American School (economics)

The American System (also known as the National System) is the macroeconomics philosophy that dominated United States national policies from the time of the American Civil War until the mid-twentieth century (after mercantilism and prior to Keynesian economics, it can be seen as a modified type of classical economics). It consisted of these three core policies:

1. protecting industry through selective high tariffs (especially 1861-1932) and some include through subsidies (especially 1932-1970)
2. government investments in infrastructure creating targeted internal improvements (especially in transportation)
3. a national bank with policies that promote the growth of productive enterprises.

It is differs from mercantilism in recognizing comparative advantage. It is a capitalist economic school based on Alexander Hamilton's economic principles. The American System form of capitalism was intended to allow the United States to become economically independent and nationally self-sufficient and is distinct from the Free Market form of capitalism of Adam Smith, the internationalist Socialism of Karl Marx and the comprehensive Planned Economy associated with the Soviet Union. The American System's key elements were promoted by John Q. Adams and his National Republican Party, Henry Clay and the Whig Party, and Abraham Lincoln through the early Republican Party which embraced, implemented, and maintained this economic system. The American System has evolved into the mixed economy of today's America.

During its American System period the United States grew into the largest economy in the world with the highest standard of living, surpassing the British Empire by the 1880s.

Policies

Senator Henry Clay

The American System included three cardinal policy points:

1. Support industry: The advocacy of protectionism, and opposition to free trade - particularly for the protection of "infant industries" and those facing import competition from abroad. Examples: Tariff of 1816 and Morrill Tariff
2. Create physical infrastructure: Government finance of Internal improvements to speed commerce and develop industry. This involved the regulation of privately held infrastructure, to ensure that it meets the nation's needs. Examples: Cumberland Road and Union Pacific Railroad
3. Create financial infrastructure: A government sponsored National Bank to issue currency and encourage commerce. This involved the use of sovereign powers for the regulation of credit to encourage the development of the economy, and to deter speculation. Examples: First Bank of the United States, Second Bank of the United States, and National Banking Act

Congressman Andrew Stewart defined the elements of this system clearly in the following extracts from his book, The American System:

"Protect and cherish your national industry by a wise system of finance, selecting in the first place those articles which you can and ought to supply to the extent of your own wants-food, clothing, habitation, and defence-and to these give ample and adequate protection, so as to secure at all times an abundant supply at home. Next select the luxuries consumed by the rich, and impose on them such duties as the wants of the Government may require for revenue; and then take the necessaries of life consumed by the poor, and articles which we cannot supply, used in our manufactories, and make them free, or subject to the lowest rates of duty."

"Adopt a system of national improvements, embracing the great rivers, lakes, and main arteries of communication, leaving those of a LOCAL character to the care of the States; and on these expend the surplus revenue only; thus uniting and binding together the distant parts of our common country, and at the same time securing the most efficient system of defence in war, and the cheapest and best system of commercial and social intercourse in peace."

"Introduce enlightened economy in every branch of the public expenditures. Lighten the burdens, diversify the employments, and secure and increase the rewards of labor in all its departments."

"In your foreign relations follow the advice of the father of his country-' observe good faith and justice towards all nations-cultivate peace and harmony with all.' Thereby illustrating the beauty and perfection of our Republican institutions, holding up a great example of 'liberty and independence,' for the nations of the earth to admire and imitate."

Henry C. Carey, a leading American economist and adviser to Abraham Lincoln, in his book Harmony of Interests displays two additional points of this American System economic philosophy that distinguishes it from the system's of Adam Smith or Karl Marx:

1. Government support for the development of science and public education through a public 'common' school system and investments in creative research through grants and subsidies.
2. Rejection of class struggle, in favor of the "Harmony of Interests" between: owners and workers, farmer and manufacturers, the wealthy class and the working class.

Philosophy

A portrait of Alexander Hamilton by John Trumbull, 1792.

The American System of economics represented the legacy of Alexander Hamilton, who in his Report on Manufactures, argued that the U.S. could not become fully independent until it was self-sufficient in all necessary economic products. Hamilton rooted this economic system, in part, in the successive regimes of Colbert's France and Elizabeth I's England, while rejecting the harsher aspects of mercantilism, such as seeking colonies for markets. As later defined by Senator Henry Clay who became known as the Father of the American System because of his impassioned support thereof, the American System was to unify the nation north to south, east to west, and city to farmer. A leading proponent and economist of the 19th Century, Henry Carey, called this a Harmony of Interests in his book by the same name, a harmony between labor and management, and as well a harmony between agriculture, manufacturing, and merchants.

