This a continuation of last weeks post.
There are two major achievements that deserve mention. First, there is Gallatin’s singular success in his pursuit of debt reduction. Gallatin took advantage of prosperous and relatively peaceful times to reduce the public debt of the emerging United States. The second is Gallatin’s efforts is the way in which he reinforced the financial institutions set up by Alexander Hamilton and made skillful use of them.
But Gallatin was referred to as the “Savior” of Hamilton’s financial system.. How are we to explain Gallatin’s transformation from a prominent critic of the Hamiltonian system to its guardian and perhaps savior? One possible answer, of course, is that when Thomas Jefferson became President in 1801, he quickly realized that the economic consequences of dismantling Hamilton’s financial structure would be dramatic for his presidency, his party and the country.
What is perhaps most remarkable, however, is that Gallatin seems to have come to appreciate the genius of Hamilton’s system and advised Jefferson accordingly. In an attempt to firmly discredit Hamilton, Jefferson – shortly after becoming President – asked Gallatin to examine the archives and uncover the “blunders and frauds of Hamilton”. After searching “with a very good appetite”, Gallatin went back to Jefferson with the following remarkable assessment: “I have found the most perfect system ever formed. Any change that should be made in it would injure it. Hamilton made no blunders, committed no frauds. He did nothing wrong.”
But what lessons can we draw today from Gallatin’s economic policies?
The most important lesson of Gallatin’s achievements is that public debt reduction requires unwavering political commitment to fiscal discipline. Gallatin faced an unexpected fiscal problem in the form of a war with Great Britain. The developed world now faces a predictable and rapidly ticking fiscal time bomb in the form of aging populations; and the truth is one - 'you can't beat demographics'. In fact, what we have now are some of the lowest rates and negative real investment yields.
The most important lesson of Gallatin’s achievements is that public debt reduction requires unwavering political commitment to fiscal discipline. Gallatin faced an unexpected fiscal problem in the form of a war with Great Britain. The developed world now faces a predictable and rapidly ticking fiscal time bomb in the form of aging populations; and the truth is one - 'you can't beat demographics'. In fact, what we have now are some of the lowest rates and negative real investment yields.
Instead of suggesting more tax cuts and increasing government spending, we should be reducing our budget deficit; but politicians will never favour such things as the common man doesn't understand them. So the government resorts to hidden ways of wealth deterioration i.e. by printing money. It creates the illusion that nothing is happening but actually wealth is being slowly eroded on a long term basis.
Christine Lagarde has critically pointed out that every major period of deficits prior to 1950 has coincided with a time of war. After the Second World War, deficits essentially returned to normal. But as you can see, after 1970 there was a significant change – all OECD countries started running sustained budget deficits, and have done so in times of relative peace.
Now perhaps its too late as current government has its hands tied up dealing with the mess predecessors made. Only time will tell whether Horses and Bayonets or Binders full of policy decisions will solve this problem.
Sources:
See previous post.
See previous post.
