In Hamilton’s Debt
But why did Hamilton want to take on those state debts? Partly to establish a national reputation as a reliable borrower, so that funds could be raised cheaply in the future. Partly, also, to give wealthy, influential investors a stake in the new federal government, thereby creating a powerful pro-federal constituency.
Beyond that, however, Hamilton argued that the existence of a significant, indeed fairly large national debt would be good for business. Why? Because “in countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money.” That is, bonds issued by the U.S. government would provide a safe, easily traded asset that the private sector could use as a store of value, as collateral for deals, and in general as a lubricant for business activity. As a result, the debt would become a “national blessing,” making the economy more productive.
This argument anticipates, to a remarkable degree, one of the hottest ideas in modern macroeconomics: the notion that we are suffering from a global “safe asset shortage.”