What is the US Treasury?

Liam Heffernan: 00:00:01

This week we're talking about money.

Because ultimately, behind every success, every failure, every event, and in every pivotal moment in American history lies a story of greed, power or loss which all comes back to money. But what sits at the heart of this? Who really decides how America spends its money? And how does this impact what. What's in your pocket?

In this episode, I want to know what is the U.S. treasury? Welcome to America, a history podcast. I'm Niamh Heffernan and every week we answer a different question to understand the people, the places, the.

And the events that make the USA what it is today.

To discuss this, I am joined by a senior lecturer in financial history and Policy at the University of Glasgow with an interest in US history and the political economy of finance.

His books include Plastic Capitalism, Banks, Credit Cards and the End of Financial Control and Private Finance, Public A History of Bank Supervision in America. And we'll link to both of those in the show notes as well. A big hello to Sean Vernata.

Sean Vanatta: 00:01:26

Hi, Liam. Thank you so much for having me. I think it's a super interesting topic and I look forward to chatting with you about it.

Liam Heffernan: 00:01:33

Yeah, it is a super interesting topic, but I think I say this as someone who's worked in banking for nearly a decade, in a previous life, that is a hard sell, getting people to care about big topics like the U.S. treasury. Right. But there's actually so much going on when you start unpicking it.

Sean Vanatta: 00:01:50

Well, I mean, you just start with a fundamental question of what is the government doing with its money? How does it spend its money, how does it bring in its money, how does it manage everything that it does?

It all comes down to how it manages its money. And so that's what the treasury is for.

Liam Heffernan: 00:02:06

Yeah.

And of course, ultimately, those big decisions that happen at a sort of federal level, although there's no kind of immediate real world impact, it does affect the money that everyday Americans have in their bank accounts every day, doesn't it?

Sean Vanatta: 00:02:20

Yeah, well, I mean, you say there's no real world impact, but if you think about events like the COVID pandemic, when the treasury is sending out checks to American households, I got those checks that did have a real world impact on me. And so that's not something that's happening all the time.

I think I take your point to be that most of the time the treasury is operating in the background, and that's certainly the case. You don't want to be in a world where you know what the Treasury Department is doing, because that means things are probably going badly.

But when things are going badly, the Treasury Department is there and it sees as its purpose to try to protect the financial well being of the American people. And throughout history it's done that in different ways.

Liam Heffernan: 00:03:05

Yeah, and let's dive into exactly how that happens then. So I wonder if you could just give us a bit of a 101 on exactly why and when the US treasury was created, for sure.

Sean Vanatta: 00:03:17

,: 1776

They're very kind of individualistic. There's an overarching political structure, but the Continental Congress, as it was called, doesn't have the power to tax.

So it can ask the colonies for money, but it can't tax on its own. And so to finance the revolution, the Continental Congress is just issuing debt.

It's issuing debt by sort of paying notes that are meant to circulate as currency. It's issuing debt in the form of bonds and other securities, but it doesn't really have a way to pay this back.

e Constitution is ratified in: 1787

And so there's this new federal government that's going to kind of take on this debt. And this is where Alexander Hamilton kind of comes on the scene. He's sort of the first, I mean, he's the first Treasury Secretary.

He's kind of the most important person for early American finance.

There's a musical we've all heard of Hamilton, I think so he was George Washington who led the revolutionary army, his aide de camp during the Revolution. Hamilton is a major advocate for the adoption of the Constitution. And he becomes Treasury Secretary when the new government is formed.

,: 1789

So in a few, there will be an anniversary from the time of recording, maybe from when this is going to be posted of the Treasury Department's founding. Part of this mission is founding the Treasury Department.

Liam Heffernan: 00:05:37

I mean, you mentioned you know, the core benefits of having a sort of central treasury is its ability to borrow and spend money a lot more effectively and manage at a federal level. But how was it able to secure the finance and the debt that it accrued in the first place without any kind of central Treasury?

Sean Vanatta: 00:05:56

Yeah, I mean, so there's a lot to think about here. When you say the treasury, you often think about a building or like a bank vault.

