How Hamilton Created U.S. Economic Independence

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. Our agrarian economy depended on Great Britain. They had the banking system, they had the factories, they had the knowhow.

But we had Alexander Hamilton.

For the perfect summary of Hamilton’s Development Plan, do listen to the Hamilton movie musical exchange between Alexander Hamilton and Thomas Jefferson:

Alexander Hamilton’s Development Plan

As Secretary of the Treasury from 1789 to 1795, Alexander Hamilton’s goal was to expand the U.S. banking system, our transportation infrastructure, and technological innovation. He wanted factories processing what our farms and plantations grew while households and businesses easily accessed money.

In a three-part development plan, he explained to the Congress what they had to do.

1. Establish Public Credit

• Hamilton said a national debt is a blessing if it’s not too large. Borrowed money had helped the U.S. finance the Revolutionary War. But now, those lenders had to know we would pay them back. With European creditors, the U.S. had to pay back the money that was due them while domestic creditors needed to know we had a viable plan. Only then could Hamilton establish the good credit that was necessary for a government to borrow the money it needed.
• Since then, the U.S. has been borrowing money and paying it back. However, now with pandemic spending and a shrinking economy, some of us are worried that the debt is becoming too large. Just like your own income determines the wise amount for you to borrow, so too does the GDP for our nation. Below you can see that recently the debt is an increasingly bigger proportion of the GDP. Soon surpassing World War II highs, the debt is projected to balloon from 107.8% of GDP for the past first quarter to more than a 120% high:

2. Create a Banking System

• By establishing the First Bank of the United States, Alexander Hamilton generated the beginning of a banking system that pumped money around the U.S. economy. His goal was a network of financial intermediaries that connects savers to borrowers. He knew that banks loan money to business start-ups and help firms finance inventory. They expand and contract the money supply and purchase the bonds that nations sell to raise money.
• At the beginning of 2020, there were close to 4,400 banks in the U.S.,  Below, you can see how the system has consolidated:

The four largest banks in the U.S. are JP Morgan Chase, BOA, Wells Fargo, and Citi:

3. Encourage Economic Diversity

• Economic growth through diversity was the third leg of Alexander Hamilton’s plan for independence. Recognizing that the U.S. in 1790 was a farming economy, he sought tariffs and subsidies to protect a young manufacturing sector. He supported a system of tariffs to encourage innovation. Correct again, Hamilton knew that the combination of agriculture, manufacturing, and invention could form an economic foundation from which we could build.
• Looking back, we can say that Hamilton created our springboard. About a different kind of independence, Hamilton’s foundation facilitated the leap beyond our borders to globalization. It let us evolve from an agricultural economy to a productive behemoth that needs world markets and global supply chains to feed our growth.

The huge volume of goods and services that each U.S. state produces can be compared to these countries:

Shown above, the four largest state GDPs (2018) would equal the nominal value of the goods and services produced by the UK, Canada, Korea, and Mexico.

Our Bottom Line: Déjà Vu

Hamilton’s goals are timeless. We still need to manage sovereign debt wisely, support a vibrant banking system, and encourage economic growth.

My sources and more: This Washington Post article looks at Hamilton attitude about slavery. Meanwhile, if you have lots of time and patience, (his sentences are impossible)  Hamilton’s Development Plan is worth reading.

Please note that this post is an updated version of what we have published on past Independence Days.