The name, "American System," was coined by Clay to distinguish it, as a school of thought, from the competing theory of economics at the time, the "British System" represented by Adam Smith in his work Wealth of Nations. In a passage from his book, The Harmony of Interests, Carey wrote concerning the difference between the American System and British System of economics:

"Two systems are before the world;...One looks to increasing the necessity of commerce; the other to increasing the power to maintain it. One looks to underworking the Hindoo, and sinking the rest of the world to his level; the other to raising the standard of man throughout the world to our level. One looks to pauperism, ignorance, depopulation, and barbarism; the other to increasing wealth, comfort, intelligence, combination of action, and civilization. One looks towards universal war; the other towards universal peace. One is the English system; the other we may be proud to call the American system, for it is the only one ever devised the tendency of which was that of ELEVATING while EQUALIZING the condition of man throughout the world."

History

President Lincoln

The American System was the name given by Henry Clay in a speech before Congress advocating an economic program based on the economic philosophy derived from Alexander Hamilton's economic theories (see Report on Manufactures, Report on Public Credit I,Report on Public Credit II). Clay's policies called for a high tariff to support internal improvements such as road-building, and a national bank to encourage productive enterprise and to form a national currency as Hamilton had advocated as Secretary of the Treasury.

Clay's plan became the leading tenet of the National Republican Party of John Quincy Adams and the Whig Party of himself and Daniel Webster.

The American System was supported by New England and the Mid-Atlantic, which had a large manufacturing base. It protected their new factories from foreign competition.

The South opposed the American System because its plantation owners were heavily reliant on production of cotton for export, and the American System produced lower demand for their cotton and created higher costs for manufactured goods. After 1828 the United States kept tariffs low until the election of Abraham Lincoln in 1861.

Implementation

The Monkey System or "Every one for himself at the expense of his neighbor". 1831
Henry Clay, right, says "Walk in! Walk in! and see the new improved original grand American system!" The cages are labelled: "Home, Consumption, Internal, Improv".
This contemporary cartoon ridicules Clay's American System. The cartoon depicts monkeys, labeled as being different parts of a nation's economy, stealing each other's resources (food) with commentators describing it as either great or a humbug.

The American System was enacted with a series of laws during the American Civil War. For example, the 1861 Morrill Tariff's reached 48%.

According to an article at US-History.com: "As soon as Lincoln took office, the old Whig coalition finally controlled the entire government. It immediately tripled the average tariff, began to subsidize the construction of a transcontinental railroad in California even though a desperate war was being waged, and on February 25, 1862, the Legal Tender Act empowered the secretary of the treasury to issue paper money ('greenbacks') that were not immediately redeemable in gold or silver."

The Republican Party Platform, supporting the American System policies stated:

• On a Protective Tariff - 1860 Platform
  • "12. That, while providing revenue for the support of the general government by duties upon imports, sound policy requires such an adjustment of these imports as to encourage the development of the industrial interests of the whole country; and we commend that policy of national exchanges, which secures to the workingmen liberal wages, to agriculture remunerative prices, to mechanics and manufacturers an adequate reward for their skill, labor, and enterprise, and to the nation commercial prosperity and independence."
• On Internal Improvements - 1856 Platform
  • "Resolved, That a railroad to the Pacific Ocean by the most central and practicable route is imperatively demanded by the interests of the whole country, and that the Federal Government ought to render immediate and efficient aid in its construction, and as an auxiliary thereto, to the immediate construction of an emigrant road on the line of the railroad. Resolved, That appropriations by Congress for the improvement of rivers and harbors, of a national character, required for the accommodation and security of our existing commerce, are authorized by the Constitution, and justified by the obligation of the Government to protect the lives and property of its citizens."

In power and without southern opposition, the Republican Party was able to move quickly upon its promised platform planks, rooted in the American System policies of national banking, tariff protection, and internal improvements. In 1861, prior to Lincoln's inauguration, the Morrill Tariff was passed at a rate of 37.5% and then raised during the war to a rate near 48%. In 1862 they successfully passed the Pacific Railways Act, initiating the building of the Union-Pacific Railroad across the continental United States. In 1862 the Legal Tender Act was passed, allowing issuance of paper money, followed by the National Banking Act of 1863 which established the final piece of a three part economic philosophy which Henry Clay termed the American System.

The United States continued these policies throughout the later half of the 19th century. President William McKinley (1896-1901) stated at the time:

"[They say] if you had not had the Protective Tariff things would be a little cheaper. Well, whether a thing is cheap or dear depends upon what we can earn by our daily labor. Free trade cheapens the product by cheapening the producer. Protection cheapens the product by elevating the producer. Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man.