You say the treasury is empty and you imagine walking into a big vault. There's like some cobwebs, maybe some spare change on the floor.

Liam Heffernan: 00:06:11

That's Scrooge McDuck esque.

Sean Vanatta: 00:06:13

Exactly right. So when the Treasury Department is founded, that's not what there is. So it's a legal fiction.

The way that revenue is primarily raised in the early period of the United States is you have kind of tariffs, excise taxes. So you have various kinds of taxes primarily collected in port cities, especially territory tariffs.

And you have revenue from land sales, so lots of publicly owned land in the sort of western states that's being sold off to speculators, investors. And those are your kind of two sources of revenue.

What Hamilton does that's important is he says, we will repay the debts accrued during the Revolution at face value. So there'd been a lot of agitation because the kind of like market value of these debts was really low.

So if you had $100 bond, you might be able to buy it for $10 or $20 because the expectation was the government wouldn't honor these debts. Hamilton recognizes that to maintain credit in the future, you have to honor these earlier debts. And he commits to doing so.

He works with bankers in Europe to kind of get short term finance while creating the system of revenue collection.

teens,: 1820

So revenue is collected in the ports or is collected out in the west in the land offices. But you have to pay federal employees or pay for various services in other parts of the United States.

And so the way this is initially dealt with is, is part of Hamilton's plan is to create the bank of the United States. So the bank of the United States is a private corporation. The US Government owns part of it, but it's largely owned by private investors.

It has branches in New York, in Boston, in smaller Places like Savannah, Georgia, where actually where I grew up, which is a big port city, major cotton exporting city, a major place where revenue is coming in. And so the bank becomes the depository for the government.

So when the federal government takes in revenue, it goes into the bank and when it wants to spend money, it writes checks using its bank account.

And so even though there's a Treasury, which you think of as like the place where that stuff is happening, Hamilton has put this into a privately owned bank.

And there's a long then kind of fight first over the first bank and then what's called the second bank of the United States, where there's this conflict about whether this should be managed privately or managed publicly. But that's a way to kind of overcome this problem of distance. It's also a way to overcome the second problem, which is a problem of time.

So revenue comes in at one time, your expenses are another time. It's helpful to have a place to put the money in between. And then the third problem is the problem of I guess maybe parity or equality. Right?

Sometimes your revenues will be higher than your expenditures. And that actually creates a really serious problem through much of the 19th century that we could talk about other times.

The more obvious problem is your expenditures are higher than what you're bringing in. And so then you have to sell more debt.

And so it's all of these that Hamilton is thinking about as he sort of first creates the Treasury Department and solidifies kind of US Credit by committing to repay these loans. And then he creates the kind of mechanism to hold the money through the bank of the United States.

Liam Heffernan: 00:09:44

We're talking about a time here where when electricity was barely invented, let alone the Internet and digital banking. So how was money moved around? Was it literally just physical transportation of cash?

Sean Vanatta: 00:09:59

Well, I mean, so it's complicated. Part of what's happening is we often think of money, we think of gold and silver coin.

But part of what I take your question is it's hard to move gold and silver coin around. It's also dangerous, right. If everyone knows you're you've got a few thousand dollars in gold coins, they're going to be coming for you.

So a lot of this is happening through kind of sophisticated accounting where banks in the early Republic period, part of Hamilton's vision is to create a banking system. So not just the banks of the United States, but privately owned banks across the country.

And so what will happen is banks will have deposits with each other. So if I have a bank in Savannah, Georgia, and I'M going to New York and I need money in New York.

I can buy essentially money from my bank in Savannah that it has in New York. So when I go to New York, I can take money out of that New York bank because there's this interbank relationship that makes it happen.

I don't have to carry the coin with me. So, you know, again, it's pre Internet, so all of this is happening through letters, through as ships are moving back and forth.

But this problem of moving money is really complicated.

And again, they're trying to develop ways through the banking system essentially to move kind of promises or move claims of ownership of money without actually having to move the physical coin.

Now, sometimes there will be such a shortage of physical money, such a demand for it, that the price people are willing to pay makes it worthwhile to actually ship the gold.

