America – A Nation Founded on Debt

I am a fundamental believer in States’ rights. The United States of America is a Republic of States bound together for a common cause – agreed to have a common representation in the international theatre. These States are independent ‘countries’ if you will.

This is not the point of my post, as I will come back later to the States’ rights, and the definition of a Republic versus that of a Democracy, but this is a premise that must be stated first.

Alexander Hamilton, the man that most only know as the front of a ten dollar bill, was the first Secretary of the Treasury. But he is responsible, not solely, but in an important way, for the way our economy is based today – both for the good and the bad. He had some ideas that were fundamental to the short-term survival of the Thirteen Colonies, but spelled certain doom if used for long-term economics.

It’s kind of like using duct tape to link two pipes together when you’re in a hurry to get the water running, and you don’t have either the time or the money to buy the connecting joint – you can do that by using a lot of duct tape. Eventually, however, it will start to leak and wear out. So you put some more duct tape on, and even discuss why you should actually get the right piece to fix it, but you still don’t have the resources to do it yet, and you can’t stop the running water for the time it takes to put that piece in. There comes a point where the water is flowing more and more, and the pressure in the joint is too great for duct tape to bear. Instead of taking the time when the problem is manageable, it ends up getting to the point where the pipe busts and causes a lot of flood damage in your basement, and you have no choice but to throw everything out and quite possibly have to redo the entire plumbing.

This is much like the way the economic system was founded. Shortly after gaining independence from England, the United States realized that they were missing an economic infrastructure. The states were hurting for money and resources, and without a quick and stable solution, the entire point of independence for the States would vanish quickly as  there was no financial or economic support. The apparent solution to insolvency is blatant – you need money. The roadblock to the quick access to money (aka, a loan) was the countries most likely to lend the money to the US had already done so during the war and were unwilling to loan more, because the fledgling appeared to be on the brink of a financial collapse.

Hamilton’s idea was this: if the Federal Government were to loan money to the States (money that it didn’t have) then this would inspire confidence in this government from other countries… Hey, if they’re loaning out money they don’t have, then they must be ok to loan money too, right? That makes sound financial sense, right? Unfortunately, it kind of does. The individual states had the ability to develop their infrastructures if they had the financial means to do so. Then, once they developed it, they would have the ability to pay back their loans.

Now, this is where it all goes wrong. Instead of paying that debt to the countries that loaned it to the US, we ended up ‘loaning’ it out again (aka, spending it) and borrowing more. This cycle has continued nearly since the founding of this country.

Up until we no longer adhered to the gold standard, there was a sort of check to the borrowing and spending. You could only borrow as much money as there was gold to back it up. Well, we then decided to start using this concept of trust and borrowing and spending on a personal basis (the birth of the credit card). The problem was that you couldn’t extend that much money without increasing the collateral to back it up. So, we abandoned the gold standard, and instead, allowed the Federal Government to say, “Trust us, we’ll back the money up.”

Now, we come to the point where lending is stressed nearly to a breaking point. China is one of the countries that has been paying our debts to other countries, and now holds the note to our loans. The day the bill collector comes to get the money they’re due, our economy will likely come to a screeching halt – and thus, your money would be worthless, since it’s backed essentially by… nothing.

This may seem somewhat incredible or difficult to believe… but take a look at what each and every US paper currency states across the top: “Federal Reserve Note” – This is an IOU from the Federal Reserve.

$10 bill - Federal Reserve Note