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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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Michael D. Bordo
Carlos A. Vegh

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6862.

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Date of creation: Dec 1998
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Handle: RePEc:nbr:nberwo:6862

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Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
N16 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - Latin America; Caribbean

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  1. Rauchway, Eric, 2006. "The Role of Federalism in Developing the US during Nineteenth-century Globalization," Working Papers RP2006/72, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  2. Huberto M. Ennis, 2006. "The problem of small change in early Argentina," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 93-111. [Downloadable!]
  3. 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. [Downloadable!]
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  4. Benjamin Eden, 2007. "The Friedman Rule in an Overlapping Generations Model: Social Security in Reverse," Working Papers 0717, Department of Economics, Vanderbilt University. [Downloadable!]
  5. Huberto M. Ennis, 2003. "Shortages of small change in early Argentina," Working Paper 03-12, Federal Reserve Bank of Richmond. [Downloadable!]
  6. 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. [Downloadable!]
  7. Osvaldo Meloni & Ana María Cerro, 2005. "Crises & Crashes: Argentina 1885 – 2003," Economic History 0505001, EconWPA. [Downloadable!]
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