Fitch Ratings' recent downgrade of United States debt one notch from AAA to AA+ is still much too sanguine. America’s debt today should be rated closer to junk than to top-notch.

The situation is not as dire as when Alexander Hamilton became the nation’s first Treasury secretary, but reforms akin to those that he implemented in the early 1790s must be made lest the nation’s public credit be impaired further. That means ridding the federal government of its addiction to borrowing and spending by returning to simple rules regarding bailouts and deficits.

A dozen years ago, S&P also downgraded the nation’s public securities a notch, leaving only Moody’s to assure the public that nothing was amiss. But as was revealed in 2008, and several times previously, credit ratings are no assurance of anything. The “Big Three” credit-rating agencies inflate the scores of all but the weakest securities for fear of losing business or facing lawsuits.

Given the power of the executive branch of the national government to tax, regulate, and otherwise control private entities and persons, rest assured that the Big Three especially tremble at the notion of making public their true views of America’s current creditworthiness. The fact that the Big Three owe their power, and perhaps even their continued existence, to the Securities and Exchange Commission renders any criticism of treasuries fraught.

Market evaluation of America’s debt is also distorted. In Hamilton’s time, the prices of public debt obligations served as a reliable guide to creditworthiness. Under his fiscal policies, the price of America’s public obligations quickly rose from a few pennies on the dollar to above par. American economic independence from Britain was definitively achieved when the yields on its bonds dipped below those of the Mother Country, in Britain’s own markets no less.

Bond prices then were internationally comparable because they were priced in gold or silver. Today, with the globe awash in fiat money, they convey less information about creditworthiness and more about relative inflation expectations and the ability of some nations, such as the United States, to force debt on their own citizens and on other governments. The condition of public credit is thus more subjective today, but still amenable to analysis.

Hamilton stated that America’s national debt would be a blessing and a cement to the union, and it long proved a net benefit. The government’s ability to borrow large sums relatively quickly and cheaply saved the country from recolonization in the 1810s, being ripped into two by a massive insurrection in the 1860s, and being dominated by evil foreign powers in the 1940s. Yet despite those exertions, our debt remained so easily manageable that it was completely paid off in the 1830s and could have been again in the 1910s if the Great War had not interceded.

In the same breath that Hamilton extolled the virtues of public credit, however, he warned that the national debt could become excessive and hence a net burden. It became excessive by his metrics following the government’s unwarranted bailouts during the Global Panic of 2008, which triggered the downgrade by S&P. The Great Pandemic of 2020 occasioned another burst of unwarranted bailouts, and the massive borrowing, deficits, and inflation that triggered Fitch’s downgrade.

Both episodes broke rules that Hamilton laid down as Treasury secretary and that were followed until the progressive and New Deal eras.

First, during panics, government money should be employed to make loans only to private parties willing to pay a penalty rate and able to post sufficient collateral. (This later came to be known as Bagehot’s Rule.) Adherence to the rule stymies panics by assuring solvent businesses that they can obtain gold if necessary while not subsidizing insolvent concerns. The technique of flooding the market with cash and lending capital to commercial enterprises encourages nothing but profligacy in private business and extravagance with the public purse.

Second, the Treasury should never borrow money to stimulate the economy or to transfer resources from one citizen to another, or from the citizens of this nation to those of another. It should borrow only for emergencies, such as just wars, and when tax receipts prove insufficient to service the debt during an economic downturn.

Third, governments should never borrow money without also raising a tax sufficient to service and retire the resulting debt. In addition to putting creditors at their ease, such a policy minimizes the incentive of politicians to borrow and spend, which creates the illusion that they have provided some benefit without a cost.

Although Hamilton sought to establish a national government larger and more vigorous than the one sought by his political rivals, even he would be appalled by its current size and scope and would be amazed that the legislative and judicial branches have allowed the executive to gain so much control of the public purse. America must restore its balance through legislation and court decisions before the republic is lost to what the Founders and Framers referred to as an oligopoly of placemen and sycophants.

Robert E. Wright is a senior faculty fellow at the American Institute for Economic Research and the author of numerous books, including One Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe (2008). Follow on Twitter: @robertewright .