What will it take to fix a European Union troubled by heavy debts and internal friction? The story of the U.S., which celebrates its 235th year of independence on July 4, offers a parable that Europe’s leaders might find instructive.

In the late 18th century, financial troubles threatened to tear apart the newly formed union. In many ways, the crisis was not unlike the one Europe is now trying to contain with a second bailout of Greece.

After the Revolutionary War, the huge debts of states such as Massachusetts and South Carolina were strangling an already depressed economy. A farmers’ rebellion against rising taxes brought the young nation to the brink of its first civil war. Faith in U.S. credit fell so low that veterans were selling government IOUs for as little as 15 cents on the dollar.

Much like today’s Europe, the U.S. lacked a federal executive branch with the power to manage the crisis. But its first Treasury secretary, Alexander Hamilton, had a proposal that went far beyond what anyone in Europe is now considering. His plan: Have Congress authorize the federal government to take responsibility for some $25 million in states’ debts -- the equivalent of about $2 trillion in today’s economy -- and to raise the money to pay them.

The plan had some flaws, and Hamilton was fully aware of them, according to biographer Ron Chernow. The government would be rewarding speculators who had bought the debt at a discount, and fiscally strong states would effectively be bailing out weak ones.

Benefits Exceed Costs

But the proposal would also free the states’ economies to grow and set an important precedent by establishing the good credit of the fledgling union. The benefits that would accrue to a nation whose bonds were viewed as good as gold, Hamilton reasoned, would far outweigh the costs.

Governments “who observe their engagements, are respected and trusted,” Hamilton wrote in his Report on Public Credit in 1789. “The reverse is the fate of those, who pursue an opposite conduct.”

Hamilton’s plan encountered vehement opposition, just as any similar suggestion would now in Europe. Like today’s fiscally prudent Germany, states that had paid off their war debts saw no reason to bail out their neighbors. James Madison, the House floor leader, railed against the idea of compelling states, “after having done their duty, to contribute to those states who have not equally done their duty.”

Most Angry Debate

The debate in Congress became so acrimonious that some worried it would mean the end of the union. “This measure produced the most bitter and angry contest ever known in Congress, before or since the Union of the States,” Thomas Jefferson later wrote.

But after losing a House vote in April 1790, Hamilton persevered. His sense of urgency was so strong that he was willing to make what, for him, was a politically perilous sacrifice: Give up the claim of his home state, New York, to become the site of the nation’s capital.

According to Jefferson, that’s the bargain Hamilton and Madison reached during a dinner meeting at Jefferson’s house. The permanent capital would go to a site on the Potomac River, and Hamilton would get the votes he needed to fix the financial crisis.

The rest is history. The U.S. entered a period of prosperity, and its faith and credit became the world’s gold standard. Even in today’s financial crisis, investors have rushed to the safe haven of U.S. Treasury bonds, and the dollar remains the world’s premier reserve currency.

In 1946, Winston Churchill voiced the aspiration he and other leaders shared for a Europe ravaged by war. “To re-create the European family,” he pledged, “and to provide it with a structure under which it can dwell in peace, in safety and in freedom. We must build a kind of United States of Europe.”

At this crucial juncture in its history, Europe may need its own Hamilton to make that vision a reality.

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