And contemporaries are really thinking about that, like, how do you tip what's called the gold shipment point so that it's worthwhile to actually send the money. But overall, your goal is to never move the money.

You want the gold to stay exactly where it is, and you want to trade promises or trade ownership claims on the gold without moving the physical money at all.

Liam Heffernan: 00:11:59

And it's interesting because even though this is a completely different time, when the whole world and the way people lived was entirely different, actually what you've described is in essence exactly what we still do today when we sort of deposit and borrow money. So that kind of fundamental infrastructure hasn't really changed, has it?

Sean Vanatta: 00:12:21

No, I mean, I think we have this perception that we've moved from some simpler world where a dollar was a coin to a more complicated world where a dollar is a bank deposit.

But actually that has been the case from the beginning, that there is this relationship between the physical thing that we call a dollar and the unit of account that is a dollar that is a measure of value. But those things are different things and they change in relationship to each other.

But there isn't a kind of linear progression from simple money to complicated money. Money has always been complicated.

It's always been a kind of construction of both the government and private bankers or private actors who are creating money on their own. And it's just that the kind of technologies that we use to move money have changed. The sort of rules or understandings of money have changed.

But a lot of the kind of fundamental practices, we can understand them if we look back to the past. The words might be slightly different, but we can figure out pretty quickly what they're doing, because it looks Very similar to what we do today.

Liam Heffernan: 00:13:31

Yeah, yeah, exactly. And setting up the treasury, it was a very new thing for the US who decided how and who ran it?

Sean Vanatta: 00:13:44

Well, the President appoints the Secretary of the treasury, and so Washington appointed Hamilton. The longest serving Secretary of the treasury is a guy called Albert Gallatin. And so that's decided by the President.

And you're approved with the advice and consent of the Senate.

And then the Treasury Secretary, I think there may be some sort of deputy positions that are also approved by the Senate, but everything else is just the Treasury Secretary deciding who the employees will be.

So you can imagine there's a growing kind of bureaucracy in Washington, D.C. i think another thing that I found strange or kind of interesting as I was thinking about this episode, is we're talking right now about the treasury as basically the agency that brings money in and sends money out of the government. The US treasury is also kind of the first administrative agency in the U.S. government. So when the treasury is formed, there's four departments.

Army, National, Navy, Treasury, State, which is International Relations, basically. And so the Treasury Department then spawns all of these agencies that are tied to its functions.

So the Coast Guard, for example, originates within the treasury because they had these ships that would go out to try to stop piracy or stop smuggling, that would avoid tariffs. There's an entire public health service that is built around helping sick sailors.

So there's a merchant Marine, and so the treasury creates a series of hospitals around the United States that becomes a U.S. public Health Service.

ce, because steamboats in the: 1830

It multiplies into all kinds of different agencies. Eventually, it's the treasury that manages the national banking system through the Comptroller of the Currency.

And so that, too, is kind of part of this, like, who decides who runs it. The IT here becomes a much bigger thing than just bringing revenue in and sending revenue out.

Liam Heffernan: 00:15:56

This kind of leads on to, I guess, the ongoing governance of the U.S. treasury.

And maybe that's particularly topical nowadays when you kind of look at how the Trump administration is perhaps trying to take a little bit more federal control in certain areas. And I just wonder what controls were put in place when the U.S. treasury was founded and how has that changed over time?

Sean Vanatta: 00:16:19

Yeah, I mean, when the treasury was founded, if you look at the act, it's like Five or six paragraphs. It's very short. It talks about where the revenue is coming in, how it's going out.

It talks about the key officials that will be in the Treasury Department. There's a auditor, there's a comptroller, there's a few others who have kind of specific duties.

And then there's a clause at the end that says the Secretary of the treasury cannot have ownership of these kinds of securities or these kinds of business interests own a ship.

So there's a way that there's an effort to make sure that the Treasury Secretary isn't benefiting financially from his office, which think ties a bit to the Trump administration as well. Over time. Yeah, it just sort of its power expands out. I think there's a tension in the 19th century between both kind of federal and state.

