23/06/2011 § Leave a comment
It’s not often that you have to worry about zombie currencies, but this week is one of those weeks. A little over a decade ago, everyone was dewy-eyed about the disappearance of the Drachma, Europe’s oldest currency. Today, everyone is terrified that it’ll come back
I find this crisis particularly interesting, because it echoes one of the most important, and easiest forgotten events in US history. All of which goes back to the question – who is it on the back of the $10 bill?
Alexander Hamilton is the spurned prophet of early American history. Setting aside the fact that he helped write the American constitution, he’s probably most famous for getting the right answer to a long list of political questions about 100 years before the rest of America. For example, he was firmly behind the creation of a central bank in America – and after another 125 years of argument America finally set up the Federal Reserve. He wanted to support the growth of industry rather than farming – eighty years and one civil war later America came round to agreeing with him.
By way of thank you, he was eventually shot and killed by the Vice President. Something Dick Cheney recently tried to bring back into fashion.
Despite all this, he was the man behind the most important deal in American political history. It was 1790 – less than a year since the new constitution had come into effect. George Washington was trying to design an entire government from the ground up, and for his Secretary of the Treasury he appointed the young Alexander Hamilton. Top economic problem at this time was a sovereign debt crisis.
America, having fought a war of independence almost entirely on credit, was flat broke. Not just nationally, but also state-by-state. Several constituent members were rapidly on their way to becoming economic basket cases, and federal debt was changing hands at 25 cents on the dollar.
Left unchecked, the United States would rapidly be divided – into those states that had a government and those that didn’t. Indeed, almost every other Latin American country in the years ahead would face the same problem, would default, and would see politics and economy stagnate. It’s not an exaggeration to say the future of the whole country was at stake.
Hamilton’s response was straight forward and direct. He didn’t horse around with bailout packages or emergency bridging loans; instead, he proposed to take the collective debts of all thirteen states and make them the responsibility of the federal government – known as assumption. Debts that Georgia couldn’t pay, the United States as a whole would. The financial system would be saved, as would the reputation of the US government.
As with everything Hamilton did, this plan caused predictable outrage. It didn’t help that most of the bonds had been bought up by speculators, betting that someone would eventually honour the devalued paper. Jefferson, Madison and the rest of the incipient Democratic party thought it deplorable to reward money men instead of the military veterans to whom the bonds were originally issued. And if those two reasons weren’t enough to make you apoplectic, you could still condemn it as an arrant grab for power by central government, cutting across the traditional responsibilities of the states.
Hamilton didn’t care that much for opposition. Since he knew he was right (and, as I say, he almost invariably was), and since no one else had a good answer to the question, he was perfectly willing to put his own future on the line. Not to mention that of the new-formed government.
This one time, he won his wager. Just as the federal assumption of debt was being debated, a separate argument was going on about the location of the proposed federal capital. In a deal worked out over dinner at Jefferson’s house, Hamilton agreed that the city of Washington would be built on the Potomac river – far further south than would otherwise be politically possible – and in return Jefferson and Madison agreed to let the debt plan pass.
Having won this round, Hamilton went on to set up the US customs service, found the First Bank of the United States and put the nation on a financial footing to start paying off some of those debts. But if he hadn’t managed federal assumption of the debt, all of this would have been in honour of a doomed country.
The lesson I take from this is that there is a virtue to insane bravery. Greece is up the spout, and the solutions that we are throwing around are devices for buying time. They might work, but whether or not they do is largely a matter of luck. If you really want to guarantee the future of the Euro, what you need is some supremely self-confident visionary to stand up and offer an unpalatably brilliant solution. Something that is feared and hated across Europe, but which truly solves the problem that we’ve got.
And whoever does that, I’m sure we can put them on a banknote.