Cementing the Union: Early US 'Attractive Precedent for Today's Europe'

By Christian Reiermann

World leaders view a football match during a G-8 summit at Camp David in May. Zoom
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World leaders view a football match during a G-8 summit at Camp David in May.

After the War of Independence, the United States looked a lot like the euro zone, with some states crippled by debt. In the end, under a proposal by Alexander Hamilton, the federal government assumed all the debt, securing the country's creditworthiness. A new report argues it could be a good model for Europe.

When German economists ponder how to rescue the euro, they are often inspired by a man who died after a duel 200 years ago. Academics like Hans-Werner Sinn of the Munich-based Ifo Institute for Economic Research, and Wolfgang Franz and his colleagues on the German Council of Economic Experts, have discovered a new role model: the American Alexander Hamilton, the country's first secretary of the treasury, who was shot to death by Vice President Aaron Burr in 1804.

The academics have noticed surprising parallels between the problems of today's euro zone and the United States in its early years. Like the European Union today, in the late 18th century the United States was more of a loose alliance of independent states than a federal body. The economic and political problems were also similar. Some states, like South Carolina and Massachusetts, were groaning under the burden of debts from the War of Independence, but no one wanted to lend them any more money.

Other states, especially Virginia, had cleaned up their finances but were refusing to help their less fortunate partners. The dispute over money threatened to destroy the young union. It was only newly appointed Secretary of State Hamilton, in his mid-30s at the time, who was able to solve the debt crisis and save the United States.

But can the euro zone learn any lessons from the days of early capitalism? Can the thoughts of an independence fighter who acquired his knowledge of economics from books, even be relevant today? Ifo President Sinn believes they can. The early years of the United States are an "attractive precedent for today's Europe," and Hamilton was something of a "hero," concludes a new report by the European Economic Advisory Group (EEAG), which Sinn and his co-authors plan to present next week.

A Bold Plan

Indeed Hamilton, who served as adjutant to General George Washington in the War of Independence, fashioned a bold plan in 1790. He was determined to prevent one or more of the 13 states from defaulting on debt payments, fearing that this would adversely affect the creditworthiness of the young republic.

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."

A Debt Repayment Pact for Europe?

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."

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.

Nevertheless, Hamilton's approach proves that doing it in reverse isn't necessarily doomed to failure. For him, fiscal union and political union were always two sides of one coin. He didn't just see his plan as a struggle against a debt crisis, but also as vehicle to strengthen the cohesion of the former colonies by dismantling a powerful central government. Joint debt reduction and the reestablishment of joint creditworthiness "to cement more closely the union of the States," he said. Hamilton, whose likeness graces the $10 bill to this day, proved to be right. The United States still exists, and US President Barack Obama recently appointed Hamilton's 75th successor.

Translated from the German by Christopher Sultan

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1. Surplus then deficit now!
SHBasse 02/19/2013
It is an impossible comparison as the USA was a union on the way up and with plenty of natural resources, land and an influx of energetic purposeful immigrants. EU is in a state of emergency as competitiveness is on the decline, the population is graying, the agricultural sector is a burden and the resources have been depleted centuries ago. Much credit to the Germans who have managed to stabilize the situation, but now the focus must be redirected to regaining competitiveness. By recognizing that even our European inventiveness does not help us as the inventions too are exported and utilized in China, we must come up with a new model that ensures that our national economies – not our internationalized firms – benefit from EU and national stimuli! “The fundamental causes of the crisis” http://unifiedscience2.blogspot.com/2011/02/deeper-causes-of-downturn.html
2.
thorpeman@sky.com 02/19/2013
Zitat von sysopAfter the War of Independence, the United States looked a lot like the euro zone, with some states crippled by debt. In the end, under a proposal by Alexander Hamilton, the federal government assumed all the debt, securing the country's creditworthiness. A new report argues it could be a good model for Europe. http://www.spiegel.de/international/europe/early-us-attractive-precedent-for-today-s-europe-a-884223.html
Two world wars didnt exactly harm their balance sheet, are you suggesting we need another world war & start mass producing arms for the side we hope can pay, say China?
3. The US Model of Federalism for Europe?
rustylink 02/20/2013
Although European poiticians resist the idea, the US Model of Federalism has much to offer. A close study of the early US political, fiscal, and Mmonetary experiences have many parallels to events in modern Europe. They offer, at the least, practical examples of how political, monetary, and ecoomic issues were tackled by the construction of a federal constitution; and how after much contradictory evolution into the current fiscal and monetary system. Without necessarily wishing to slavishly adhere to american solutions, there can be little doubt that faced with the same issues the decison-makers of Europe should carefully examine and learn from the historical experices of 13 colonies that eventually grew and unified to become the worlds's preminent superpower.
4. Profound ignorance of America
mae 02/20/2013
Once again this article proves Germans profound ignorance of American history. When the USA had its Hamiltonian moment during the 18th cnetury it was overwhelmingly of 1) One heritage - British 70% 2) One language - English 3) One culture - Anglo 4) One legal system - British common law. Very different from the EU of today. Germans and this includes German journatlists are totally unaware of their superficially knowledge of American history. And this leads to absurd comparisons such as between early America and the EU of today.
5. Cart before the Horse
HarryHavens 02/20/2013
I would agree that the current Euro situation is similar to the early years of the USA, but an important series of events were omitted to jump to Hamilton's rescue. The Articles of Confederation contained a clause that allowed for changes and/or a complete revision. The result being the current constitution. Even that did not go without a hitch, as the very clause in that new constitution used by Hamilton, was vociferously opposed by the anti-federalists, which of course led to the the Bill of Rights, the formation of the Democrat party, etc, and is a subject of division even in the 21st century. That division being about the rights of the states as stated in the 10th Amendment. (Note: the 10th amendment is dealing with the plural form of states. The civil war was about the individual right of a state. This leads many to believe that the matter of states' rights were settled during that war, when it was the matter of state rights.) Seriously, until the European Countries adopt a similar language to " The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States", discussion of Hamilton's ideas are futile in my humble opinion. Harry Havens
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