So how much power does the treasury have as against the state governments? And there's a tension between sort of federal and private business. So I mentioned the banks of the United States. There's a lot of sort of anger.

There's huge political fights in the 19th century about whether there should be these private banks of the United States, essentially whether we should have a central bank or whether all the money should be held by the government in the treasury or whether the treasury should deposit its money in other banks. So if you're a banker, you want government deposits because that's helpful for you. There's a lot of conflict over that.

Eventually what happens is Andrew Jackson kills the second bank of the United States and then Van Buren, who's his successor, institutes what's called the independent treasury plan, where basically the US treasury can only deal in gold and silver coin and it manages and controls all of its money. So there's an effort to completely separate public finances from the private banking system.

That doesn't work because basically the banking system needs gold and silver coin. And so any money that's in the treasury is not in the banking system. And that destabilizes the banking system.

And so over time there's this gradual realization that the treasury has a role to play in financial stability and preventing financial crises. But that takes a long time to materialize. And much of the 19th century is, is a series of financial crises.

Liam Heffernan: 00:18:51

I feel like this is something that the US Always is kind of wrestling with these sort of dynamics between what should be federally controlled versus privately controlled or state controlled. It just feels like there's always this sort of three way tug of war going on.

And I mean, you've lived on both sides of the pond now I wonder how you feel the US sort of system works versus something that is a lot more kind of publicly operated like here in the uk.

Sean Vanatta: 00:19:20

You know, I think initially I would have taken that, you know, sort of agreed with the premise of the question, but I'm not sure that I do. So I live in Scotland. Right. So we certainly have an active independence movement.

Not as strong as it, as it more recently was, but there has been a lot of devolution to Scotland. And so you can see there, I think, an analog between the federal and the state.

It's complicated, right, because it's like England doesn't to my knowledge have a separate government from the UK government. So it's like Westminster is England and is the uk, which is different than like in the United States.

It's like the federal government is the federal government and Washington D.C. and that's a different, that doesn't map onto this. I also think there is a real attempt here.

ly it looked different in the: 1960

US but I think probably post: 1980

Liam Heffernan: 00:20:47

I guess going back to 19th century America, the earlier days of the treasury, when we think about the landscape at the time, I mean, the US was fighting seemingly war after war after war, and most notably they had the Civil War. So how does a body like the US treasury operate at a time of civil war?

Sean Vanatta: 00:21:14

have this effort beginning in: 1840

So the war starts, money is needed. Secretary Salmon Chase, who goes on to be a Supreme Court justice, needs to raise money.

So he has this loan that he issues and he can only collect the loan in gold and silver coin. New York bankers subscribe to the loan, so they agree to pay the money in on the expectation that the money will stay in their vaults.

So the way to think about banking in the 19th century is you have a kind of foundation of gold, which is what stays inside the bank, and then banks are making loans on top of that. So the gold is the reserve. We might think about like a 10% reserve.

So, you know, if you have 10 gold dollars in the bank, you can lend a hundred dollars out to the public. But if you take that gold out, then the reserve is gone and you have to retract the loans.

And so all of a sudden, Chase, instead of leaving the money in New York, takes it to D.C. there's a panic in New York. They suspend gold convertibility of the dollar, so New York banks aren't paying out gold to people who ask for it.

And there's essentially a mini financial crisis. Furthermore, Congress is not interested in increasing taxes to pay for the war because that's bad politics.

So Chase is in this bind where one, the banking system is not functional for financing the war effort. Two, Congress is refusing to raise the revenue that's necessary. So the first step is for the government essentially to create its own currency.

So before the Civil War, all circulating notes are private bank notes. So the government is creating or is minting gold and silver coin, but any physical dollar bill that you get is going to be issued by a private bank.

It's only during the Civil War that the US prints its own money. It's known as the greenback. It prints, I think, something like $400 million worth of greenbacks.

And so this is a moment when the public sort of steps in and creates a physical paper dollar. This is also where you get the Bureau of Engraving and Printing because it's kind of a huge pain to print $400 million worth of bills.

