Sinking funds as credible commitments: Two centuries of US national-debt experience

For much of US history, the federal government employed sinking funds as de vices to support the market for its debt. The policy was inaugurated by Ham ilton in 1790 as a method of enhancing public credit by committing the gove rnment to redeem its debt. We interpret the commitment, as others have inte rpreted the gold standard, as a way of achieving time consistency of govern ment policy. Although steeped in controversies about the utility of sinking funds, subsequent US history did reflect that commitment-until the 1930s. Since the 1930s, the view of Hamilton's opponents, namely Jefferson and Mad ison, that the government's hands should not be tied by commitments such as sinking funds have prevailed, just as the gold standard itself was abandon ed. (C) 1999 Elsevier Science B.V. All rights reserved.