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What If Alexander Hamilton Had Been Argentinean? a Comparison of the Early Monetary Experiences of Argentina and the United States

56 Pages Posted: 10 Jun 2000 Last revised: 7 Oct 2021

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Carlos A. Vegh

University of Maryland - Department of Economics; Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); University of California at Los Angeles; National Bureau of Economic Research (NBER)

There are 2 versions of this paper

Date Written: December 1998

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.

Suggested Citation:

Bordo, Michael D. and Vegh, Carlos A. and Vegh, Carlos A., What If Alexander Hamilton Had Been Argentinean? a Comparison of the Early Monetary Experiences of Argentina and the United States (December 1998). Available at SSRN: https://ssrn.com/abstract=227624
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