Is the savior of the EU’s debt crisis a long-dead American?

posted at 10:01 am on February 19, 2013 by Ed Morrissey

“Can the Euro zone learn any lessons from the days of early capitalism?”asks Der Spiegel in report on the latest from the EU’s search for an escape from their debt crisis.  It depends on the teacher, and the lesson drawn.  In this case, the EU may cast its eyes back more than 200 years and across an ocean to find the man who rescued a nascent nation from its early crisis over war debts, and who founded an economic system that eventually produced the “arsenal of democracy” and the world’s remaining superpower:

[Alexander] Hamilton, a lawyer, adhered to a creed in politics and business alike: “Promises must be kept.” In his view, this also applied to the repayment of debts. In his private life, however, the father of eight children had trouble keeping his resolution. He was repeatedly interested in women to whom he wasn’t married. But his economic plan worked. The federal government assumed all the debts of the individual states and combined them into a fund Hamilton referred to as the debt “sinking fund”. He also introduced duties and assessed luxury taxes, on spirits, for example, especially whiskey.

Hamilton used the revenues to repay the war debts, and in doing so he managed to reduce the country’s high interest costs to 4 percent. The resulting low interest rates stimulated the economy, and the recovery brought more revenue into the government’s coffers. Within a few years, Hamilton was able to eliminate a large portion of the US’s mountain of debt.

Sinn and his colleagues believe “that the logic of an internal revenue source also applies to modern Europe.” They argue that the EU should receive the revenues from the planned financial transaction tax. But that isn’t all. “In the long term, and in analogy to Hamilton’s system, a fundamentally reformed fiscal order would be necessary, one that provides for the joint administration of customs revenues or the value-added tax.”

Hamilton’s “sinking fund” prompted the German Council of Economic Experts to envision a “debt repayment pact for Europe.” Under the plan, member states would collect portions of their liabilities in a common pot and jointly repay the debt. The economic experts have nothing but effusive praise for the consequences of Hamilton’s work. “It contributed to securing the creditworthiness of the United States, creating a large bond market and making it possible to refinance at low interest rates.”

There are a couple of very large caveats in this lesson, however.  First, the US was even at that time more politically united than Europe is today.  Hamilton could do what he did because he had the authority of one sovereign nation with which to work.  Could Hamilton have succeeded in a long-range effort under the Articles of Confederation — or even worse, with the states only loosely connected by a common currency, as is the case with Europe today?  It seems exceedingly doubtful, as the Hamiltonian approach requires political as well as monetary authority.

Another big problem is the quote offered by Der Spiegel: “Promises must be kept.” One reason that the Euro zone is taking a beating is that investors aren’t quite sure whether the EU can live up to that standard.  Greece’s default forced bond holders to cut a deal in order to keep from losing their shirts, and other EU members aren’t too far off from the state in which Greece finds itself.  That too is a result of having a single monetary policy with distributed sovereignty and political control.

Not surprisingly, the one country that has to rescue the EU isn’t too enthusiastic about the Hamiltonian approach:

It remains questionable whether the leaders in Europe’s capitals working to save the euro will want to learn from Hamilton, because his debt fund was ultimately a liability union. The common bonds with which he refinanced old debt are better known today as euro bonds. Both are ideas that trigger allergic reactions in some capitals, especially Berlin. Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble, both members of the center-right Christian Democratic Union (CDU), are only willing to accept such ideas if a political union is installed as a counterweight to the monetary union.

A liability union would give even greater influence of other nations into German policies.  That’s already a problem for Germany and its leadership, as it struggles to keep the euro from collapsing under the weight of decades of deficit spending by its member states.  I’m not sure that they’re terribly interested in losing what little control they have left without being able to enforce policies on other states regarding spending and taxation.  That sounds a lot like the problems facing the US at the beginning of our independence, but without the cultural, linguistic, and political unity of the early colonies.  I don’t think Hamilton will help the EU much in this instance.


