Nexus: Chapman's Journal of Law and Public Policy

One of the early steps taken in the creation of the federal government was to consolidate the separate debts of the individual states into a single national debt. In 1790 Treasury Secretary Alexander Hamilton presented Congress with the First Report on Public Credit where he argued for the federal government to assume the war debts accumulated by the states during the Revolutionary War. Representatives from those states who had to be responsible when borrowing and paying back their war loans opposed this measure because they felt that they were being punished for their fiscal discipline while those states that ran up massive debts and were not repaying their debts were being rewarded for being irresponsible. Unmoved, Hamilton fought and was ultimately successful in getting Congress to pass legislation where the federal government assumed the debts of the states. This decision ultimately proved to be correct as the single national debt became the bedrock of stability for the US economy and allowed the Treasury to issue government bonds that were backed by the faith and credit of the US government.

Nearly 220 years later another Treasury secretary had an equally difficult policy to get through Congress. In October 2008, Treasury Secretary Hank Paulson convened a meeting with the heads of the 8 biggest banks and financial institutions in the country. In this meeting Paulson told the financial institution that the US government would be directly injecting funds into those institutions. After the bursting of the mortgage-backed securities bubble that was threatening to take down the American (if not global) economy, Paulson and others had come to the decision that the American government had to directly intervene in the affairs of financial institutions that had become “too big to fail” due to the fears of what would happen to the entire economic system if these instructions were to collapse. While it is too early to say whether the TARP program created under Paulson was a success or failure, the fact that the federal government got involved in the economy shouldn’t come as a surprise. Since its inception, the federal government has always exhibited a type of centralized economic planning. This initially took the form of tariffs that were designed to protect certain targeted industries. This was followed by the overt economic planning of the New Deal and the national industrialization that occurred for World War II and followed into the Cold War. More recently federal intervention could be seen in the massive subsidies given to certain industries like agriculture.

Whether the government should get involved in the economy or take a hands-off approach and let the market decide winners and losers is a great academic debate to have but the fact of the matter is that the US federal government has intervened in the economy from the start. The solution to the current economic situation will undoubtedly come from a combination of government restraint in certain sectors of the economy and direct intervention in others. But with the cries of socialism and communism in response to the actions of the federal government (TRAP, auto bailouts, etc) it is important to put what is happening today in its correct context and see that we have always had government intervention in the economy.