February 8, 2012

BLESSED TAXES:

Why the Early U.S. Didn't Go the Way of the Euro (

The early nation was so fractured that the U.S. Armed Forces relied heavily on state militias until after the War of 1812. So what kept the new nation together?

First-rate economic statesmanship, not a shared unit of account. In the early 1790s, Treasury Secretary Alexander Hamilton defined the dollar in terms of gold and silver, but more significantly he established the taxes and institutions (collection system, central bank) that made it possible for the national government to service its own debts and those of the states. Assumption of state debts, as it was called, was positioned not as a bailout but rather as a way of ensuring that each state shouldered the burden of the Revolutionary War equally. Just as importantly, assumption made bondholders beholden to the national government, cementing the union together as Hamilton predicted it would.

The U.S. Constitution effectively prevented state governments from endangering the monetary union by prohibiting them from issuing money or making anything other than gold or silver a legal tender. The Constitution didn't enjoin the states from incurring debt but -- with the exception of assuming war burdens -- the early national government refused all responsibility for state debts. [...]

By leaving state debts to the states, the national government protected itself, the dollar union and the residents of fiscally sound states from the depredations of profligate or rapacious ones (like Rhode Island, which was so willing to benefit at the expense of other states that it was referred to as Rogue Island). What kept the tender young republic together during its formative decades, then, was not a shared unit of account called the dollar but a shared sense of fairness. Debts incurred in the defense of all were shared by all. Debts undertaken to build a state canal or to thwart federal law were not.
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Posted by at February 8, 2012 6:21 AM
  

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