The Debt Ceiling Fix—A History Lesson From Our Founding Fathers
by Johnny Byrd, CPA

Most Americans no doubt view our current National Debt crisis, at least in terms of dollar magnitude, as historically unprecedented. Yet, consider the words King Solomon penned over three thousand years ago: “There is nothing new under the sun.” I believe those words still ring true today, even for our debt problem, and if Solomon was right then the past may hold the key to solving the repeat problems of the present crisis.

A little study of the American Revolutionary War era reveals not only amazing parallels to our situation today, but a useful advice about what to do and what not to do to get the American financial “house in order.”

Then, as now, America was at war. Unlike the British who could pay for the war effort with hard cash, the American army could rely only on limited state funds and on paper money to settle debt. The Confederation Congress issued 6 million dollars of paper money in 1775, another 25 million in 1776, and 200 million total by 1779. The dollar dropped in value to between 2 and 3 cents in this short time period. Today, we have what the colonies did not–the benefit of the US dollar having world reserve currency status, but we have abused that status and, just like our forebears, are suffering from dollar devaluation and mounting inflation today nonetheless.

Then, as now, America went deeply into foreign debt to finance its war activities. By 1790 the National Debt was at $54 million. That may only be $1.25 billion in today’s dollars, but consider that the central government at the time had no power to tax, so limited cash flow, and likewise no massive budget from which other expenses could be cut to more easily reduce the debt. Neither the states nor the central government had the power to control the economy. People realized the government needed to be strengthened at a national level.

Then, as now, a powerful conservative faction emerged in America that felt success could only be achieved through free enterprise and a sound financial basis. In colonial times that sound financial basis included considerable state and local taxation. The new conservatives detested paper money and inefficient government, but not taxes per se—only taxation without representation, which took power away from colonial governments.

The leader from among these new conservatives was Robert Morris, a Philadelphia merchant and later prominent politician. Morris was appointed Superintendent of Finance by the Confederation Congress, which adopted his policies including cutting costs, reducing the budget and personnel, and eliminating numerous government functions. America was on its way to restoring the credit of the central government, but a little something happened along the way.

Morris’ most important policy initiative was to set the Confederation Congress free from the arbitrary impulses of the states by allowing it to impose taxes sufficient to cover federal expenses, including the repayment of the country’s war debts and related interest. This key initiative required unanimous ratification by all thirteen states by amendment to the Articles of Confederation. Rhode Island was the lone dissenting state, and Morris’ plan failed.

It was only a few years later that the framers of the new Constitution would convene at the behest of Alexander Hamilton, the impotent congress finally resigned to the fact that a powerful, central (federal) government had to be adequately empowered to levy taxes. Such would enable the government to raise adequate revenues to do things like, “…establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty…” You know the rest of the story.

My point is that the solution then, as now, required both reduction in government costs and new taxes–in a couple of words, efficient government. The democrats are coming to the table today offering some cost reductions, albeit with sacred cows like Medicare, Social Security, and even Obamacare off the table for reform consideration. Republican leaders are balking, having a sacred cow of their own, saying they have a “titanium spine” when it comes to increasing taxes. Rubbish! I say they have no spine at all.

Reform requires sacrifice from both parties.

We could start with eliminating deductions for second homes and corporate jets, and then reform the current tax deductibility of million dollar home mortgages. Those aren’t things that are going to stifle job creation in America. Social Security and Medicare likewise need an overhaul. When these programs were set up, people didn’t live as long as they do now, nor were they physically able to work as many years as most people are today.

Then, as now, there was no such thing as sacred cows—everything must be subject to scrutiny and reform.

Sadly, the current brood of politicians have forgotten much about taxation and history. Just as then the British Parliament in the wake of the Boston Massacre refused to enter into a policy debate over the American colonies, thus setting off a certain war, now both sides of the American political aisle, faced with the economic ruin of an entire nation, evidently are holding fast to long held principles, too rigid to accommodate the large scale reform required to continue to preserve the Blessings of Liberty. If they don’t act decisively now, there will be none left for our posterity. It is time for our political leaders to take note of history, make deep sacrifices, and get a deal done that not only addresses the debt ceiling, but pays off our national debt entirely.

“Through the ages, taxation has acted as a lubricant smoothing the way toward a democratic, unified state.”—Ferdinand H. M. Grapperhaus

Johnny Byrd is a tax CPA with 15 years of experience specializing in corporate and individual income taxes, transfer pricing, foreign taxes, and estate planning. Byrd earned a B.S. in Business Administration and Masters in Taxation from the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. A resident of Franklin, TN, in addition to politics and writing, he enjoys golf, hunting, music, fantasy football, chess, and entertaining his five children and wife of 17 years, Gina.