the support of President Washington, “… first the House voted on (July) 10th to approve the Potomac location,” – referred to as the “Residence Act.” “… and then on the 26th, four Representatives from states bordering the Potomac switched their votes and Hamilton's assumption plan narrowly passed,” – the “Funding Act.”


“A grand and lasting compromise had been achieved…”


Of course, the deal of 1790 also involved steep taxes; a stiff federal tariff and an excise tax on liquor – which led to the 1794 Whiskey Rebellion and the combination of the two taxes, in addition to global economic dynamics, previous mentioned, led to the Panic of 1797 – but that’s another story…


Contrary to what various sanitized and romanticized versions of history would want you to believe, these politicians were no more friends in 1790 than Senate Republican-leader Mitch McConnell, Senate Democratic-leader Harry Reid, Republican House Speaker John Boehner, Vice President Joe Biden and President Obama are today.


Perhaps there is no better time for this group of august individuals to order a couple of pizzas, a couple of six-packs, and strike a deal.


… I’m just saying.


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