History

History

The potential perils of federalism did not escape the attention of its most colorful historian and critic, Alexander Hamilton. His well-known fear, illustrated with copious historical examples from the Lycian and Achaean Leagues to the German diet, was of a weak federal government falling prey to foreign conquest or internal dissolution. Much less scholarly attention has been given, however, to his related fears about fiscal federalism (Barlett & , 1992). Hamilton was very skeptical about the wisdom of giving the "power of the purse" to state governments.

He feared not only that they would use taxing and borrowing powers to weaken the center, but more specifically, that they would spend and borrow excessively, attempting to shift their burdens onto the central government and one another. His fears were well founded-a binge of over-borrowing by a group of states in the 1840s led to macroeconomic instability and ruined U.S. creditworthiness abroad. Remarkably similar events involving the Brazilian states and Argentine provinces have recently led directly to debt crises and hyperinflation in those federations, with staggering social and economic costs.

Related problems of federalism and fiscal indiscipline have shown up in a number of other countries including India, Nigeria, South Africa, and Russia (Barlett & , 1992). The Extraordinary Life and Times of American National Debt is a good, if brief, overview of the fiscal history of the American government. It is somewhat misnamed, since the National Debt serves as a background and tie in to each period of fiscal history studied (Barlett & , 1992). The author does a superb job of explaining Alexander Hamilton's establishment of our financial, banking, debt and money system (Barlett & , 1992). Here is a woefully under appreciated founder explained succinctly and whose brilliance and indispensability are brought forth by Gordon (Barlett & , 1992). Descriptions of attitudes towards and major changes in financial policy and tools follow. Gordon covers the major aspects: the struggle over the Second National Bank, Jackson's paying off the debt (the only time the US Gov't has been debt free), Lincoln and Chase's tax, greenback and bond finance of the Civil War, the long fight to establish the income tax, the fight over high marginal rates and an efficient system of taxation, and the change in view in the last century from one that deficits and debt were something to be controlled to our current sorry state of view whereby no one worries about much about deficits anymore (John , 1998).

Debt, when properly used, has allowed us to primarily wage wars. It was retired in times of peace. We face an interesting time now, when debt as a percentage of GDP is much higher than it has been in most peacetimes. This raises the question that if we have to fight a truly massive and long war in the future, will we have the capacity to borrow what we need (based on historic statistics, it is a question well worth pondering) (John , 1998). According to Phillip "Net operating loss" is ...