PRINCETON – Europe’s debt crisis has piqued Europeans’ interest in American precedents for federal finance. For many, Alexander Hamilton has become a contemporary hero. Perhaps one day his face should appear on the €10 banknote.
Specifically, for European states groaning under unbearable debt burdens, Hamilton’s negotiation in 1790 of the new federal government’s assumption of the states’ large debts looks like a tempting model. Indeed, after Thomas Sargent won the Nobel Prize in Economics last year, he cited it as a precedent in his acceptance speech.
Hamilton argued – against James Madison and Thomas Jefferson – that the debts accumulated by the states during the War of Independence should be assumed by the federation. There were two sides to his case, one practical, the other philosophical.
Initially, the most appealing argument for his plan was that it would provide greater security to creditors, and thus reduce interest rates, from the 6% at which the states financed their debt to 4%. Hamilton emphasized the importance of a commitment to sound finance as a prerequisite to public economy. “When the credit of a country is in any degree questionable,” he argued, “it never fails to give an extravagant premium upon all the loans it has occasion to make.”