Lessons for the EZ From Alexander Hamilton

It is good to see that RGE is not alone in considering the lessons of history, especially the compares and contrasts between the EZ of today and U.S. experience just after the founding of the republic.

Citi in a recent paper draws similar conclusions to our own, but other interpretations of the key lessons of the success of the very first Secretary of the Treasury Alexander Hamilton with EZ difficulties present themselves.

Washington, it is said, wanted to be able to fund a standing army eventually; his influence helped carry the day in framing the source of federal revenue in import tariffs (another Hamiltonian brainchild to protect nascent firms/industries), and especially the Assumption Act of 1790, under which the Treasury assumed the general and war debts of the original 13 United States. How to carry a minimal state, to counterbalance federalist ambitions held by Hamilton et al. against those dead set against a strong central government like Jefferson, yet maintain security, had a profound effect on early politics and the Constitution itself, e.g. accounting for the right to bear arms…so as to fall back on a militia.

Hamilton’s argument that the colonies had bonded together against a common external enemy no doubt benefitted from his charisma and tenacity, but it was also true. From the word go, the nature of the exercise was all about hanging together to avoid hanging separately… contributing to the success of compromise in balancing competing interests, as per James Madison and other accounts, as per Citi.

But today’s EZ not only lacks a Hamilton-like figure, it lacks the possibility of one because several EZ members owe way too much debt to others, which is intrinsically divisive. Whereas U.S. colonial/state/federal debts—financial and political—were owed locally and globally, individually on a financial basis and jointly on a political basis; today, the EZ PIIGS are increasingly incapable of paying their excessive debts to their EZ Core taskmasters…

Back then, there was for example, no durable union between the United States and France, which has provided moral, logistical and financial support in her efforts to undermine Britain. The role of the Marquis de Lafayette may have been one of the high points in the bilateral relationship; but it did not automatically imply that the dire state of U.S. public finances could be used to plead for transfers, grants or bailouts in the form of debt rollovers from France, herself embroiled in revolution.

Besides which, the main source of war in Europe has been about parts of it fighting each other, rather than bonding together to fight a common enemy (other than the Cold War, perhaps). Bilateral financial relations have not been separate from these political conflicts, but have been part and parcel of them. Indeed, France and Great Britain could not count on forgiveness of bilateral World War I or II debt by the United States; these were rescheduled or even actually defaulted—and some remain so to this day. All of which has echoes in the war reparations imposed on Germany at Versailles and by others upon France at the loss of other prior wars…

Furthermore, all EZ politics is national rather than pan-EZ; the member states zealously and jealously guard their sovereignty when it comes to fiscal and structural matters. Even now, with a profound reform of economic governance on the table, France, for example, wants more national responsibility whereas Germany wants more oversight. The EZ pacts—Stability and Growth, and Maastricht—entailed both, but were observed in the breach…

Finally, a potentially powerful compare/contrast from U.S. history is not just about fiscal federalism but about federal politics, federal money and the federal central bank: Hamilton’s effort to establish a central bank did not survive; the Bank of the United States was often questioned and twice disbanded, as political leaders feared that this all-encompassing federal entity had gone too far. The charter of the first central bank was not renewed; Andrew Jackson paid down federal debt and disbanded the second central bank. And U.S. political/fiscal/monetary union was in no more grave, sustained danger of dissolution than during the Civil War, during which the Confederate secession aimed to end all of the above, by creating a new state and fiscus, and the new Confederate dollar.

But even today, clarion calls to end the Fed continue to ring out, even from a presidential contender, no matter how unlikely to prevail. Politicians more in the mainstream call for greater accountability, transparency and oversight of the Fed. The irony is epic and epochal: The Fed faces these threats in the wake of the 2008 banking crisis and Global Crash, even as it seeks to implement the lessons of history and to fulfill its mandate for financial and economic stability and growth/employment. This very mandate in turn arises from its creation in response to the Banking Panic of 1907, when a single bank, JP Morgan & Co, decided which banks to save and which to subject to a panic; and its gold-standard driven failure to contain the effects of the Great Crash of 1929 that led to the Great Depression.

Fast forwarding to today and across the pond, it’s worth noting that while the ECB is a pan-EZ institution, it lacks a legal mandate to do all that might be required of it, in fact it is legally constrained from doing some of what might be required, such as monetizing public debt.

Thus the lessons of U.S. history may well imply that the more the ECB is called upon to do the heavy lifting, the less durable it may prove: Is the ECB more like the Banks of the United States that came and went; or more like Fed? Does the absence of an EZ Alexander Hamilton or of EZ federal/supranational institutions other than ECB imply that the institutions are empowered or the ECB diminished? The answers are at best ambiguous and the comparisons offer no cause to draw comfort for EZ viability.