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Hamilton was a anti-federalist statist who wanted a central bank.

gryphon202 on February 19, 2013 at 10:07 AM

Stupid idea.

dforston on February 19, 2013 at 10:08 AM

Under the plan, member states would collect portions of their liabilities in a common pot and jointly repay the debt.

This is a scam.

Do they even mention restriction on the right to borrow more money?

It sounds like a formalized blank check from Germany to the out of control spenders.

sharrukin on February 19, 2013 at 10:10 AM

Old dead whitey? Come on, this is the new age of the Hip Dog-Eating Black Dude (who is clean and articulate to boot).

Bishop on February 19, 2013 at 10:11 AM

A VITAL difference is, Washington and Hamilton answered to voters….Bruxelles answers to NO ONE. So, essentially, the Germans are asking that bankers and unelected bureaucrats have control over the revenue of elected governments.

What could go wrong?

JFKY on February 19, 2013 at 10:12 AM

… collapsing under the weight of decades of deficit spending by its member states. I’m not sure that they’re terribly interested in losing what little control they have left without being able to enforce policies on other states regarding spending and taxation. That sounds a lot like the problems facing the US at the beginning of our independence, but without the cultural, linguistic, and political unity of the early colonies

…meanwhile…looking at the direction the U S of A is going….

KOOLAID2 on February 19, 2013 at 10:17 AM

The Nazi children and grandchildren think that they can be the Lords of Europe and may be the World when their Nazi fathers and grandfathers failed to do so militarily… Like their Nazi ancestors they are going to fail… They are going against human nature… Human nature says that you cannot make a strong and long lasting union out of many countries with many people, many cultures, many languages, and many national interests…

mnjg on February 19, 2013 at 10:20 AM

The crux of the matter is not central control of our industries, but central control of our banking system, such that things like currency manipulation — in which people like Soros make billions of dollars by pulling the value of those dollars out of our pockets — can’t happen. The financial marketplace should also be well regulated, so that strange derivatives which work against the economy as a whole cannot be sold.

We don’t need a central bank if the laws are designed to prevent rapacious behavior… Indeed, the closest thing we have to a central bank — the Federal Reserve — acts as a printing press for the Government, and not on behalf of the People.

We had a robust economy until the leeches figured out how to trash it. Interesting that the leeches are liberals and they are still walking around with our cash in their pockets.

unclesmrgol on February 19, 2013 at 10:35 AM

Well, it sure ain’t a living one.

VorDaj on February 19, 2013 at 10:40 AM

He was repeatedly interested in women to whom he wasn’t married.

Somewhere Bill Clinton is smiling.

VorDaj on February 19, 2013 at 10:41 AM

Oh gee, look what we have here. An American, ANY AMERICAN will have to yet AGAIN, save the pansy-a$$ed hides of the Euro-peons.

RandallinHerndon on February 19, 2013 at 10:43 AM

It may be mentioned somewhere in all the talk about this, but one thing I don’t see is the most important caveat to establishing a “sinking fund” and that is that somewhere along the line you need to have A SURPLUS!

All the talk about a “sinking fund” and about “promises must be kept” isn’t going to solve anything without doing something that will create A SURPLUS!

See that’s what the US government did via Alexander Hamilton efforts. The government paid off the “sinking fund” by running a surplus of revenue.

If you ask me, I’d say this EU idea of pooling the debt and creating a “sinking fund” is to get the bad debt off the certain (read: most and likely all but one) individual states’ books, so they can start afresh in running deficits again.

Dusty on February 19, 2013 at 10:58 AM

This idea will never work unless certain European countries, I’m talking about you Greece, are restrained from further increasing their debt load. Hamilton’s plan can be summarized “because we all control how our debt grows, we can all help pay it down.” Europe doesn’t control how the debt is being accumulated so any plan to pay it down will fail. It’s just like a heavily in debt family with a number of working members and a number of world-class spenders. The workers may agree to pool their incomes in order to pay down the debt they all owe but this isn’t going to work if the spenders don’t also co-operate to hold down spending. And why should they if the workers are continually coming up with innovative plans to carry the debt the family has now?

