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

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  • Bordo, Michael D.
  • Vegh, Carlos A.

Abstract

The contrast between the early nineteenth century Argentinean experience of high inflation and the American experience of low inflation is interpreted in terms of a dynamic monetary model of optimal taxation. It is argued that the two countries' experiences diverged because of the different constraints they faced in financing wartime government expenditures. In the presence of frequent wars, ever-tightening access to foreign capital, and an inadequate tax base, Argentina's use of the inflation tax may be viewed as an optimal solution to its wartime problems. By contrast, with the exception of the Revolutionary War, the absence of such constraints in the United States required full-tax smoothing, with only a temporary use of the inflation tax during wartime. Such policies were embodied in Alexander Hamilton's fiscal package of 1790, which allowed the United States to bond-finance most subsequent wartime expenditures.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 49 (2002)
Issue (Month): 3 (April)
Pages: 459-494

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Handle: RePEc:eee:moneco:v:49:y:2002:i:3:p:459-494

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  2. Auernheimer, Leonardo, 1974. "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 598-606, May/June.
  3. Calomiris, Charles W., 1988. "Institutional Failure, Monetary Scarcity, and the Depreciation of the Continental," The Journal of Economic History, Cambridge University Press, vol. 48(01), pages 47-68, March.
  4. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Gerardo della Paolera & Alan M. Taylor, 1997. "Finance and Development in an Emerging Market: Argentina and the Interwar Period," NBER Working Papers 6236, National Bureau of Economic Research, Inc.
  6. Gerardo della Paolera & Alan M. Taylor, 2000. "Economic Recovery from the Argentine Great Depression: Institutions, Expectations, and the Change of Macroeconomic Regime," NBER Working Papers 6767, National Bureau of Economic Research, Inc.
  7. Barro, Robert J, 1986. " U.S. Deficits since World War I," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(1), pages 195-22.
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  9. Carlos A. Végh, 1989. "Government Spending and Inflationary Finance: A Public Finance Approach," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 657-677, September.
  10. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November.
  11. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc.
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Cited by:
  1. Huberto M. Ennis, 2006. "The problem of small change in early Argentina," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 93-111.
  2. Benjamin Eden, 2007. "The Friedman Rule in an Overlapping Generations Model: Social Security in Reverse," Vanderbilt University Department of Economics Working Papers 0717, Vanderbilt University Department of Economics.
  3. della Paolera, Gerardo & Taylor, Alan M., 2013. "Sovereign debt in Latin America, 1820-1913," Revista de Historia Económica, Cambridge University Press, vol. 31(02), pages 173-217, September.
  4. Huberto M. Ennis, 2003. "Shortages of small change in early Argentina," Working Paper 03-12, Federal Reserve Bank of Richmond.
  5. Bordo, Michael D., 2012. "Could the United States have had a better central bank? An historical counterfactual speculation," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 597-607.
  6. Joshua Aizenman, 2013. "The Eurozone Crisis: Muddling through on the Way to a More Perfect Euro Union?," Social Sciences, MDPI, Open Access Journal, vol. 2(4), pages 221-233, October.
  7. Osvaldo Meloni & Ana María Cerro, 2005. "Crises & Crashes: Argentina 1885 – 2003," Economic History 0505001, EconWPA.
  8. Rockoff, Hugh & White, Eugene N., 2012. "Monetary Regimes and Policy on a Global Scale: The Oeuvre of Michael D. Bordo," MPRA Paper 49672, University Library of Munich, Germany, revised May 2013.
  9. Matias Vernengo, 2005. "Economics Ideas and Institutions in Historical Perspective: Cairú and Hamilton on Trade and Finance," Working Paper Series, Department of Economics, University of Utah 2005_08, University of Utah, Department of Economics.
  10. Lazaretou, Sophia, 2005. "The drachma, foreign creditors, and the international monetary system: tales of a currency during the 19th and the early 20th centuries," Explorations in Economic History, Elsevier, vol. 42(2), pages 202-236, April.
  11. Noel Maurer & Andrei Gomberg, 2004. "When the State is Untrustworthy: Public Finance and Private Banking in Porfirian Mexico," Working Papers 0402, Centro de Investigacion Economica, ITAM.
  12. Rauchway, Eric, 2006. "The Role of Federalism in Developing the US during Nineteenth-century Globalization," Working Paper Series RP2006/72, World Institute for Development Economic Research (UNU-WIDER).
  13. Meissner, Christopher M., 2005. "A new world order: explaining the international diffusion of the gold standard, 1870-1913," Journal of International Economics, Elsevier, vol. 66(2), pages 385-406, July.
  14. Sophia Lazaretou, 2004. "The Drachma, Foreign Creditors and the International Monetary System: Tales of a Currency during the 19th and the Early 20th Century," Working Papers 16, Bank of Greece.
  15. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.

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