Hamilton's Menu Approach to Debt Resolution: Implications for Modern Sovereign Debt Relief

Abstract

Alexander Hamilton proposed a debt conversion plan for the United States in 1790 that allowed different creditors to choose from a list of different (reduced) repayment options. This plan was not, however, adopted by Congress, which instead opted for a one-size fits all scheme. Modern economic models demonstrate that the "menu" approach leads to a lower cost of debt reduction for the borrowing nation than offering one type of debt conversion for all creditors. This aspect of Hamilton's plan has been under-appreciated in the modern debt-relief literature, and the episode contains lessons for sovereign countries currently seeking debt relief.