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A Confederacy of Dunces?

Courtesy of Doug Short.

On January 9th, 1790, Secretary of the Treasury Alexander Hamilton issued his Report on Public Credit in response to a request by the House of Representatives. The report, though overlooked, belongs in the canon of American historical documents along with the Declaration of Independence, the Constitution and the Federalist Papers among others. In it Hamilton argued the newly formed Federal government should assume the war debts incurred by the thirteen colonies during the Revolutionary War.


 

At the time, the credit of the U.S. government was in disrepute. Although the newly formed government (or, its predecessor under the Articles of Confederation) had not repudiated its war time debts, it was in arrears on both interest and principal. Furthermore, in the intervening period between the Treaty of Paris (1783) and the Constitution’s ratification (1788) several states had adopted differing policies to the war debts they incurred. Some such as Georgia had made it a priority to settle its accounts; while others such as South Carolina delayed repayment.

The brilliance of Hamilton?s plan was to recognize that no matter how scrupulous the new Federal government might be in paying its debts, the reputation of the United States would be tarnished by the reluctance or inability of individual states to pay their war loans. Naturally there was discord between states such as Georgia that would gain little by Hamilton?s proposal and other states like Massachusetts which would be relieved of their debt burden.

In the end, Congress voted to adopt the Hamilton plan. Within a short space of time the credit of the United States was redeemed. Debt which formerly traded at a deep discount appreciated sharply.

Today European leaders are faced with a similar dilemma. All realize certain member states of the European Monetary Union have borrowed way more than they can ever hope to repay. Certain nations, most notably Germany but also the Netherlands, Finland and Austria, hesitate to bail out their profligate neighbors to the south.

Their objections rest upon the argument of sovereignty. Without suitable restraints, there is little to stop the likes of a Greece from indulging in another borrowing spree. Many commentators scoff at this argument urging a consolidation of the debt of the seventeen nations which have adopted the Euro as their currency. We concur in the long run this argument makes sense.

But we accept without a transfer of powers to a pan-European government, currently retained by member states, this proposal is unworkable. Many market commentators view the European Union as a confederation of dunces. With the obvious solution before them they grasp at half measures. Our view is more charitable: they are grappling with sovereignty issues which required years to negotiate. Only when a stronger central government was formed could we resolve this issue. If the American experience is any guide, Europe?s leaders will eventually acknowledge they must join or die.



Notes:

Data was obtained from a number of historical publications.

Revolutionary War debt amounts ? both at the state and national level ? which were consolidated under the Hamilton Plan came from the Treasury Department?s 1881 publication, The National Loans of The United States From July 4, 1776 to June 30, 1880, by Rafael A. Bayley.

Selected U.S. national debt prices were excerpted from three databases of early U.S. security prices created by Sylla, Wilson and Wright available on eh.net. Prices for three securities reflect quotes published in newspapers circulating in Boston, New York and Philadelphia. The series are composites of prices from the three respective databases. The series are meant only to be indicative of the trend in prices for U.S. national debt in the period before and after the adoption of the Hamilton Plan.

(Sources: Cornell University Library; eh.net; AIFS estimates.)



About American Independence Financial Services, LLC

American Independence Financial Services, LLC (“AIFS”) is the investment adviser and administrator for the American Independence Funds and the NestEgg Target Date Funds. The firm is a limited liability company founded in 2004.

Important Disclosures

(c) 2011, American Independence Financial Services (AIFS). All rights reserved. Redistribution and quotation permitted with attribution to the author and source.

The views expressed in this document are based on political, market, economic and other conditions subject to change at any time. Data are acquired from sources believed to be reliable. But no warranties are made to the accuracy, completeness or timeliness of the data and information presented. Opinions expressed are those of the author unless indicated to the contrary. Nothing in this document should be construed or taken as financial or investment advice. Please consult with your financial advisor to discuss how the subject of this research report may impact your unique, individual circumstances.

Certain indices, yields, exchange rates and other market and economic statistics may be quoted or mentioned in this report. You can not invest directly in an index; nor can you obtain many of the other yields or rates quoted. Please bear in mind such indices and other statistics do not include many of the expenses associated with investing in securities including (but not limited to) trading costs, custodial fees and management fees. All index results cited in this document reflect returns including the impact of re-invested dividend or interest payments expressed in US Dollar terms unless noted to the contrary.

Investors should understand and consider these and other risks they may face by investing in the Funds. These risks are discussed more fully in the Funds’ prospectus. Investors are encouraged to read the prospectus.

For more complete information on the American Independence Funds, you can obtain a prospectus containing complete information for the funds by calling 1-866-410-2006, or by visiting www.aifunds.com. Please read the prospectus carefully before investing. You should consider the fund’s investment objectives, risks, charges and expenses carefully before you invest or send money. Information about these and other important subjects is in the Funds’ prospectus.

Income taxes may be due on all or a portion of the interest, dividends or capital gains received or realized through an investment in a mutual fund. Please consult with your tax advisor to discuss how different investments may affect your tax liability.

Shares of the American Independence Funds are distributed by Matrix Capital Group, Inc., which is not affiliated with American Independence Financial Services, LLC.

Not FDIC Insured – May Lose Value – No Bank Guarantee

 

 

 

 


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