The 'American System' Requires That A Nation Control Its Own Currency

PHYSICAL ECONOMY -- Part III

by L. Wolfe


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Under Hamilton's American System, the key to the determination of economic value is the human creative intervention that produces physical product and alters the land. A productive economy must encourage individual creative discoveries, which discoveries have the power to transform that economy. The use of credits, distributed through a banking system, is the primary way such creative ``enterprise'' can be encouraged.

Hamilton set out to erect a national economy based on these principles. Just as Lyndon LaRouche must deal with a nation which is effectively bankrupt, under a stifling debt load, Hamilton took over a United States encumbered with debt to foreign lenders who had financed the Revolution, and then the government under the 1783 Articles of Confederation; this debt problem was compounded by the huge debt loads of the various states. Under these circumstances, Hamilton's first task in building a productive economy was to defend the sovereign public credit of the United States.

To do that, he had to consolidate the debt under the new sovereign government of the United States.

- Defending Public Credit -

In response to a Congressional mandate to propose a way out of this morass, Hamilton issued his famous ``Report on Public Credit'' in 1790; in it he proposed, for the sake of repairing the nation's credit to ensure its future necessary ability to borrow, that all war debts of the states be assumed by the Federal government, and that the government place the ``full faith and credit of the United States'' behind all its debt obligations, without restriction. Foreign creditors and others were to be told that they would be paid, as rapidly as prudence permitted, and that the government and future governments were committed to this repayment, as soon as the United States had the ability to make good on its obligations by the improved performance of the economy.

While establishing the sanctity of U.S. sovereign debt obligations, Hamilton also ridiculed the idea that government should operate on a ``pay as you go'' basis, without borrowing. The incurring of debt, so long as it was judged to be in the national interest and for the promotion of the General Welfare, was sound economic policy; a debt obligation which might appear to be a negative, a debit, on some accountant's balance sheet, was capable of being transformed into a positive or ``a credit,'' beneficial to the economy, by creating the capability to generate a ``profitability'' well beyond its own mere repayment. Such a debt had a ``cycle'' which, if set at a proper length, would ensure its repayment, and would produce a benefit in productive economic activity whose real worth was far greater than the debt's principle and interest. (In this way, Hamilton, like LaRouche, distinguishes between short-term debts, which have maturations of a few years or less, and either do not tend to add to longer-term increased capacity for productive economic activity and/or are for purposes of ``speculation,'' and long-term debt with a 25-50 year cycle, for productive investment.)

While discussing the ``positive'' qualities of debt, Hamilton also warned against any simple-minded resort to incurring debt that was not carefully scrutinized according to the principle of investing in the ``General Welfare''; any debt is an obligation to pay by the United States that must be met--and which, if properly managed, creates greater benefit to the nation, than to the lender:

``To justify and preserve their [lenders'] confidence; to promote the increasing respectability of the American name; to answer the calls of justice; to restore landed property to its due value; to furnish new resources both to agriculture and to commerce; to cement more closely the union of states; to add to their security against foreign attack; to establish public order on the basis of an upright, liberal policy. These are the great and invaluable ends to be secured, by a proper and adequate provision, at the present period, for the support of public credit.''

Hamilton also insisted that the credit extension not be limited by deposits of ``hard currency,'' coin, or metals--that is, gold, silver, etc.--and that paper currency would serve the purposes of the nation. However, as the Constitution dictates, only the Federal government can be responsible for emission of such paper currency, because only the Federal government can assure its stability. Credit, he told Congress, is the means to place money into circulation; credit, when offered for sound economic purpose, not only assures the lender of repayment, but, through advancing the economic well-being of the nation, makes its currency valuable and enhances our standing among nations.

The Hamilton report, especially its recommendation for the assumption of state debt, stirred up a bitter debate, with opponents, mostly in the Southern states, led by James Madison of Virginia, a former ally of Hamilton in arguing for a strong central government and for ratification of the Constitution, claiming that the Constitution did not specifically grant the Federal government this power, and that Hamilton was unfairly discriminating against states that had prudently dissolved their debts. But the Treasury Secretary realized that his debt assumption and reorganization was the only viable pathway to establish the credit of the new nation, and would not give in. Eventually, the report, debt assumption and all, was adopted in 1791, by way of a famous ``barter deal''--in exchange for Southern votes for its passage, Hamilton organized President Washington to support the location of capital of the new nation in a special district on the Potomac, rather than in the North.

This is part 3 of a series, and will be continued.


Part I: What Is 'American System' Economics?

Part II: The 'American System' Means Sovereignty, Not Free Trade

Part III: The 'American System' Requires That A National Control Its Own Currency

Part IV: The 'American System' Requires A National Bank