By Mark Roe

The West is ensnared in a debt crisis. The United States, as everyone knows, came perilously close to defaulting on August 2, and Standard & Poor’s downgraded US debt from AAA on August 5. In Europe, the outgoing head of the European Central Bank recommends more centralized fiscal authority in Europe in order to deal with likely defaults by one or more of Greece, Portugal, and Spain.

Both Europe and America can learn a lesson hidden in American history, for, lost in the haze of patriotic veneration of America’s founders is the fact that they created a new country during – and largely because of – a crippling debt crisis. Today’s crises, one hopes, could be turned into a similar moment of political creativity.

After independence from Britain in 1783, America’s states refused to repay their Revolutionary War debts. Some were unable; others were unwilling. The country as a whole operated as a loose confederation that, like the European Union today, lacked taxing and other authority. It could not solve its financial problems, and eventually those problems – largely recurring defaults – catalyzed the 1787 Philadelphia convention to create a new United States.

And then, in 1790-1791, Alexander Hamilton, America’s first treasury secretary, resolved the crisis in one of history’s nation-building successes. Hamilton turned America’s financial wreckage of the 1780’s into prosperity and political coherence in the 1790’s.

To understand Hamilton’s achievement – and thus to appreciate its significance for our own times – we need to understand the scale of the Revolutionary War debt crisis. Some states lacked the resources to pay. Others tried to pay but would not levy the taxes needed to do so. Others, like Massachusetts, tried to levy taxes, but its citizens refused to pay them.

Indeed, some tax collectors were met with violence. Indebted farmers physically disabled the repayment machinery in many states, most famously in Shay’s Rebellion in Massachusetts. Read more…

Mark Roe is a professor at Harvard Law School.

As published in Project Syndicate on August 8, 2011.

Copyright: Project Syndicate, 2011.


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