Author: Joaquim Levy

Source: Jornal do Brasil, 31/05/2009

Today, few people would associate one of the greatest events in history with the simple dismissal of a finance minister. But it was the resignation of French Minister Jacques Necker that led to the taking of the Bastille.

Necker shows how the postponement of economic adjustment can lead any regime to the abyss. The minister's magic came from years ago that he had raised loans that kept the government going despite the stark imbalances in public finances. At that time, and understanding the fundamentals of credit markets, he scandalized the court by publishing France's first public accounts. As always, many felt that opening accounts and discussing certain expenditures put the country at risk. In fact, it jeopardized the customs of Versailles S / A, which resulted in the dismissal of the minister in 1781, but also his popular esteem. His successors attempted an escape through the fiscal stimulus policy, but the debt became unsustainable, making extensive tax reform unavoidable. After hesitating, the king called Necker back, but showed no stomach to support the reform and dismissed him again on July 11, 1789.

Although Necker returned to Paris a few days later, in glory, he did not last long, and the economy entered an inflationary phase, which only ended with the success of the Napoleonic expansion.

News of the financial crisis from richer nations crossed the Atlantic, encouraging the first US Treasury secretary to ensure that the nation's domestic and foreign public debt that the nation was born with would not hamper its development.

Alexander Hamilton's main contribution was to make the commitment to honor public debt sacred. Many interests, particularly agricultural ones, said that this was secondary, thinking perhaps that inflation would help anyone who owned land. Hamilton was a lion, never hesitating to remember that the solidity of the public debt, being the basis of the financial system, was fundamental for credit and investment.

Also a pioneer in public sector transparency, Hamilton explained all his policies in well-written reports. One of the most famous warns that "when the public debt is solid, the people who hold it can enter any business project with the same confidence that they would have if they had big money, since they will always find someone willing to buy their bonds". On the other hand, when it is not solid, the government and all those who need credit pay dearly and are blocked.

“But if credit quality is so important, then how do you get it? The immediate answer is: through the fulfillment of contracts. Like individuals, countries that keep their commitments are respected and trustworthy, while the opposite is true for those who do otherwise, ”the report continues.

Hamilton was born in the Caribbean, and like President Obama, he had an unconventional youth, owing his success to his studies. He was not afraid of finances and was not against foreign debt, but he was nevertheless not a surrender. His report on the importance of the industry and the means of promoting it, including with foreign capital, made a school, being largely adopted by Congress, shaping American thought. Perhaps for this reason, many remember him as a protectionist, since the report proposed tariffs on imports. Only they were 7% to 15% - less than the Mercosur modal tariff!

More than 200 years later, when we see the consequences of the postponement of the US macroeconomic adjustment in the last decade, oiled by the relaxation of banking supervision and the explosion of public debt, the parallels with the dynastic ambivalence that surrounded Necker, and the contrasts with the Hamilton's principles are evident. It is clear that structural imbalances camouflaged by the excesses of finance are not new, nor the privilege of poor or Saxon countries. On the other hand, Hamilton's example reinforces the belief that taxation compatible with spending, a strong financial system and respect for public debt do not hinder, but in fact are indispensable for development.

Joaquim Levy

Economist