A national debt, if it is not excessive, will be to us a national blessing; it will be a powerful cement to our union. It will also create a necessity for keeping up taxation to a degree which without being oppressive, will be a spur to industry . . . .
Alexander Hamilton, 1781
Alexander Hamilton, the financial genius who later became the first secretary of the Treasury, wrote those words when the Revolutionary War was, as a practical matter, almost over. He wasn't sure what the total debt of the 13 colonies was or how much more money might have to be borrowed -- if it could be -- before the war was over. He didn't even rule out the possibility of an English victory.
But Hamilton's vision for America was that of a strong central government that would take over the states' debts and levy taxes to pay them off. Both the assumption of the debt and the taxes would cause Americans, and foreign lenders, to think in terms of a single nation instead of a collection of states.
Besides, Hamilton argued in his letter to Robert Morris, the Philadelphia banker who was taking over the thankless task of financing the revolution, once the war was settled, the country's commerce would grow fast enough that the debt could be paid off in 35 years "without at all encumbering the people."
Hamilton was right. For the next 150 years, the United States periodically ran up large debts during wars and financial panics, and then reduced them to the point that they hardly mattered. Even as late as the early 1950s, when, as a result of World War II, the federal debt exceeded one year's gross national product, the government could borrow money for 30 years at 2 percent interest.
And while the amount of outstanding debt rose throughout the 1960s and the 1970s, its level fell relative to the size of the economy. Since 1980, all of that has changed. In the opinion of many analysts, the national debt has finally, in Hamilton's word, become "excessive."
On Dec. 31, the total federal debt reached $1.663 trillion, up from $930 billion when President Reagan took office four years earlier. It also rose from 35.5 percent of GNP to about 44 percent.
Part of the debt, about $330 billion, was owed either to Social Security and other government trust funds or to state and local goverments -- leaving a debt owed to the public of more than $1.3 trillion.
According to most estimates, the government's total debt will be approaching $1.9 trillion by the end of this year, and will easily eclipse the $2 trillion mark sometime in 1986. In other words, it will have gone from $1 trillion to $2 trillion in five years.
Meanwhile, net interest payments on the debt have more than doubled, going from $52.5 billion in 1980 to $111 billion last year. Interest costs will rise another $25 billion to $30 billion this year, depending on the course of interest rates and how much new money has to be borrowed to cover the current year's deficit.
The Reagan administration has said it plans to reduce spending in fiscal 1986 by about $50 billion from what current policies would otherwise require. According to revenue and outlay figures from the Office of Management and Budget, a cut of that magnitude would still leave about a $175 billion deficit for 1986 and at least that large an addition to the publicly held debt.
If interest rates remained unchanged -- many private forecasters expect them to be higher next year than they are now, though the administration's last official forecast showed them declining -- the rise in debt in 1985 and 1986 ought to increase net interest payments in 1986 by about the same amount as this year -- $25 billion to $30 billion.
In other words, half or more of the proposed $50 billion savings would be eaten up by rising interest payments.
But the direct interest cost is only a part of the total burden represented by the debt, a debt now so large that, in the opinion of many financial analysts, it is becoming ever more difficult for the Treasury to manage without disrupting credit markets.
Treasury Secretary Donald T. Regan, in a farewell meeting last week with Treasury employes, called attention to the debt management issue by noting that during his term in office, he raised $3.63 trillion to cover new deficits and pay off old maturing securities.
"Maybe we shouldn't have headlines on that," Regan said. "No other administration has raised anywhere near that amount of money." But, he added, "I don't think in so doing we have disturbed the market place too much."
Economist Henry Kaufman of Salomon Brothers and some other analysts disagree about the degree of market disturbance. Kaufman warned in a speech last month to the National Press Club that the growth of debt in the economy generally, and that of the government specifically, is creating new problems and dangers.
"What is left of the traditional long-term bond market has become the domain of the U.S. Treasury," Kaufman declared. "Because of its huge issuance of long bonds [35 billion in 1984, compared with $14 billion just five years ago], the U.S. government has saturated this market and, as a result, private borrowers have been pushed into the shorter-maturity range.
"Thus, the private borrower, who can least withstand upward leaps in interest rates, has become a greater risk-taker, while the U.S. Treasury, the most credit worthy, has usurped the long-term fixed-rate market."
