Wednesday, June 13, 2012

Hans-Werner Sinn is for Hanging Separately. Is Germany?

In a NY Times op-ed attempting to explain "Why Berlin is Balking on a Bailout" Hans-Werner Sinn writes:
Even a European nation, however, should not socialize debt, a lesson demonstrated by the United States in the 19th century. 

When Secretary of the Treasury Alexander Hamilton socialized the states’ war debt after the Revolutionary War, he raised the expectation of further debt socialization in the future, which induced the states to over-borrow. This resulted in political tensions in the early 19th century that severely threatened the stability of the young nation. 

Every American schoolkid learns that Ben Franklin said "we must all hang together or assuredly we shall all hang separately." The point is that the we succeeded by hanging together.  Sinn somehow manages to draw the opposite lesson.  Wow.

The more widely-held (until today, I would have said "universally") view is that Hamilton's plans - which faced a great deal of opposition at the time - helped establish the creditworthiness of the United States and provided a foundation for its financial and economic development. Bob Wright and David Cowen, in Financial Founding Fathers explain:
The positive effects of funding and assumption of the debt upon not only the country's credit standing but also its commerce were felt almost immediately. Writing from Hartford in 1791, Noah Webster, the "schoolmaster of America," boasted about the era of prosperity brought on by assumption. "The establishment of funds to maintain public credit," he noted, "has an amazing effect upon the face of business and the country." "Commerce," he continued, "revives and the country is full of provision. Manufactures are increasing to a great degree, and in the large towns vast improvements are making in pavements and buildings."

Moreover, Europe's capital markets magically opened to the United States. As early as March 1791, United States securities were selling from 1 to 40 percent above par in Europe. In November 1791, European-based broker John Fry assured Hamilton that American credit overseas was secure and that European funds would stabilize securities prices. "The American Funds," Fry claimed, "had inspired no Confidence in this market 'til they had acquired a high price at home & three months ago a sale of them must have been effected here with the greatest difficulty." "The Case is now so materially alter'd," he wrote, "that one friend of mine has bought & sold near a Million of Dollars." Fry noted that Europeans at that time had more money than local investment opportunities and were looking to employ their capital in the United States. In short, Americans were able to borrow money in Europe at between 3 and 6 percent and use it to fund projects that returned 10, 15, even 20 percent per year. 
That is, Hamilton's plan for the national debt mostly worked out pretty well and is a good example of something that was controversial at the time but vindicated by history.

I really hope Sinn's view isn't representative of German opinion.  If it is, we're in way more trouble than I realized.

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