US Government Debt Different - Finance Department - University of ...

6 U.S. Government Debt Has Always Been Different!One of the most significant was the Louisiana Purchase in 1803. Inreturn for paying Bonaparte’s France with $11.25 million of newlyissued 6% bonds with a 15-year maturity and assuming $3.75 millionof private American claims against France for cargo and ship seizuresduring the quasi-war of 1798-1800, the U.S. doubled the sizeof the country. France accepted the deal because the securities, theLouisiana 6s of 1803, had a ready market in Europe. The bonds wereeasily placed by Barings and Hopes, European investment banks,with investors in England and the Netherlands. While Jeffersonsent Lewis and Clark to explore the new U.S. territorial acquisition,Bonaparte expended funds largely furnished by British investors topursue his wars against Britain and other European countries. Suchstories are what make financial history so interesting.3. Paying Off the National DebtAlthough Hamilton regarded a national debt as potentially a nationalblessing because it would lay the groundwork for a modernfinancial system and help to attract foreign capital to the U.S., mostnational policymakers after him thought differently. For them, as forAdam Smith, the less debt the better, and best of all would be nonational debt at all. Europeans, as noted above, had another idea:debt in the form of perpetuities, requiring only interest paymentswithout any obligation to pay back principal. That idea never caughton in the U.S.There were several periods of substantial national debt reductionin the 19th and early 20th centuries. Thomas Jefferson (president,1801-1809), who espoused “a wise and frugal government,” and hissuccessor, James Madison (1809-1817) reduced the national debtfrom $83 million to $45 million between 1801 and 1811. Sinceforeigners held the major part of the debt, this reversed Hamilton’spolicy of encouraging capital inflows. It was a popular policy, but thewisdom of it may be doubted. Americans could earn more than the6% they paid foreign investors for the use of their capital, so whyreturn that capital to them? Moreover, the frugality involved ill preparedthe country for the War of 1812, which saw the national debtsoar to $127 million in 1815. Penny-wise became pound-foolish.