Economic Independence Day

Jul 4, 2012 • Developing Economies, Economic History, Government, Macroeconomic Measurement, Thinking Economically, Uncategorized • 177 Views    No Comments

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 an economy to stimulate.

Sound familiar?

Hamilton submitted a 3-part report to the Congress for their approval. Focusing on public credit, creating a national bank , and encouraging manufactures to diversify a farming economy, he had a plan for economic independence.

Public credit was crucial. Created by the Revolutionary War, the sovereign debt was primarily owed abroad. Hamilton 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 its sovereign debt.

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. And so, whether we are looking back at the 18th century US, or Greece or Spain today, still manageable sovereign debt remains central to economic independence.

On this July 4, as we celebrate political and economic independence, let’s applaud Alexander Hamilton, the father of our economy.

These articles provide additional facts about how Alexander Hamilton established a national bank,  encouraged manufactures and created public credit. For euro zone sovereign debt concerns, this BBC interactive graphic clearly conveys each nation’s borrowing status.

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