"[It is said] that protection is immoral.... Why, if protection builds up and elevates 63,000,000 [the U.S. population] of people, the influence of those 63,000,000 of people elevates the rest of the world. We cannot take a step in the pathway of progress without benefitting mankind everywhere. Well, they say, `Buy where you can buy the cheapest'.... Of course, that applies to labor as to everything else. Let me give you a maxim that is a thousand times better than that, and it is the protection maxim: `Buy where you can pay the easiest.' And that spot of earth is where labor wins its highest rewards."

Evolution

As the United States entered the 20th century the "American System" evolved in both nomenclature and substance. During the century, it evolved into Keynesian economics which promotes a type of mixed economy. Instead of the economic process being based on continuous improvements in potential output, as most classical economists had believed from the late 1700s on, Keynes asserted the importance of aggregate demand for goods as the driving factor of the economy, especially in periods of downturn. Towards the end of the 20th century Free Market policies were increasingly adopted; justified by arguments from the Classical, Supply-side, and Austrian schools of economic thought. Monetarism strongly limits American Free Market policies and can be seen as a continuation of the third core policy (financial infrastructure) of the "American System".

The "American System" became known by other names, which include: "American Policy", "Economic nationalism", "National System", "Protective System", "Protection Policy", and "Protectionism", which alludes only to the 'tariff policy' of this system of economics.

In 1913 the administration of Woodrow Wilson pressed forward with his New Freedom policy that replaced the National Bank System with the Federal Reserve System, and lowered tariffs to revenue only levels with the Underwood Tariff.

The election of Warren G. Harding and the Republican Party in 1920 represented a partial return to the American System through restoration of high tariffs, although a shift away from productive investments into speculation by the Federal Reserve System continued. This speculation lead to the Stock Market Crash on Black Friday in October of 1929. President Herbert Hoover responded to this crash and the subsequent bank failures and unemployment by signing the Smoot-Hawley Tariff, which some economists considered to have deepened the Great Depression, while others disagree.

The New Deal continued infrastructure improvements through the numerous public works projects of the Works Progress Administration (WPA) as well as the creation of the Tennessee Valley Authority (TVA); brought massive reform to the banking system of the Federal Reserve while investing in various ways in industry to stimulate production and control speculation; but abandoned protective tariffs while embracing moderate tariff protection (revenue based 20-30% the normal tariff under this) through reciprocity, choosing to subsidized industry as a replacement.

Much of Roosevelt's "New Deal" remained in place during the Truman, Eisenhower, Kennedy, and Johnson administrations. America remained dominant in industrial strength during this era with little competition for her industries and with moderate protection offered through subsidy and revenue tariffs under reciprocity arrangements.

In 1973 when the "Kennedy" Round concluded under President Richard Nixon which cut U.S. tariffs to all time lows, the New Deal orientation towards reciprocity and subsidy ended, which moved the United States in a Free Market direction. The semi-privatization of the U.S. Post Office is an example of continued movement in the Free Market direction.

The administrations of Ford and Carter continued these policies. Privatization and "contracting out" continued on through Reagan, Bush, Clinton, and Bush together with a continuing march toward free-trade liberalization through NAFTA and CAFTA.

Legacy

The key elements of the American System are debated in American politics today.

The American System's reliance on protecting and promoting industry through tariffs or subsidies has gained renewed interest since Ross Perot's run for the Presidency in 1992 and the passage of NAFTA in 1993. Among those adovocating "fair trade" reform in various forms are:

• Political parties such as the: Reform Party;
• Economists such as: Pat Choate, Dr. Ravi Batra, William J. Gill, and William R. Hawkins
• Organizations such as Kevin Kearns and Alan Tonelson's U.S. Business and Industry Council and Auggie Tantillo's American Manufacturing Trade Action Coalition;
• Political commentators such as: Lou Dobbs, Michael Lind, and James Fallows;

Indicating renewed interest for internal improvements to infrastructure, in a March 8, 2006 article at senate.gov titled Senators Voinovich, Carper and Clinton Introduce Infrastructure Improvement Bill Sen. Clinton stated:

"Our nation’s economic strength throughout history has been inexorably linked to the investments made in our public infrastructure. From the Transcontinental Railroad to the National Highway System, the public sector's investments in our roads, our waterways, our railways and our aviation systems have defined the bedrock strengths of the American economy and its people."

