THE WEEKLY SCREED (#590)

Europe 2012: 
Alexander Hamilton's worst nightmare
by David Benjamin

PARIS — The big surprise I’ve experienced here and on a visit to Portugal have been comments from several Europeans that the current economic dilemmas in Europe and America are essentially parallel, two sides of the same devalued coin.

This perception would only be accurate if the worst economic performers in the U.S.A. were almost single-statedly dragging the whole American economy into the toilet — if, for instance, poor, pitiful Mississippi was affecting America the way Greece is crippling Europe, or bankrupt California was behaving like Spain, or Florida like Italy.

But that’s not happening. In fact, notwithstanding the magnitude and duration of the Great Recession, there are mechanisms that have evolved over two centuries of American union that render the U.S. crisis less profound than the European Union’s current mess. As Europe’s fiasco has unfolded, I’ve been privately drawing comparisons to an old yellow Yankee document: The Articles of Confederation and Perpetual Union Between the States, ratified by delegates of the Original Thirteen on 1 March 1781.

The Articles of Confederation lasted officially eight years, but were clearly inadequate to the chore of regulating commerce, currency, banking, taxation and other fiscal functions among 13 diverse states covering 20 degrees of latitude and reaching greedily west to absorb an entire continent. The Articles’ swift collapse derived from an inability to compel states to trade fairly among one another, to enforce a common currency and, worst of all, to collect the money needed to pay debts incurred collectively by all the states. Some states were grownup and thrifty; some were outright deadbeats, deriving the blessings of economic liberty but contributing little to the common kitty.

Such problems were predictable, even inevitable, and perhaps insoluble. Nowhere on earth had even as many as three or four contiguous, but wildly disparate states ever attempted an economic compact requiring the level of trust, comity and steadfastness required to turn the American Revolution into a going concern.

The U.S. Constitution replaced the Articles of Confederation in 1789. Herein lies the difference between the U.S. and the E.U. The European Union is still trying to make its own Articles of Confederation work.

Among measures that accompanied the U.S. Constitution was the creation of a national Treasury that shared common revenues and debts among member states of the Union. The first Secretary of the Treasury was Alexander Hamilton, who said he wanted a national bank — an idea virulently opposed by the same states-rights advocates who fought then to preserve slavery and who argue today for the abolition of the Federal Reserve and a return to the gold standard. But Hamilton won his fight. He was present for the founding the First Bank of the United States in 1791.

That bank’s charter expired in 1811. The Second Bank of the U.S., which was again opposed passionately by the states-rights crew, finally got going in 1816. But when its charter expired in 1836, America’s national bank — and the broad security it provided to a shaky pioneer economy — ceased to exist for 77 years. For most of that time, America depended on the fiscal ethics of railroad tycoons. Not coincidentally, the United States suffered a cycle of financial panics on a roughly 20-year cycle (in which, like Europe today, weak states dragged down more prosperous states).

Gradually, U.S. leaders re-learned Hamilton’s lesson: that only a more centralized, system could manage the disparities in wealth and poverty, prosperity and debt among states now stretching across 75 degrees of longitude. The solution began in 1913 with a brand-new national bank, the Federal Reserve, accompanied by the passage of the 18th Amendment, establishing a progressive federal income tax.

The Great Depression triggered a fresh series of federal reforms that further stabilized the economic union. In 1933, the Glass-Steagall Act and the charter of the Federal Deposit Insurance Corporation restored public trust to a corrupt and discredited banking system. The founding of the FSLIC did the same for the savings and loan industry. In 1933, the gold standard died quietly. The Fed became the sole guarantor for the greenback dollar, which became the world’s default currency.

Also helping to secure economic union was the invention and issuing of four different types of U.S. Treasury bonds. I can only imagine the uproar among “fiscal conservatives” in 1929 against establishing an essentially permanent system for incurring national debt. Since then, however, “Treasuries” have reigned as the world’s most stable, desirable and reliable securities. The flow of money in and out of the U.S. economy, via Treasuries, is one of the great engines of both the U.S. and global economies.

From 1933 ‘til the 1980’s, when Congress needlessly began dismantling regulations on S&L’s, on insurance companies, on banks and Wall Street traders, the U.S. went fifty years without a “panic.” Our winning streak ended with the S&L scandal in the ‘80’s and then things got even worse, not very long after Congress gutted Glass-Steagall in 1999.

The E.U.’s articles of confederation today lack most of the fixes that emerged in the American economic union between Alexander Hamilton and FDR. Europe has a central bank, but it wields few of the wide-ranging and unifying powers of the Federal Reserve. The E.U. cannot issue bonds, nor has it the power to divvy up debt and revenue among its states on a relatively equitable basis. The euro, the “common currency” of Europe, is only common among 17 of 27 members and isn’t legal tender in several fairly crucial European states, including Sweden, Poland and the United Kingdom.

The U.S. and E.U. have grown economically closer in one respect. They’ve stood idle — or actually collaborated — while banks became casinos, while all of Wall Street got “too big to fail, while deposit insurance turned into a system of taxpayer extortion.

God only knows if the alleged leaders of either great economic union has the will to drive the plutocrats back into their villas and re-ordain the “general welfare” to people who actually work for a living. But if they ever resolve to establish some measure of economic justice, they must begin with Alexander Hamilton’s sweeping vision; and they must restore, with all due penitence, the common-sense discipline of the New Deal.