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Virginia and Germany

Dec 1, 2010 • Demand, Supply, and Markets, Economic Debates, Financial Markets, Government, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy • 129 Views    No Comments

“Where…is the justice of compelling a State which has taxed her citizens for the sinking of her debt, to pay…the debts of other states, which have made no exertions whatever?”

This quote, from John Steele Gordon’s, Hamilton’s Blessing (p. 29) reflects the debate between James Madison and Alexander Hamilton about whether the newly formed U.S. federal government should assume all of the states’ Revolutionary War debts. Virginia, having paid back most of her debt said no while Massachusetts, a debtor state, disagreed.

Caring little about individual states, Alexander Hamilton sought to create a strong central government. He cared more about the “whole” than the “parts.”

Now, more than 200 years later, euro zone countries are having a similar debate. How should the economically stronger nations respond to those that are weaker? A NY Times article explained the three part split: 1) The stronger nations include Germany and Austria. 2) Heavily indebted, Ireland and Greece are among the weakest. 3) France and Italy represent the third group that did not decline very much from the recession but now is minimally rebounding. 

The Economic Lesson

As wonderfully described by Professor Timothy Taylor in Lecture 6 of American and the New Global Economy, there is a fundamental tension between the whole and its parts in the structure of the European Central Bank (ECB). Responsible for overseeing monetary policy, the ECB board is dominated by the central bankers of the countries that compose the euro zone.

By contrast, the board of the U.S. Federal Reserve is numerically dominated by members nominated by the President and approved by the Senate. They have more loyalty to the “whole” than to any of its parts.

 

 

 

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