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An Emerging Market: US Economic Independence

by Elaine Schwartz    •    Jul 4, 2013    •    284 Views

On this Independence Day, let’s celebrate the economic independence that Alexander Hamilton launched.

In 1790, as Secretary of the Treasury, a troubled economy had become Hamilton’s responsibility. He had a huge federal debt to fund, a barely existing banking sector and farm based production. Responding, Hamilton submitted a development plan to the Congress that focused on funding public credit, creating a national bank, and encouraging manufactures.

  • Public credit was crucial. Created by the Revolutionary War, the sovereign debt was primarily owed abroad and Hamilton had to reassure our European creditors that they would get all of the money that was due them. Only then could Hamilton establish the good credit that was necessary for sound finance. Perpetuating Hamilton’s philosophy, the U.S. has never defaulted on its sovereign debt.
  • As financial intermediaries that connect savers to borrowers, a vibrant banking sector facilitates economic expansion. Banks loan money to business start-ups and help them finance inventory, they purchase the bonds that nations sell to raise money and they expand the money supply. By establishing the First Bank of the United States, Hamilton generated the beginning of a banking network that continued to grow and support US economic independence.
  • Economic diversity was the third leg of Alexander Hamilton’s plan for economic independence. Recognizing that the US in 1790 was a farming economy, he sought to create a complementary manufacturing sector. Correct again, Hamilton knew that the combination of agriculture and manufacturing meant we would not have to rely on others for our necessities. So, through tariffs that would protect infant industries in the US and incentives that would encourage their creation, he stimulated business people to diversify.

Isn’t it interesting that Hamilton’s goals–managing sovereign debt wisely, producing a vibrant banking system and encouraging productive diversity–remain leading economic issues?

Sources and resources:  Tough reading but fascinating, the plan that Hamilton gave to President Washington and received congressional approval was a prototype for development in a nation with a barely emerging market. These links, here, here and here take you to each report. I also recommend The Founders and Finance, the story of Alexander Hamilton’s and Albert Gallatin’s impact on the US economy.

Please note that sections of this post have been edited and appeared July 4, 2012.

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