ZeeVeeTV

April 5, 2012

As of today, the national debt held by the public is over $ 10 trillion. That’s more than $ 30,000 for every man, woman and child living in the United States.

We might think heated debates about the national debt are a relatively new phenomenon, but in fact, they stretch back all the way to the earliest days of the Republic, says economist Simon Johnson. His new book, White House Burning, co-written with James Kwak, traces the history of the national debt from America’s earliest days, when the nation started out in dire financial shape.

“In fact, it was essentially bankrupt,” Johnson tells Fresh Air‘s Dave Davies. “It was in default on its debt. There wasn’t a stable, robust source of revenue.”

During the Revolutionary War, American soldiers had suffered from poor food, and a shortage of boots, uniforms and blankets because the Continental Congress couldn’t come up with the money to pay for them. As a result, shortly after George Washington became president, Treasury Secretary Alexander Hamilton established a revenue stream through tariffs and customs to support the federal government. He also helped restructure the nation’s debt.

White House Burning

The Founding Fathers, Our National Debt, and Why It Matters to You

by Simon Johnson and James Kwak

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“Hamilton said, ‘We need to consolidate the debt and we need to make sure the debt that we have outstanding can be brought down by the revenue,’” says Johnson. “And he pulled it off – it was an amazing and absolutely lasting achievement.”

Familiar Debates Over Government Debt

Reliable tax revenues reassured borrowers, but raised many of the same conflicts we’re now facing today: when and whether the nation should borrow, and how it should manage its national debt. During George Washington’s administration, a group led by Thomas Jefferson and James Madison argued that the federal government was getting too much power and that imports shouldn’t be taxed because an undue burden was placed on the Southern states, which imported more manufactured goods than the North.

“Hamilton said, ‘Look, we need to have this revenue in order to have a viable central government,’” says Johnson. “The federal government was smaller than it is today, but Jefferson and Madison were adamant that it was way too big. So arguments about the size of government, arguments about the debt of central government and arguments about how to fund what kind of revenue you have — those arguments have been with us for more than 200 years.”

In the early decades of the 19th century, there was a shift away from Hamilton’s financial system. In 1812, when James Madison was president, a group in Congress led by Henry Clay argued that the United States should confront Great Britain — and that taxes should be cut.

“The country was on a contradictory course,” he says. “It led to a war for which we weren’t prepared and for which there wasn’t the revenue to back up the efforts. And they’d also abolished the First Bank of the United States. … So they didn’t have the tax revenue, they couldn’t issue debt, they were very aggressive and this confrontation — the War of 1812 — didn’t go well.”

Enlarge Courtesy of the authorSimon Johnson is a professor of entrepreneurship at MIT. From March 2007 to August 2008, he was the chief economist of the International Monetary Fund.

Courtesy of the author

Simon Johnson is a professor of entrepreneurship at MIT. From March 2007 to August 2008, he was the chief economist of the International Monetary Fund.

Borrowing Responsibly For The Country

The United States suffered military defeats and couldn’t afford to expand its military efforts.

“This represents exactly what you need to avoid,” Johnson says. “When you run a country, and you’re trying to achieve whatever you’re trying to achieve, you have to fund it properly. And you have to have an ability to provide revenue to support that effort, and when necessary, you need to be able to issue debt in a responsible and well-managed manner.”

On Thursday’s show, Johnson also shares his thoughts on the increasingly visible national debt and the U.S. fiscal policy over the past 30 years. He says ultimately either the voting public will ensure the national debt is brought down to manageable levels, or bond investors will do it for us, with the kind of calamitous impacts that Greece and Ireland have suffered.

“Can we sell unlimited amounts of debt at 2 percent interest for unlimited periods? I don’t think so,” he says. “We should be looking for revenue to support the sensible social insurance functions of modern American federal government.”