green sprouts from Amexander Hamilton economic growth

Happy Birthday to a Great Father (of our economy)

Jan 11, 2014 • Developing Economies, Economic Growth, Economic History, Economic Thinkers, Financial Markets, Government, Innovation, International Trade and Finance, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 426 Views    No Comments

When you sing happy birthday to Alexander Hamilton today, please just think of this upward sloping (logarithmic) economic growth line:

Steady US Economic Growth from Measuring Worth

Today, 257–or maybe 259–years ago (no one is positive) on the Caribbean island of Nevis, Alexander Hamilton was born.

Only 15 and hoping to attend the College at Princeton, he spent a year learning literature, elocution, math, geography and foreign languages and then left for New Jersey. Anxious not to waste time at college, upon applying, he asked Princeton’s president if he could “advance from Class to Class with as much rapidity as his exertions would enable him to do.” Princeton said no.

Undaunted, he took his request to King’s College, now Columbia University in New York, and was accepted. Within 2 1/2 years he had completed most of King’s course of study and joined the effort to defeat the British. From serving as an aid to George Washington during part of the war, to propelling us toward a strong central government after it ended, Hamilton was a “founding father” of the United States.

Really though, he was the father of our economy.

In 1789, when Hamilton became Washington’s Secretary of the Treasury, with a huge federal debt to fund, a banking sector that was distressed, and manufacturing to stimulate, the nation’s finances were potentially disastrous. Responding, he presented a 3-part solution to the Congress.

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. Only then could we continue borrowing money at reasonable interest rates whenever we needed it.

As for banking, with only 3 banks in all 13 colonies, he had to establish financial intermediaries. Having a link between savers and borrowers would create funding for business creation and expansion. His springboard was a national bank from which federal and private money could circulate.

Finally, the goal of his plan for manufacturing was diversity. He knew that the farming that dominated the economy had to be balanced by manufacturing. Otherwise we would forever be dependent on Great Britain. To avoid so catastropic a fate, he proposed encouraging and protecting infant industries with subsidies and tariffs.

Was he successful? The above US economic growth graph says it all.

A final thought…

Interesting that we always seem to be concerned about debt, banking and manufacturing.

Sources and resources: Tough to slog through because of long complicated sentences, still, Hamilton’s reports to the Congress on the public credit, a national bank and manufactures are worth the time because they are so brilliant. This post includes excerpts from a previous blog on Hamilton and Econ 101 1/2. H/T to the “Conversable Economist,” Timothy Taylor, for his comments on the measuringworth.com graph.

 

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