Fred 2 on February 19, 2013 at 11:29 AM

Hamilton didn’t have Social Security, Medicaid, and Obama-Care to pay for while he paid down the debt.

German reluctance is the same reaction Hamilton got from the states, who recognized that once the Federal Government assumed their debts, the states’ powers would be reduced. The wealthy states knew a subsidy when they saw one.

2ndMAW68 on February 19, 2013 at 11:34 AM

It may be mentioned somewhere in all the talk about this, but one thing I don’t see is the most important caveat to establishing a “sinking fund” and that is that somewhere along the line you need to have A SURPLUS!

All the talk about a “sinking fund” and about “promises must be kept” isn’t going to solve anything without doing something that will create A SURPLUS!

See that’s what the US government did via Alexander Hamilton efforts. The government paid off the “sinking fund” by running a surplus of revenue.

If you ask me, I’d say this EU idea of pooling the debt and creating a “sinking fund” is to get the bad debt off the certain (read: most and likely all but one) individual states’ books, so they can start afresh in running deficits again.

Dusty on February 19, 2013 at 10:58 AM

You couldn’t be more wrong about what a sinking fund is or it’s use. The definition is as follows and has nothing to do with surplusses.

Sinking Fund Definition: Fund set aside by a corporation or government agency for the purpose of periodically redeeming bonds, debentures, and preferred stocks. The fund is accumulated from earnings, and payments into the fund may be based on either a fixed percentage of the outstanding debt or a fixed percentage of profits. Sinking funds are administered separately from the corporation’s working funds by a trust company or trustee. The purpose of a sinking fund is to assure investors that provision has been made for the repayment of bonds at maturity.

The governments general revenue is separate from “sinking funds” which IS used to retire debt repurchased in the public markets.

DevilsPrinciple on February 19, 2013 at 12:02 PM

To Jefferson’s horror he also alluded to the English form of government as near perfect as can be achieved…………

Tenwheeler on February 19, 2013 at 12:30 PM

Ed,
I encourage you to read John Meacham’s Thomas Jefferson: The Art of Power.

The struggles of the fledgling Republic to shake off it’s monarchial roots forever continued long after the signing of the Declaration.

Hamilton and his followers fought sometimes bitterly to enhance the power of the Executive, a struggle which was met with veracity from Jefferson and other Republicans.

The parallels with today’s political discussions in Washington are many.

Tenwheeler on February 19, 2013 at 12:43 PM

Der Spiegel got one thing wrong about Hamilton: he strayed from his marriage only once, with Maria Reynolds, and he admitted this publicly to diffuse criticism from the Jeffersonians that he had paid blackmail with public funds. Hamilton may have been naive regarding women who sought to use for personal gain; but it is untrue that he “was repeatedly interested in women to whom he wasn’t married.” He loved his wife and family above all else.

J Baustian on February 19, 2013 at 12:54 PM

The solution is to get the government out of the money business. It’s as archaic as having the government in the postal business based on the ability to deal with robbers and counterfeiters. If you formed a new nation with a few million freedom loving citizens, what would the government’s role be in the economy and what would you use for currency? The Founders wouldn’t involve themselves in that in today’s world and private banks would issue currency backed by commodities, stock, gold, land, etc. Buyers and sellers would choose which currencies they prefer to use and it would benefit them to accept many and an exchange system for the competing currencies ( which could include any national currencies of other countries ) would develop at the cash register. Government issued currencies wouldn’t remain for long.

Buddahpundit on February 19, 2013 at 2:14 PM

Could Hamilton have succeeded in a long-range effort under the Articles of Confederation[?]

Nope. One of the biggest problems with the Articles of Confederation was the inability to enforce the revenue subscriptions levied against the individual States. That is the main reason the Founders retained the right to enforce taxation to the central government, rather than leaving that enforcement in the hands of the States.

ss396 on February 19, 2013 at 2:36 PM

false equivalence

Not much else to say. In every way imaginable it is amusingly idiotic. Reaching into the depths of the abyss for a rationale, for their existence. Since they make up currency, why not make up tenuous assertions.

John Kettlewell on February 19, 2013 at 10:59 PM