Time for an Alexander Hamilton moment?

from Anne Mayhew

Perhaps what the technocrats of Europe need is an “Alexander Hamilton moment,” in which they reflect upon the proposals that Hamilton made when the newly formed United States was faced with massive debts left from the revolutionary war.  The debts were those of the Continental Congress and of the states and Hamilton boldly proposed that the financially strapped new nation “refund” all of these debts, which had greatly depreciated in exchange value, and that they be refunded at full face value. 

When the Revolution began, there was a fairly long (though uneven) history of successful use of paper money issued by the colonial governments and a continuing shortage of specie and of claims on specie through London or elsewhere.  It made sense to continue the practice of using bills of credit and that is what the Continental Congress and the various colonies did.  But the demands on government finance expanded greatly with the war and the Continental Congress could not tax directly but had to depend on the colonies/states, whose taxing powers were also not up to the task at hand.  The value of the issues depreciated during the War and even more so after fighting ended as doubts about their repayment mounted.

By war’s end, there was a lot of worthless paper as well as a shortage of ways to complete commercial transactions, which is to say, a shortage of ready money.  Hamilton saw a way to solve both problems and to give legitimacy to the new central government as well.  He proposed refunding the national debt by reissuing paper at the full face value of the now much depreciated Continental Congress paper and of the state debts as well.  Both steps were controversial.  It was generally agreed that paper issued to French and Dutch lenders should be repaid but domestically speculators (some close to Hamilton) had bought up “continentals” for small fractions of the face value and some states had large debts while others owed little.  With a lot of compromise (particularly with Jefferson and Madison over the location of the new capitol on the swampy shores of the Potomac River), Hamilton prevailed and the full debt was refunded.

Hamilton pushed so hard for his refunding proposal because the new nation needed liquidity so badly and as he put it “a well-funded debt will pass current as specie.”  But he also pushed for refunding the largest debt possible, which is to say both state and Continental Congress debt, because by repaying this debt in full, those with money and other assets would develop trust in and loyalty to the new government.  Of course, this trust and loyalty would only follow if the debt was serviced in a timely manner and this was accomplished and the debt essentially paid off within a few decades.  Both foreign and domestic investors found the U.S. government to be a trustworthy borrower and, shall we say, the rest is history.

All of this happened a long time ago.   And, if Eurobonds were to be used to “refund” current European national debts, the government of the now much older USA would probably not be able to borrow at such favorable rates.   But, putting aside those objections aside, it might be worthwhile for the EU to consider having a “Hamilton moment.”