Greece, Debt, Capital, And The Whiskey Rebellion

European finance ministers are meeting today to craft a solution to the Greek debt crisis.

The more I read about the so-called Greek sovereign debt crisis, the more I am convinced that the Eurozone as currently structured has been a vast mistake. Of course, the powers that be in Europe will never admit this. They will figure out a way to blame and punish the present victim (Greece) and possible future victims (Italy and Spain), and to avoid placing any significant burden on the real perpetrators, German banks. Well, not only German banks, but also French, Benelux and Finnish banks.

As for Greece, the beatings will continue until morale (or the economy) improves. The beatings themselves will make it impossible for the economy to improve.

How did Greece get in this pickle? Private capital movements over which Greece had no control, and which were the prime motivation for creating the Euro in the first place. In short, wealthy owners of capital in the heart of Europe wanted more freedom to invest in the periphery at higher interest rates.

The economist Kash Mansori has an excellent explanation of the process in a recent edition of The New Republic.

Some of the "blame Greece" rhetoric reminds me of accusations bandied about concerning balance of payments issues (current accounts) back when the world operated with fixed exchange rates. Under the Bretton Woods system established under the guidance of John Maynard Keynes at the end of World War II, persistent balance of payments imbalances were expected to be addressed by exchange rate adjustments by both the country in deficit and the country in surplus. That never happened. The country in surplus always blamed the country in deficit and the latter had to devalue its own currency. Surplus countries never adjusted.

When Greece joined the Eurozone, they adopted a currency with the most fixed exchange rate of all. No adjustments possible. Therefore, instead of simply devaluing their own currency, Greece must increase taxes (in a depressed economy) and reduce expenditures (including social benefits which are already below much of the rest of Europe).

What else can Greece do? Induce a greater recession than the rest of Europe. Drive down wages and prices which, by the way, depresses government revenue and worsens the deficit. The Greek economy just isn't big enough to accomplish all that by growth.

What does this have to do with the Whiskey Rebellion?

In 1790, the newly-established US Congress agreed to consolidate federal and state debts, principally for revolutionary war expenses. Anticipating this, wealthy Eastern capitalists bought up largely valueless state revolutionary war bonds at pennies on the dollar (or pence to the pound as the case may be). The 1790 agreement, which made sense from the standpoint of establishing the "full faith and credit" of the United States, resulted in a windfall for the speculators who had bought state bonds. But how to repay the debt?

Alexander Hamilton pushed a whiskey tax. It passed the Congress in 1791 and ran into immediate opposition.

The problem? The tax burden fell most heavily on small western yeoman farmers beyond the Appalachians, many of whom paid debts in whiskey, due to a regional shortage of money. Collecting the tax would contract an already marginal regional economy. There were uprisings in the west, mainly in Pennsylvania, but also in Maryland, Virginia and North Carolina. President Washington led forces against the rebels, the rebellion was put down, and federal authority established.

Many westerners continued to evade the tax, and it was repealed after Thomas Jefferson became president.

At this remove, it seems fair to see the tax as a measure to redistribute wealth from the poor to the wealthy.

Were there other commodities Hamilton could have taxed? Tobacco comes immediately to mind. But he would have to have dealt with wealthy and powerful tobacco interests instead of corn farmers.

Power to the powerful - wealth to the wealthy!