Financial Times
December 19, 2011
To stem the unfolding sovereign debt crisis and save the euro, European summits seem to provide too little, too late. A look back to the late 18th century could provide insights into what can be done to resolve a sovereign debt crisis. The solution to an American at least is clear: Europe needs not just a centralised finance ministry; it need its own Alexander Hamilton.
After the revolutionary war in 1790 the fledgling US government was also facing paralysing gridlock between major protagonists over a huge, seemingly unsustainable debt problem. During the war, the taxing ability of most of the individual states had eroded, but to support George Washington’s army and cover ordinary government expenditures, many states – particularly in the north – had borrowed by issuing paper notes. By 1790, most of these notes were threatened by default. Speculators had purchased many of the notes from their original owners at steep discounts. To establish confidence in the nation’s near moribund financial markets, Hamilton, the nation’s first secretary of the Treasury, proposed a one-time assumption of state debts by the new federal government.
However, unlike their less provident northern neighbours, the southern states, notably Virginia and Georgia, were not threatened with debt default and opposed federal assumption – somewhat like northern European countries today. Populists also worried that federal purchases of discounted state debts at 100 cents on the dollar, as Hamilton proposed, would unjustly enrich the speculators. So, early in 1790, the first Congress failed to pass Hamilton’s assumption bill – to the detriment of the country’s national and foreign credit standing.
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