And the government has to figure out a way to do that too. But that's really controversial, right?

This is again, this question about the role of the public versus the role of the private and how you're creating money in this system. There are factions that really want the green back. But largely speaking, that doesn't seem like a sustainable path.

And so at the same time, Chase creates, or the Congress creates, the national banking system, which is a new system of private banks that's going to be issuing banknotes. But to issue banknotes, they have to buy an equal amount of U.S. debt to the notes they issue.

So this is a nice way to be able to sell debt to the bankers and then create a currency on top of it.

So while before the Civil War, you have individual banks issuing their own money, they're chartered by individual states, the financial system is hugely disaggregated and regulated differently across the entire nation. The idea is that in this moment of emergency, we can centralize the banking system, we can regulate it at the federal level.

It can be a way to finance the war effort. And in that case it's relatively effective.

Liam Heffernan: 00:24:41

Yeah, and that seems like complete sense to me that that would happen and the Civil War is clearly the sort of the trigger for that. But I just want to rewind a little bit because you said that before the national currency was created, private banks would issue their own notes.

It's making me think of like modern day gift cards where, you know, you can get a 10 pound voucher from Sainsbury's or Tesco, but you can only really spend it at those stores. Right. Was that problematic at the time?

Sean Vanatta: 00:25:12

So the idea was if I'm a banker, I have this gold reserve in my vaults and when I'm making a loan to you, I will issue you these banknotes. So here's $100 in banknotes and you go out and you spend them in the economy.

Now if we're in the same city and I'm a respectable banker, then those notes will spend. You can go to the merchant down the street and spend them. You can go, you know, pay your rent in them.

All of that is fine because we're in the same community. I have a reputation. People know I'm going to pay them gold back when they bring me those notes.

If you take those notes to the next city over, then it gets a bit more complicated. Maybe you can still spend the money, but people are going to take it at a discount.

So you give them $100, but it only counts for 80 because they know one, there's a risk, maybe they just don't know me as well. So there's a credit risk. Two, they'll have to send the money back to actually redeem it in gold. So there's this kind of transportation cost.

Civil War breaks out, there's: 1600

Where you have really solid, well known banks in New York and Boston whose notes circulate at par across the country to really sketchy banks out in the west where they're hard to get to. They're issuing notes, you don't know if they have gold to back them up and their notes are circulating at a deep discount.

That's the kind of situation when we had the banks of the United States, the first and the second bank, they play a bit of a regulatory role in that, because they have branches across the country, they can collect notes that might be circulating far from the issuing bank, take them back to the issuing bank, and say, give us the gold. And just that threat of redemption is enough to keep banks relatively in check.

But once the bank of the United States is gone and the federal government is saying we don't want anything to do with the private banking system, those checks really kind of fall away. And so it's kind of state by state, whether the local banking system is solid or not. And the federal government doesn't really have control.

So, yeah, in a sense, like the Civil War is a logical moment to try to reassert that control. And that's part of what happens. But the mistake that the Congress makes is that they tax state charter banknotes.

So the idea is that banks can't circulate their own money anymore, but banks can still take deposits and make loans inside the bank on their balance sheet.

And so while right after the Civil War, state banks almost all disappear throughout the 19th century, the state banking system grows, and it grows much more rapidly even than the national banking system.

And so you continue in the US to have this, even down to the present, this dual national and state banking systems, which create huge problems for oversight, huge problems for financial stability, because neither one can see what the other is really doing until something like the fdic, the Federal Deposit Insurance Corporation, begins to have oversight of the whole system. But for a long time, they're separate, even as they're trying to operate together.

Liam Heffernan: 00:28:24

n nicely to subjects like the: 2008

And for anyone who maybe wants a slightly less technical explanation of what happened, I would recommend watching the Big Short, which is a fantastic film, and that kind of explains it nicely. But essentially there was a lot of shady stuff going on, wasn't there? A lot of loans being made that shouldn't really have been made.

And it created this incredibly unstable flaw in the economy, and it bottomed out.

And I wonder how the US treasury plays a role in crises like that, both in restabilizing once it happens, but also in preventing them from occurring in the first place.

