October 31, 2014

A Cautionary Tale of Cinco de Mayo (That Doesn’t Involve Tequila)

Cinco de Mayo over the years has become a popular American excuse to overindulge on nachos and beverages served in salt-rimmed glasses, but it should also serve as a reminder about the severe consequences of incurring large national debt. Many people believe that Cinco de Mayo is Mexican Independence Day (September 16, but that's another story), but it's really about forestalling the bill collectors.

In 1861 the newly formed Second Republic of Mexico faced untenable debt following the Mexican-American War, the Mexican Civil War and the Reform War.  President Benito Juárez declared that the Republic would not make payments on its foreign debt for two years. Most of its debt was owed to Great Britain, Spain and France, which took exception to not being repaid in the way large countries did in those days: They sent their navies to dun the new nation, seizing the port at Veracruz as collateral.

In late 1861 the French, led at the time by Napoleon II  - as ambitious about worldly domination as his namesake - sent troops inland to recover their money, and by spring the following year had pushed Juárez and his government into exile. But on May 5, 1862, the poorly equipped Mexican army, outnumbered 2-to-1, finally held its ground at Puebla, about 80 miles from Mexico City.  The military upset has been celebrated in Mexico as Cinco de Mayo every year since.

Unfortunately, the victory was short-lived. The French regrouped and enhanced their collection methods by taking Mexico City, toppling the Mexican army and installing Maximilian I as the new leader of Mexico. It would be another 50 years or more, when the Mexicans drafted their own constitution, before they considered themselves free.

I will allow you to draw your own analogies to our current fiscal situation. But as you celebrate with margaritas, cervezas and salsa this weekend, remember that incurring large national debt does have its consequences.