An American History Lesson for Europe

In 1789, the political price for our federal constitution included a bailout of the 13 indebted states. But it was by refusing to bail out the states a second time in the 1840s that the United States preserved its federal system, with substantial fiscal independence for state governments. Facing a similar moment, Europe might learn from our experience.

The 1789 bailout was part of a grand bargain designed by Alexander Hamilton to convert the creditors of the 13 states into advocates of a stronger federal government—one having the ability to raise all revenues required to service the large debts that the Continental Congress and the 13 states had both accumulated to finance that "Glorious Cause," our war of independence.

Hamilton and George Washington wanted those debts to be paid. They had to engineer institutional changes to achieve that goal. Under our first constitution, the Articles of Confederation, the continental government had virtually no power to tax. For revenues it depended on voluntary contributions from the 13 states.

Read More at The Wall Street Journal