Alfred M. Mthimkhulu Economist
On 29 July 2020 was the Global Compensation Deed between Government of Zimbabwe and former farm owners. The agreement has two basic goals. The first is to restore trust.
The other is to improve productivity in agriculture. The price tag is US$3.5 billion. Matters arising include concerns on government capacity to raise US$3.5 billion and if recipients will be made public.
Some deem the Deed a reversal of land reform thus re-igniting social justice questions as other murmur on the constitutionality of the Deed.
The Deed is essentially a peace settlement thus not novel. A fitting title for its review could very well be “The Economic Consequences of Peace”, much like 34-year-old John Maynard Keynes’ look into WW1 peace settlements.
Unlike issues confronting Keynes and his seniors, the Deed arises from domestic matters that have usurped trust in government for decades.
Such weighty matters compel some of us to escape to distant pasts and places in search of similar events to learn from how they were handled. Two events are never identical but similar ones are useful in nudging us to re-examine our perspectives on burning issues we face.
Like Keynes in 1919, Alexander Hamilton was 34 when he was appointed US Secretary of Treasury in 1789. The US had for long defaulted on its debts.
A couple of years earlier, some war veterans had taken up arms demanding compensation. As the key man in a cabinet of two other ministers, what was he going to do?
“From the beginning,” writes his biographer TJ Stiles, “he faced pressure as wary creditors waited to see if the young treasury secretary could miraculously resurrect American credit.” Just 10 days after being appointed, the House of Representatives gave him 110 days to report on the state of public credit.
Federal government owed $54 million. Individual states owed $25 million. Government bond prices had fallen below their par value of $100 per bond, as low as $15 in the 1780s. Bond prices as we know are driven by perceptions. If investors are nervous as they were about the US, then prices would be low.
If Hamilton’s magic worked, prices would rise towards par.
In that case trust would be restored. The world would know that great things were afoot in the US without him saying a word.
On his first day, he borrowed $50,000 from the Bank of New York.
Two days later he borrowed another $50,000 from the Bank of Philadelphia. Treasury had some money to get started! What next? The report to the House.
They wanted to know the scale of the problem and his plan to fix it.
As he wrote by hand his forty thousand-word report, he also “established high ethical standards and promulgated a policy that [Treasury] employees could not deal in government securities, setting a critical precedent for America’s civil service … divested himself of any business investments that might create conflicts of interest.”
On February 8, 1790 the report was ready.
All foreign debt would be honoured, he reported.
He made numerous proposals on repayment of local debt including that it be part-paid in land or entirely in cash but at a lower interest rate with extended duration.
That was detail. The message was clear: creditors would get their money back.
James Madison, an old comrade who would become president 18 years later opposed his plan. Madison’s argument was that if government was to repay local debt at par it would benefit speculators who had bought bonds at, say, $15 and not the patriots who had actually funded the revolution.
Many of those patriots were war veterans who had received bonds as compensation.
If people got to hear that Treasury would honour all debts then bond prices would rise, a scenario that was certain to infuriate veterans who had sold in desperation. Bond prices had crept up a bit in the euphoria of a new government in 1789.
What Madison wanted was that the upside in bond price from the date Hamilton’s plan was announced accrue to current bondholders but that all price increases up to that date accrue to old bondholders irrespective of when they sold.
This meant that Treasury had to track all past trades and bondholders, an almost impossible task.
The fundamental flaw in Madison’s argument was that it focused on the bondholder and not on the financial instrument.
It personalised the instrument thus making an emotional argument. Whoever held the bond was irrelevant.
What mattered was the bond issuer’s pledge to repay what was advanced, with interest.
Hamilton’s plan passed.
How was he going to fund it? He improved efficiencies in collecting custom duties and introduced taxes on wine, spirits, coffee and tea.
A portion of tax revenues was credited to a sinking fund set up to redeem 5 percent of debt annually.
What was novel in Hamilton’s plan was that he persuaded cabinet and legislature that the federal government takeover individual states’ debts.
Oh, how some objected! The state of Virginia for instance had no borrowings.
Why should I pay for the land I didn’t get, a Zimbabwean probably shouted on the news of the Deed.
Negotiations ensured on assumption of states debts by federal government.
It was agreed that what we now know today as Washington DC be the nation’s capital, right there next to Virginia – a peace offering.
In 1791, he started buying back bonds. Bond prices rose.
In the process he saved public funds and probably made extra money for government.
As prices increased, interest rates fell so spurring enterprise. A decade later, trust had been restored.
For decades, limited trust in government has lingered in Zimbabwe.
That this problem stems from or was accentuated by land reform is incontestable. In that regard, a peace settlement on the land question is indispensable in the next phase of progress. The rest is detail.