everyday economics and Alexander Hamilton's development program gave the US economic independence

Celebrating Economic Independence

Jul 4, 2014 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Financial Markets, Government, International Trade and Finance, Labor, Macroeconomic Measurement, Regulation • 148 Views    1 Comment

Yes, the United States declared independence from Great Britain on July 4, 1776 and won the American Revolutionary War. But still, we were not truly independent.

George Washington’s Secretary of the Treasury Alexander Hamilton knew that true independence required a vibrant economy. He had to diminish our huge debt, create a banking system, and diversify what we produced. To deal with so troubled an economy, Hamilton submitted a development plan to the Congress. In 3 separate reports, he explained how to establish public credit, create a national bank, and encourage manufactures.

Public Credit

  • Countries need good public credit in order to borrow money at reasonable interest rates. Sort of like you and me, the only way to get good credit is having lenders know you will pay them back. With the US sovereign debt owed partially to Europeans who had funded the Revolutionary War, Hamilton had to reassure them that they would get all of the money that was due them. Domestic creditors also needed to hear that Hamilton had a viable plan. Only then could Hamilton establish the good credit that was necessary for sound finance. Since then, the U.S. has never defaulted on its sovereign debt.

Banking

  • Composed of financial intermediaries that connect savers to borrowers, a banking system facilitates economic expansion. Banks loan money to business start-ups and help them finance inventory, banks purchase the bonds that nations sell to raise money, and banks expand the money supply. By establishing the First Bank of the United States, Hamilton generated the beginning of a banking system that continued to grow and support US economic independence.

Diversified Production

  • 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. Through tariffs that would protect infant industries in the US and incentives that would encourage their creation, he stimulated business people to diversify.

Our bottom line? 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 more...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, herehere 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 much of the above was from previous Independence Day posts.

Related Posts

  • The AHA Society

    Thank you for a great post. We will be sharing it on the AHA Society blog.

« »