America's first debt crisis

A history lesson from Rep. Paul Ryan in The Chicago Tribune:

The Declaration of Independence, 234 years ago today, proclaimed that self-government exists in order to secure the rights of the people. As we celebrate America's birthday, it's easy to forget that this experiment in freedom nearly collapsed in its first decade because of a massive debt crisis.


The wave of debt now bearing down on the U.S. poses no less a threat to our way of life than our first debt crisis did. Can we learn anything from the financial upheavals of the 1780s that might guide us today?

Following the Revolutionary War, the U.S. found itself under a mountain of mostly foreign debts. Financial collapse wrecked the new American economy and foreign trade, brought civil violence, set states against each other and endangered our nation's moral character. Every state acted like a separate nation. The national government, under the Articles of Confederation, was practically moribund.

Some printed huge quantities of paper money with no guaranteed value, resulting in uncontrolled inflation. Creditors rejected this unsecured paper. Without real money, commerce ground to a halt. Farmers were especially hard hit. Some states enacted laws preventing debt collections, causing credit to disappear completely.

Massachusetts rejected these debtor laws. In 1786, gangs of farmers, led by Revolutionary War veteran Daniel Shays, terrorized the western region. To stop foreclosures, they shut down the courts. The reign of violence peaked when upward of 2,000 men tried to capture the national arsenal in Springfield but were driven off by state militia.

In December 1787, two ringleaders of the Shays Rebellion were hanged. The U.S. was on the verge of dissolution. Self-government had become a mockery. Soon, the Old World powers would recolonize the states, perhaps invited by Americans themselves to restore order.

Earlier that year, a few public-spirited leaders who desperately wanted America's experiment in freedom to succeed met in Philadelphia. Rising above personal and partisan rancors, they drafted a new Constitution with the powers necessary to address the debt crisis and economic collapse.

The new government, led by President George Washington and Alexander Hamilton, his treasury secretary, resolved to assume, fund and pay off all foreign, private and state debts.

In 1791, the national debt equaled about 40 percent of the gross domestic product. With its interdict on paper money and its stable dollar guarantee, the Constitution combined with the financial instruments Hamilton created to fund the debt provided an incredibly powerful stimulus to economic growth. National and foreign trade reopened. Federal revenues grew rapidly from sales of western lands and the tariff. Old taxes were cut, and the Jefferson and Madison administrations imposed new limits on federal spending. By 1836, 45 years after Hamilton initiated his audacious debt plan, the U.S. government paid off the entire debt.

From this history, we see that a debt crisis dissolves social bonds, weakening economic, personal, social, moral and political relationships. As government monetizes the debt to meet rising interest rates, inflation is unleashed and the currency devalued. Money whose future value is unpredictable cannot serve its most important purpose, to provide a common rule to equate goods, services and work effort. When social transactions are undermined, people lose trust in one another.

A society without trust cannot long remain free. A paralyzed democratic government, unwilling to act against a predictable threat, such as a growing debt crisis, invites popular contempt and resistance. Frightened citizens whose representatives will not protect their private property or the public treasury may not only give up on their representatives but dismiss constitutional self-government as weak, inadequate, servile and ignorant.

Recent polls show a near majority believe their government has now become the chief danger to their rights.

America's looming debt crisis challenges this experiment in democracy. Political leaders should meet this crisis with the same seriousness and determination they would bring against an invading army. There are no Madisons, Hamiltons and Washingtons to save us from our folly, nor do we need a new Constitution. Yet the courage, imagination, wisdom and public spirit that provided the founders with the plan to end America's first debt crisis can also supply our needs. We only need leaders who will rise above narrow partisanship to confront our debt challenge and save our exceptional country.


Republican U.S. Rep. Paul Ryan represents the 1st Congressional District of Wisconsin.