Europe Plays the 1837 Game

The Greek financial crisis, which will be followed by similar events in Portugal, Ireland and Spain, has a lot of journalists wondering if this has ever happened before, and whether there are lessons to be learned.

It has. Here. And there are.

What Europe is playing is a version of a game we played, and lost, 173 years ago. In 1837.

I have written up the story several times. Many states tried to emulate what New York had done with the Erie Canal. They bet big on their own canals, which failed. When the states defaulted, the American government refused to step in. Andrew Jackson had just won his greatest victory, destroying the U.S. Bank, and he wasn't willing to step in.

The result was that America's trust was lost. Banker Charles Peabody, then working in London, found he could not sell American debts at any price. And the country remained essentially bankrupt until the California Gold Rush.  I would argue that the whole "Manifest Destiny" period of the 1840s, including the acquisition of Texas, the treaty that brought us the northwest, and the War with Mexico, were all based on Democrats' eagerness to find something — anything — to sell in order to get out from under.

It all ended well. The gold made America's debts good. Peabody became rich, took a partner, and went back home. After being trained in the business the partner's son also went back home, to New York, and opened a bank. He had been named for his grandfather, the preacher John Pierpont, by his father, Junius Morgan. He often went by his initials. J.P. Morgan.

Europe does not have that option. As with slavery in America, the present crisis was set in motion at the Euro Zone's birth. Countries like Greece were given the Euro but did not surrender the sovereignty needed for the Euro to succeed. No one in Europe had the power to prevent member nations from creating Euro-debt, and no one had the power to make them raise the money needed to pay the debts.

Could we be facing the same situation, with states like California, New Jersey, and Florida on the edge of default? No. Our authorities have the power to compel payment, and to back that debt. The political cost of exercising that power may be high, but the power does exist. We learned the lesson of 1837. We created a Federal Reserve System in 1913 to control our currency, and we created an income tax the same year to assure payments.

The biggest lie being told by Glenn Beck today is that "America never went broke before Progressivism." In fact it happened repeatedly. Without the power to defend a currency, and compel payments of debt created under that currency, you can't run a modern economy.

Europe won't like learning the lesson, but in the end their choice is simple. Economic control over the Eurozone must be centralized. Countries that won't hand over that control need to be let loose. The Greek bailout, when it comes, must draw that line in the sand.