Thomas Sargent gives an interesting perspective in An American History Lesson for Europe, in the Wall Street Journal 2/3/12.

Excerpt:

To finance canals and railroads, many state governments incurred large debts in the 1820s and 1830s. A financial crisis in the late 1830s pushed many of those state debts into default.

Appealing to the precedent set by the 1789 bailout, state creditors asked the federal government to bail out the states once again. After an enlightening debate, in the early 1840s Congress declined, so many states repudiated their debts.

In the aftermath of those repudiations, many states rewrote their constitutions to require year-by-year balanced budgets, something they had never done before. As noted, fiscal crises, like the one in Europe today, often produce political rearrangements—at best peaceful ones like these.

Did the federal government do the right thing in refusing to bail out the states in the early 1840s? By doing so, the federal government reset its reputation vis-a-vis the states, telling them in effect not to expect it to underwrite their profligacy. In the short run, that cost the federal government substantially in terms of its reputation with its own creditors. Federal credit abroad suffered along with state credit. But in the long run, the decision exposed state governments to continuing market discipline, making future crises and requests for federal bailouts less likely.

If the federal government had chosen to bail out the states a second time, it probably would have taken greater control over state taxes and revenues in order to prevent yet another bailout situation. Refusal to bail out the states was thus a pivot point in sustaining a federal system in the United States. It led the states to discipline themselves by rearranging their constitutions in ways designed to allow them to retain freedom and responsibility for taxing and spending within their borders.

HKO Comments:

Part of the bargain to ratify the constitution was for the federal government to assume the debts of the states, largely incurred to win the war.  But under careful consideration the Congress did not let that become a precedent.  They looked beyond the immediate crisis, and its very real costs,  and felt this position was in the long term best interest of the nation.

While Sargent wrote this as a lesson to Europe, it is also a lesson to us to look beyond short term problems. It has been our unwillingness to face short term pain that has led to solutions that only magnify the problem later on.

Thomas Sowell writes Best Way to Aid Economy? Just Do Nothing in the Investors Business Daily, 9/14/11.

Excerpts:

The grand myth that’s been taught to whole generations is that the government is “forced” to intervene when there is a downturn that leaves millions of people suffering. The classic example is the Great Depression of the 1930s. What most people are unaware of is there was no Great Depression until after politicians started meddling in the economy.

There was a stock market crash in October 1929 and unemployment shot up to 9% — for one month. Then unemployment started drifting back down until it was 6.3% in June 1930, when the first major federal intervention took place. That was the Smoot-Hawley tariff bill, which more than a thousand economists across the country pleaded with Congress and President Hoover not to enact.

But then, as now, politicians decided they had to “do something.” Within 6 months, unemployment hit double digits. Then, as now, when “doing something” made things worse, many felt the answer was to do something more.

Both President Hoover and President Roosevelt did more—and more, and more. Unemployment remained in double digits for the entire remainder of the decade. Indeed, unemployment topped 20% and remained there for 35 months, stretching from the Hoover administration into the Roosevelt administration.

In 1987, when the stock market declined more in one day than it had in any day in 1929, Ronald Reagan did nothing. There were outcries and outrage in the media. But Reagan still did nothing. That downturn not only rebounded, it was followed by 20 years of economic growth, marked by low inflation and low unemployment.

The Obama administration’s policies are very much like those of the Roosevelt administration during the 1930s. FDR not only smothered business with an unending stream of new regulations, he spent unprecedented sums of money, running up record deficits, despite raising taxes on high-income earners to levels that confiscated well more than half their earnings.

Like Obama today, FDR blamed the country’s economic problems on his predecessor, making Hoover a pariah.

Yet, six years after Hoover was gone, and nearly a decade after the stock market crash, unemployment hit 20% again in the spring of 1939.

HKO Comment:

Sowell dispels the narrative that government must save us from the imperfections, or at least the short term dislocations inherent in capitalism. Perhaps the opposite is more true.  The political battle centers on who controls the narrative and which one we accept.

Tips to Gary Meyers.

“These are times in which genius would wish to live. It is not in the still calm of life or in the repose of a pacific station that great characters are formed. The habits of a vigorous mind are formed in contending with difficulties. Great necessities call out great virtues. When a mind is raised and animated by scenes that engage the heart then these qualities which would otherwise lay dormant wake into life and form the character of the hero and the statesman.”

..from a letter to John Quincy Adams from his mother. At the time he was a young boy on his 2^nd trip to Europe with his father.

When Alexis de Tocqueville wrote of America in the early 19^th century in his classicDemocracy in America, he was comparing America’s democracy to the declining norm in Europe: aristocracy.

“Once cherished, history is currently viewed as onerous- unless employed for social engineering. The results are political leaders who cannot weigh the consequences of their actions; journalists who confuse the exciting with the significant; military officers who view their profession through peepholes; and impassioned citizens easily misled. In place of history, we get hysterical headlines.”

“The blood-drunk killer is rarely disarmed by the man who lives in books- or by the eternal adolescent clinging to the lie that all men want peace.”

“Above all, history that adheres to facts inoculates the citizens against lies.   ”

From Endless Wars by Ralph Peters