Forgive us our debts

But maybe not all of them

During Andrew Jackson's second term, the president announced something that had never been accomplished before in American history and would never be repeated. The federal government had paid off its debt. The government owed nothing to anyone. Interest charges, the bane of every debtor, no longer had to be paid by American taxpayers.

Many Americans celebrated the moment. They felt as liberated as the owners of homes and farms who, upon making their final mortgage payments, proceed to burn the mortgage contracts. Most Jacksonians had blamed the debt on Alexander Hamilton, the first treasury secretary. Few of them had mourned Hamilton's death at the hands of Aaron Burr in the famous duel between the two. The elimination of the debt freed America from the dead hand of Hamilton, the Jacksonians felt.

The political heirs of Hamilton viewed the historic moment differently. They had become attached to the debt. Many had owned government bonds. The government had never missed an interest payment, providing them a reliable source of income. That income stream had now dried up. 

Moreover, the government bonds had served as collateral for other debts. Many kinds of collateral were difficult to evaluate. How much is that farm worth? What is the true value of that merchant’s order book? The federal bonds announced their value on their face. 

The bonds themselves could serve as money, which had been a chronic problem in the American colonies and remained a problem after independence. Gold possessed the greatest credibility, but gold was always in short supply. Silver came next, but silver too was insufficient to meet the needs of a growing country. Banks printed paper notes, but these varied in value by distance from the issuing banks and by the acumen and trustworthiness of the banks’ directors.

One bank stood apart from the others, or at least it had. The Bank of the United States was Hamilton's brainchild—and Jackson's bête noire. When the director of the second version of the bank, Nicholas Biddle, engineered a financial panic to compel Jackson to recharter the bank, the president declared war on Biddle and the bank. Jackson won the war and the bank sank into oblivion. Jackson was as proud of that accomplishment as of terminating the federal debt.

But the demise of the bank, coinciding with the erasure of the debt, left the American money supply in disarray. The notes of the national bank had been the most reliable of the banknotes; now these were gone and the country was thrown back upon the notes of state banks. Jackson disliked banks generally, but the old soldier probably should have reflected that it was better to deal with one enemy than with many. He could keep his eye on Biddle and the national bank; monitoring the hundreds of state banks was impossible.

The disarray produced a financial panic in 1837, which precipitated a painful depression in the larger economy. Yet such was the lingering animus toward the central bank that the country carried on without one for the next several decades, until Congress created the Federal Reserve in 1913.

As for the freedom from debt, that was shorter-lived. The absence of debt eroded justification for the tariff, which constituted the government's principal source of revenue. The tariff served other purposes, though, including protection of American manufacturers from foreign competition. The manufacturers still wanted the protection, but they didn't like being exposed as self-serving. For them, the debt had provided political cover.

As it turned out, the positive balance on the government's ledgers disappeared for other reasons. The depression suppressed imports and therefore tariff revenues. And not long after it ended, America went to war against Mexico. Wars are always expensive, and this one was no exception. The government again had to borrow money.

Conceivably the country could have dug out of debt after the war, but before that happened, the Civil War began. The debt soared to levels never imagined before. And from then until now the government has never come close to extinguishing the debt.

Indeed, it has seldom broken even for a single year. The last time it did was in 2001. At that point some of the nineteenth-century ambivalence about the debt resurfaced. The treasury stopped issuing 30-year bonds after investors stopped buying them. Both the treasury and investors didn't know what would happen to the value of the bonds over their lifespan. If an annual surplus became a regular thing, once again the debt might disappear. Even a large dent in the debt would alter the government's needs and investors’ expectations.

Nor were Americans the only ones who worried. At the start of the 21st century, US treasury bonds were a linch pin of the world financial system. Interest rates on many financial instruments were pegged to the rates on US treasuries. Financial scares in any part of the world caused investors to flee to treasuries. If the treasuries disappeared, where would the investors they go?

The worries were premature. America's wars in Afghanistan and Iraq, and then the recession of 2008, and then the covid pandemic, and then the Biden administration’s ambitious climate agenda, all against the backdrop of the baby boomers aging into Social Security and Medicare, pushed the federal debt into realms where the debt had never gone before. Today, the mere thought that the debt might disappear seems impossibly naive.

And as anachronistic as Andrew Jackson's face on the $20 bill beneath the banner of the Federal Reserve, the reincarnation of the bank he thought he had killed once and for all.