What if Alexander Hamilton had been Argentinean? A comparison of the early monetary experiences of Argentina and the United States

This paper contrasts the divergent nineteenth-century inflation experiences of Argentina and the United States and argues the divergence reflects not differing policy competence but the different fiscal constraints each country faced in financing wartime spending. Argentina fought a near-continuous sequence of wars (the wars of independence, 1810-1821; the war with Brazil, 1825-1828; the French blockade, 1838-1840; the Anglo-French blockade, 1845-1847) against a backdrop of permanent civil war, and its treasury depended overwhelmingly on trade taxes that collapsed whenever a wartime naval blockade cut off customs revenue; having defaulted on its 1824 London loan in 1827, it also faced increasingly costly access to foreign capital, and its long-term bond-funding operations of 1821, 1829, and 1833 all failed. The United States fought three separated wars (Independence, 1812, the Civil War) punctuated by long peacetime intervals, and after the Revolutionary War’s severe continental-currency inflation, Alexander Hamilton’s 1790 fiscal package – funding the national debt, a sinking fund, secured tax revenue, and the First Bank of the United States – built the institutional capacity to bond-finance most subsequent wartime expenditure and retire debt in peacetime. To interpret this contrast, Bordo and Végh build a dynamic, open-economy public-finance model in the Phelps/Lucas-Stokey optimal-taxation tradition, in which a government facing collection costs on conventional taxes and, potentially, a risk premium on foreign borrowing optimally supplements a consumption tax with an inflation tax. The model shows that when collection costs or borrowing costs rise specifically during wartime, it becomes optimal to raise the inflation tax during wars and let it fall in peacetime; Argentina’s chronic reliance on inflation is attributed to a combination of wartime-elevated collection costs and an increasing risk premium on foreign debt after 1827, while the United States’ pattern – wartime inflation offset by peacetime deflation, averaging to price stability from 1774 to 1900 – is read as consistent with unanticipated inflation financing only the unanticipated component of temporary wartime spending, with no persistent reliance on the inflation tax. The authors conclude that Argentina’s inflationary path was an optimal response to constraints it did not control, not evidence that Alexander Hamilton’s example could simply have been replicated there.

Carlos A. Végh | Macro Paper Warehouse

What if Alexander Hamilton had been Argentinean? A comparison of the early monetary experiences of Argentina and the United States