ABSTRACT
In the autumn of 2009, the global financial crisis mutated in Europe into sovereign debt crises in several countries of the euro area. Financial market participants were desperately seeking access to liquidity and safe assets. Credit risk became a relevant consideration for hitherto considered safe sovereign debt. The prospect breakdown of the euro area was a present threat for investors and populations. The situation started stabilizing only after political commitment to deeper integration was achieved in the European Council of June 2012. That was followed by the announcement of the Outright Monetary Transactions Program by the ECB in September 2012. One year after, in the summer of 2013, euro area fragmentation
appeared to no longer be a relevant consideration in the financial calculations of international investors. The history of financial politics in the early stages of US history can
provide insights into what can be done to build a robust and resilient European financial system and to establish the credibility of sovereign debt as safe assets. The US federal government has never defaulted on its debt and the US is a well-integrated monetary union of continental dimension. Alexander Hamilton was the first secretary of the US Treasury, from 1789 to 1795. He managed successfully the transition from a bankrupt federal government to a situation where the US Treasury became the issuer of the ultimate safe asset. In the process, Alexander Hamilton laid the foundations for a modern financial system able to finance innovation and growth. Alexander Hamilton appears as a rare combination of theoretical and
practical reason; strategic and tactical thinking; and of audacity and realism. Building a Continental financial system in the aftermath of sovereign debt crises in the euro area is a priority in Europe. The aim of this article was to find out whether we can learn Hamilton’s recipe for building a continental financial system in Europe. The comparison of the challenges of Europe today and the early US is
the theme of Thomas Sargent Nobel Lecture (Sargent 2013) that provided the inspiration for this article. Sargent draws on the general lessons from US financial history, focusing on two episodes: the origin of the US fiscal constitution in the late 1780s and the state debt crisis of the 1840s. James (2015) and Kincaid (2014) also interpret a much longer period of US financial history. This article instead concentrates on a very specific period from late 1789 to early 1795 and looks at broader dimensions of finance. By concentrating on a briefer period, it is possible to examine in more detail how it was done. The paper closest to this one in scope is Sylla (2014). The Hamilton moment illustrates the very strong threefold cord consti-
tuted by politics, fiscal policy, and financial activities. As emphasized by Sargent (2013), it took a political transformation to make it possible to ground public finances on solid fundamentals. More generally, it is important to realize that changing policy outcomes systematically requires changing the rules and incentives of politics. For Europe, a crucial question is: How can we (Europeans) design institutions in Europe so as to align political incentives with macroeconomic stability and financial integration? The experience of the first US Secretary of the Treasury offers some inspiration. Alexander Hamilton himself poses and answers some fundamental
questions:
• Why is it important to honor public credit? Why not repudiate debt?