Sean Vanatta: 00:29:06

Yeah.

So, I mean, one way to think about it is the US Government of any institution within the economy has the best credit when everything else is going badly. The US Government should still be able to borrow because that's the one safe asset that investors can put their money in.

so in moments of crisis like: 2008

Like, it takes political will Congress has to appropriate the money for treasury to spend it or has to give treasury the authority to spend money in an emergency.

But in something like: 2008

The treasury rescues the banking industry both by buying some of the really shady assets that you mentioned, but also by buying ownership stakes in U.S. banks. And this is a practice, I'd say, like in the 19th century. The treasury recognizes or begins to recognize that it has a crisis fighting role.

And really what it's trying to do in those moments is take the gold that it has in the vaults and actually get it out into the economy. So the treasury might buy back U.S. bonds so that you take the bond, it comes into the treasury and the cash goes out. The cash is now in the economy.

And so if there's a crisis, that will be helpful eventually.

Once you get into the: 1930

Or once the FDIC is created, the treasury is the final backstop to the deposit insurance fund. So if there's really catastrophic failure, the treasury guarantees that it will come in and intervene.

I think it's from that moment forward when because the treasury has the money that's really the money of last resort, it's able to play that role.

Even though we think about a central bank as something called a lender of last resort, when there's a financial crisis, the central bank is stepping in, buying assets that banks want to sell. The treasury is buying behind the Federal Reserve. Even so, if the Federal Reserve takes losses, it's the treasury that ultimately bears that cost.

So I think that's sort of one part of it and then the other part of it is that I think about the treasury as like the convener. So the Secretary of the treasury is arguably the most important economic actor in the economy.

You could debate whether Fed chair, Treasury Secretary, but I think as the. The Treasury Secretary is certainly the most important person in the federal government, in the administration.

And so they can then bring everyone to the table and figure out what's going to happen.

So if there's a crisis, it's the Treasury Secretary who's Bringing in the Fed, who's bringing in the fdic, who's bringing in other stakeholders and trying to figure out what to do. And so I think it's that convening power, too, that makes this treasury secretary and the treasury overall really powerful in those moments.

Liam Heffernan: 00:32:25

You've touched on something there that I want to follow up on because it's easy to think of bodies like the treasury as just, it's very black and white, it's balance sheets, it's just simply making sure that the numbers work right. But actually there is such an, I would say an ethical element to what they do.

And case in point, looking at the financial crisis, the collapse of Lehman Brothers, the conversations around that, know, is a bank too big to fail?

You know, if they, if they rescue, if they step in and rescue Lehman Brothers, then you know, they're enabling the sort of behavior that led to its collapse in the first place. But if they don't, then many, many people are out of jobs and, you know, the impact on people's lives is quite severe.

So it's not just about balancing the books, is it? There's so much more at play here.

Sean Vanatta: 00:33:15

Yeah, there's, there's so many places where this occurs.

I think, to take this example, with the collapse of Silicon Valley bank recently, the treasury steps in and says, we are going to back up all deposits in this bank and then we're going to purchase certain kinds of assets at par, even though they're really devalued on banks balance sheets.

There's this effort to stabilize the system, but just as you say, then there's a moral hazard problem where having done that, now it's created this expectation that the government will always be there to back up bad behavior or be there in a crisis that private actors are creating. And that cuts across all of financial regulation from the very beginning. That's a hard balance.

And there's other things too, where it's like the treasury market. The US has issued, of course, an enormous amount of debt. That's part of what the treasury is doing.

They're trying to figure out day to day what kinds of debt to issue, how to manage all the debt that's in circulation. But the treasury market itself is foundational to the way the financial system works.

It is meant to be the one safe asset across the entire global economy.

And so the treasury has this enormous obligation, not just within the US Financial system, but in the global financial system to, to balance the needs for stability with the financing needs of the US Government and administration, to administration Treasury Secretaries will view the balance of responsibility differently.

