Alexander Hamilton must have been worried. In 1790, as Secretary of the Treasury, a troubled economy had become his responsibility. He had a huge federal debt to fund, a banking sector that was distressed, and manufacturing to stimulate.
Public credit was crucial. Created by the Revolutionary War, the debt was primarily owed abroad. He had to reassure our European creditors that they would get all of the money that was due them. By funding the war debt, he would establish our good credit, a requisite, he believed for sound finance.
Hamilton understood that economic independence actually related to being dependable within a network of interdependence. The Congress and President Washington followed his lead, implemented his ideas, and the rest is history. The U.S. has never defaulted on a loan.
On this July 4, as we celebrate political and economic independence, let’s applaud Alexander Hamilton, the father of our economy.
The Economic Lesson
Sovereign debt is created when a nation sells bonds. Because banks typically purchase these bonds (governments, households and businesses buy them also), the health of the banking sector can be tied to the bonds that banks own.
An Economic Question: Keeping in mind Greece’s long history of defaulting on its sovereign debt, why would German and French banks want a Greek bailout?