“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.