Liam Heffernan: 00:34:48

And actually, when we look at the US Relative to the global economy, there's a whole nother dynamic there, isn't there? Because, okay, in the early days, they just had to make sure that the country had a stable financial war.

But when you consider the country's position in the world now, any decision that they make and any severe movements to the US Dollar has these huge worldwide ramifications, doesn't it? Yeah.

Sean Vanatta: 00:35:17

And I mean, that's largely a product of kind of the post World War II architecture created under what was called the Bretton woods system that really put the dollar at the center of the global economy.

stem falls apart in the early: 1970

Part of what the US Was trying to do through much of the post war era was be the market that countries could sell into to to help their development. Right.

It's like we want Germany and Japan to revive their manufacturing because we want them to be healthy, prosperous economies because we don't want war again. But in doing that, then we create new competitors for American industry. Right. It's Japanese and German cars that are invading.

I don't know, I'm using scare quotes in case that's not clear on the audio. Like invading the US Market. Right. So these fears about foreign goods go back a very long way.

And then just thinking about the post war period were focused on Germany and Japan before they were focused on places like China.

But that was part of a kind of obligation that US policymakers understood that to be the center of the global economy, to be the geopolitical leader, you also needed to accept certain trade offs in terms of how the global economy would work. And part of that was making your markets open to competitors and financing all that trade through dollars.

And there's reasons to kind of think about those trade offs differently. And certainly that's what's happening in the present.

Liam Heffernan: 00:37:06

Yeah. And there is definitely a growing argument, largely from the right, I think that America should be a little bit more isolationist.

Is that the right word? I think there's definitely a sense that maybe America need to think about themselves first and be a bit more selfish in their approach.

And I think that's where all this tariff stuff has kind of come from.

But I mean, it just doesn't feel like that's possible anymore because the US Economy and the world economy are so kind of deeply interwoven now that it feels like it would be mutually destructive for the US to try and remove itself from that.

Sean Vanatta: 00:37:47

Yeah, I mean, I think there has always been in US history some tension between autarky, this idea that we're going to be entirely self sufficient, this vision of what America is, this giant country, an empty land. So just imagine, native people don't exist. We have all these resources. We should be able to take care of ourselves and an integration.

We want to be integrated in the global economy. We want to be able to profit globally. And that's not a new tension. That's a tension that goes all the way back to the beginning of the United States.

Hamilton is the kind of person who has an international vision of where the US Is going to fit within the global system. It's a vision that embraces some protectionism. It wants to build up US industry by using tariffs and other tools to do that.

But it's not an isolationist vision. Whereas someone like maybe Thomas Jefferson might, they want international markets for agrarian products.

But it's mostly a vision of the United States as an agrarian, self sufficient country.

And so to kind of imagine that we're in a new moment where these concerns are novel or like the scale and scope of them or the tensions around them is novel. This is really not the case.

It's just that there's been this back and forth throughout history and we're in a moment now where we're swinging back towards a vision of autarky, a vision of self sufficiency. Whether that's going to do the most good for the most people, I think remains a very open question.

Liam Heffernan: 00:39:23

All things considered, from what we've discussed, kind of proves why the US treasury also can never be full, fully independent from the White House. Because they have to reflect the values of the administration. They have to fit into a bigger hole.

And we're seeing that quite significantly in the first six months of the Trump administration. But every president has some influence to some degree over how the treasury acts and the sort of policies that it, it puts forward, right? Yeah.

Sean Vanatta: 00:39:58

And I think on the one hand, I would say to some extent that's how it should be. The administration should control its income and its spending. But as we've talked about, the international role of the US complicates that story.

So we have an independent central bank, or what we think of as an independent central bank. And so that does create some economic management functions that are more or less out of the administration's Control.

Although, of course, the president is appointing members to the Federal Reserve Board, is appointing the chair. But especially this issue of the treasury debt market.

What the US Is deciding to do, how well it's maintaining its creditworthiness, its legitimacy on a world stage overall, really shapes not just the pocketbooks of Americans, but the pocketbooks of everyone across the world. Outsiders might want a bit more separation from the administration and the treasury secretary, but this is the world that we have.