Next week, the Treasury will auction $19 billion worth of three-year and 10-year notes and 30-year bonds to pay off $8 billion worth of maturing securities and raise $11 billion in new cash. Most government securities traders think the issues will be well received, but in the back of their minds is always the possibility of a repetition of a similar auction last May.
At that time, interest rates were rising in the face of strong demands for credit from both government and the private sector and the Federal Reserve was tightening its monetary policy because it feared economic growth was going so fast that it would generate new inflationary pressures. The Treasury auction was, nevertheless, a success in the sense that there were more than enough bids.
But interest rates kept rising and the price of the newly auctioned securities plummeted. At one point, all of the longer-term securities issued by the Treasury after 1982 were "underwater" -- that is, they were worth less than the original purchaser paid for them. Bond dealers faced huge losses, only some of which had been hedged by taking positions in interest rate futures.
The dealers and the market, of course, weathered the storm, and declining rates later in 1984 meant that those securities issued last May are now worth considerably more than when first sold.
But that episode was a lesson for many dealers.
"When the market is red hot and rates are coming down, as they have been, and with this positive sentiment, it is possible that all three auctions will be swept off the shelf right away," said an analyst at a major bond house in New York. "But that's not enough.
"We are not dealing any longer with just these little wrinkles in the market," he continued. "This Treasury battering ram is coming at us all the time . . . The problem is so big now, these quarterly cycles [of security issues] so large that they have begun to jam up the plumbing . . . ," the analyst said.
"Look at all the securities that people have bought. Suppose we get into a quarterly refunding and the dollar starts to go down. Suppose they are offering $19 billion or $20 billion and suddenly there is also a huge offering coming in from outside by owners of Treasury securities seeking to sell.
"That could be very serious. I think it is just a matter of time before the dollar does start to fall and we face that kind of problem," he warned.
At Treasury, Thomas J. Healey, assistant secretary for domestic finance, agrees there are formidable problems in managing a debt so large and growing so fast, but like his boss, Don Regan, he stresses that the needed financing has been obtained.
"I do not want to portray too sanguine a feeling," Healey said in an interview. "The deficit is too damn big, but we are able to finance it without too much short-term pain. There is adequate credit out there for us."
Healey pointed to several recent changes that have made it easier to sell securities, particularly the repeal last year of a 30-percent withholding tax on interest payments on U.S. interest payments on corporate and government bonds owned by foreigners.
Since that repeal, the Treasury has sold nearly $13 billion worth of securities in two issues targeted to foreign buyers. In addition, there has been a substantial rise in direct foreign purchases at regular note and bond auctions, Healey pointed out.
To make Treasury securities more desirable to U.S. buyers as well, the 10-year notes and the 30-year bonds being auctioned this week can be "stripped." That means that records of the securities will be kept by Treasury in a way that allows separate trading and ownership of the interest and principal payments.
"Regularity, predictability and a gradual lengthening of the maturity of the debt are the cornerstones" of Treasury's debt management, Healey said. Even lengthening the average maturity of the debt, while it makes management easier, also has a cost since long-term rates normally are higher than short-term rates. At year's end, Treasury was paying an average of 10.9 percent on its interest bearing debt, the highest rate in history.
If all continues to go well from Treasury's point of view, some private borrowers are going to be squeezed. Each time economic growth has spurted during this expansion, interest rates have risen, too, particularly short-term rates. One reason for that, according to many analysts, is that federal borrowing has not diminished in this expansion as it has it has in the past.
For instance, in the recession year of 1975, the U.S. government absorbed 41 percent of all the funds available to domestic non-financial borrowers. Two years later, in 1977 that figure dropped to 16.7 percent and in 1979 it was down to only 10.3 percent.
In 1982, the worst year of the last recession, federal borrowing took almost as great a percentage of available funds -- 39.9 percent -- as in 1975. But two years later, in 1984, the federal share had dropped only to 26.2 percent, based on the average for the first three quarters of the year.
That difference between 1977 and 1984 of 10 percentage points was equal to nearly $70 billion worth of credit that would have been available to the private sector that instead was absorbed by the Treasury. That is the essence of the arguments about "crowding out" of private borrowing by government borrowing.
Behind it all is the inexorably expanding federal debt, the rising interest bill and the continuing annual budget deficits.