Now and again, sifting through those puffed up self aggrandizing and overly complicated articles (aka messages of doom/rants) written by ‘celebrated’ economists, you find a few golden nuggets that are both enjoyable to read and useful. Robert E Wright (Bloomberg) recently penned such a shining example – ‘Why the Early US Didn’t Go the Way of the Euro: Echoes.’
Obviously its quite timely, although equally obviously, its subject matter is anything but obvious (if you follow me). In the original PIIGSty publication on the euro, I made a few comparisons between the US and the European ‘federation’ experience – mainly that, the Americans nailed down their political unity quite early, allowing a standardised economic federation to follow quite early in the genesis of their union wherein most subsequent US states (ignoring the Civil War, of course) have done so with their feet firmly planted on this solid foundation. In effect, political union predated full, accepted economic federalism. For Europe, it’s far more complicated although not all that different (at least at one point in history)– except for the fact that the EU is trying to achieve a similar outcome by working in reverse.
Wright adds historical substance to this argument. Below are his findings:
Similarities between the 18th Century US and today’s EU
- Citizens saw themselves as state citizens first and ‘federal’ citizens second
- Flow of human capital was open but movements limited due to cultural (ethnic and linguistic) differences
- Flow of financial capital across state lines limited (local and state banks)
What did the US do?
- Economic statesmanship was provided by Treasury Secretary Alexander Hamilton (late 1790s). He established the gold/silver standard dollar, federal tax system and the US Federal Reserve (Central Bank).
- ‘Assumption of state debt’ was proposed which allowed the US federal government to issue debt (bonds) as a federal whole which superseded state bonds, providing a mechanism for the feds to control the whole bond system and also, alleviate state debt (which indebted nations could not resist). This effectively mean that the federal Treasury would pay all state debts, financed by a 4% interest US gov bond. This action bound bondholders, no longer to the states but to the federal US as whole.
- The action also bound states to the federal government. In exchange, states lost their control over money (couldn’t set interest rates, exchange rates) and their control over their fiscal policy was diluted.
- The US government refused to ‘pay’ state debts (i.e. bailout states), enshrined in Constitution after Civil War (Post-1865) in 14th Amendment
Adding meat to this argument is another recent article (there have been many in recent months) by C. Randall Henning and Martin Kessler.