This is the structure that, as conservatives like to say, the founders, in their infinite wisdom created. So that's where we are.

Liam Heffernan: 00:41:08

Yeah. And just thinking about kind of joining the dots here as well.

We've been talking a lot at the higher level, but how does all of this ultimately filter down to things like interest rates, to taxes, to the money that average Americans have in their pockets?

Sean Vanatta: 00:41:28

So I think we've lived in this strange world probably for the last 20 years. There was, I think, for a long time an effort to balance the U.S. budget. There was a real concern about the expansion of the U.S. debt.

And then the financial crisis initiated its own shock. The first Trump administration certainly spent much more than I think conservatives would have expected.

And then with COVID that has just sort of ballooned the US Debt recently. And there's always a question about what that's going to do in the short term to things like interest rates.

So the Federal Reserve adjusts monetary policy by moving rates up and down.

But as the kind of overall stock of debt gets larger, it becomes more and more expensive to finance, that you have to pay people more and more money to agree to take on this debt as it gets bigger and bigger.

So even as the Federal Reserve is trying to adjust certain kinds of interest rates, you can imagine a world where long term interest rates are going to get higher, and that's going to make it more expensive for companies to invest or for people to buy houses. And so there's like, I think that's a kind of major concern.

And then another concern is if you have all that debt and at some point you decide to take it seriously, that you need to rein it in, what are the social costs of that going to be? What's going to happen to the US Social Security system that provides people with retirement security?

What's going to happen to US Education financing? What's going to happen to other public and social services that people value?

Will it become more difficult politically to have those things if the debt becomes the overarching concern? What will happen to the US Military if we can't spend infinitely on Defense.

And so I think that's really where the Treasury's job of balancing revenues with expenses will continue to be very important in the future as we sort of recognize that the national debt is a kind of huge and unresolved, and it doesn't look like there's going to be much momentum for resolving it, at least in the immediate future.

Liam Heffernan: 00:43:40

Yeah. So then hypothetically, let's do a little thought exercise to end on, and I'm putting all kind of legal impossibilities to one side here.

If the President decided tomorrow, that's it, let's get rid of the U.S. treasury, we're starting again, what would happen to.

Sean Vanatta: 00:44:01

The U.S. i mean, I think the key question is, okay, where is the money going to come from? Like, are we just not going to spend any money? Are we just not going to take in any money?

I think you could imagine the current administration might say, we're going to privatize this, so we will give private institutions the right.

So this is an old practice of tax farming where you just say, okay, bank, your job is to collect all the income tax in this community and we'll pay you 10% of whatever you collect.

So you could privatize tax collection and you could privatize public services and you could enable private banks, in the way that the first and Second bank of the United States are private banks, to be the kind of intermediary where the income comes in and the spending goes out.

I think that would be a disastrous system because it would take those intermediary functions that the public benefits from and that maybe the public gets as cheaply as possible, recognizing that government services are expensive by privatizing them and making them for profit, I think they become more expensive, not less. I think the public would suffer significantly if that were the choice. Unless you owned these companies and then you would do quite well.

Liam Heffernan: 00:45:25

I guess that's not even just the story of America, but the story of everywhere. Right. The, the richer get richer. But yeah, anyway, that's another conversation.

But I think in a nutshell, what we've kind of determined here is we've gone full circle to conclude that the US treasury actually isn't that bad after all. Sean, I can't thank you enough for joining me on the podcast to start to explain all of this.

I think there's an awful lot more to cover, and I think we're going to have to look at some of these things that we've, we've, we've started touching on in more detail in future episodes, for sure. But I can't thank you enough for starting that conversation on the podcast with us.

For anyone listening anything that we've mentioned here, we'll leave links to in the show notes if you were interested in learning more. And if anyone wants to connect with you directly, Sean, where can they do that?

Sean Vanatta: 00:46:19

So you can find me at the University of Glasgow. My email is Sean venatalasgo ac.uk Send.

Liam Heffernan: 00:46:27

Me an email Wonderful. And if you care to connect with me, I'm on social media in various places, so just search for my name and I'm sure you'll find me.

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