There has also been increasingly bipartisan collaboration in the U.S. Senate to revive a national commitment to manufacturing. On June 14, 2005, Senators Lindsey Graham (R-SC) and Hillary Clinton (D-NY) formed the Senate Manufacturing Caucus to address this concern.<;ref> "For generations, our manufacturing sector has been the backbone of the American economy,” said Senator Clinton in announcing the caucus. “Manufacturing jobs built our great middle class and allowed millions of families to live the American dream and create a better life for their children. That bedrock strength is being eroded and we cannot afford as a country to sit back while our manufacturing capability slips away. We need a strong manufacturing base for our economy to grow and we need to invest in creating the manufacturing jobs of the future. This caucus will lead efforts on Capitol Hill to help address these challenges."nema.org</ref>

See also

• History of economic thought
• Historical school of economics

Important early economists

• Adam Smith
• Anders Chydenius
• Alexander Hamilton
• Henry Charles Carey
• Mathew Carey
• Daniel Raymond
• David Ricardo
• Friedrich List
• Johann Heinrich von Thünen
• John Stuart Mill
• Karl Marx
• Thomas Malthus
• William Petty

Key concepts and articles

• Austrian School
• Bullionism
• Classical economics
• Economic nationalism
• Keynesian economics
• Macroeconomics
• Mercantilism
• Microeconomics
• Monetarism
• Neoclassical economics
• Post-Keynesian economics
• Producerism
• Supply-side economics
• World economy

Further reading

Modern books

• Batra, Ravi, Dr., The Myth of Free Trade: The pooring of America (1993)
• Boritt, Gabor S. Lincoln and the Economics of the American Dream (1994)
• Buchanan, Patrick J., The Great Betrayal (1998)
• Curry, Leonard P. Blueprint for Modern America: Nonmilitary Legislation of the First Civil War Congress (1968)
• Croly, Herbert, The Promise of American Life (2005-reprint)
• Dobbs, Lou Exporting America: Why Corporate Greed is Shipping American Jobs Overseas (2004)
• Joseph Dorfman. The Economic Mind in American Civilization, 1606-1865 (1947) 2 vol
• Joseph Dorfman. The Economic Mind in American Civilization, 1865-1918 (1949) vol 3
• Foner, Eric. Free Soil, Free Labor, Free Men: The Ideology of the Republican Party before the Civil War (1970)
• Faux, Jeff. The Global Class War (2006)
• Gardner, Stephen H. Comparative Economic Systems (1988)
• Gill, William J. Trade Wars Against America: A History of United States Trade and Monetary Policy (1990)
• Carter Goodrich, Government Promotion of American Canals and Railroads, 1800-1890 (Greenwood Press, 1960)
  • Goodrich, Carter. "American Development Policy: the Case of Internal Improvements," Journal of Economic History, 16 ( 1956), 449-60. in JSTOR
  • Goodrich, Carter. "National Planning of Internal Improvements," ;;Political Science Quarterly, 63 ( 1948), 16-44. in JSTOR
• Richard Hofstadter, "The Tariff Issue on the Eve of the Civil War," American Historical Review, 64 (October 1938): 50-55, shows Northern business had little interest in tariff in 1860, except for Pennsylvania which demanded high tariff on iron products
• Jenks, Leland Hamilton. "Railroads as a Force in American Development," Journal of Economic History, 4 (1944), 1-20. in JSTOR
• John Lauritz Larson. Internal Improvement: National Public Works and the Promise of Popular Government in the Early United States (2001)
• Lively, Robert A. "The American System, a Review Article," Business History Review, XXIX (March, 1955), 81-96. recommended starting point
• Lauchtenburg, William E. Franklin D. Roosevelt and the New Deal 1932-1940 (1963)
• Lind, Michael Hamilton's Republic: Readings in the American Democratic Nationalist Tradition (1997)
• Lind, Michael What Lincoln Believed: The Values and Convictions of America's Greatest President (2004)
• Paludan, Philip S. The Presidency of Abraham Lincoln (1994)
• Richardson, Heather Cox. The Greatest Nation of the Earth: Republican Economic Policies during the Civil War (1997)
• Remini, Robert V. Henry Clay: Statesman for the Union. New York: W. W. Norton Co., 1991
• Roosevelt, Theodore. The New Nationalism (1961-reprint)
• Richardson, Heather Cox. The Greatest Nation of the Earth: Republican Economic Policies during the Civil War (1997)
• Edward Stanwood, American Tariff Controversies in the Nineteenth Century (1903; reprint 1974), 2 vols., favors protectionism

Older books

1. W. Cunningham, The Rise and Decline of the Free Trade Movement (London, 1904)
2. G. B. Curtiss, Protection and Prosperity: an ; W. H. Dawson, Protection in Germany (London, 1904
3. Alexander Hamilton, Report on the Subject of Manufactures, communicated to the House of Representatives, 5th December 1791
4. F. Bowen, American Political Economy (New York, 1875)
5. J. B. Byles, Sophisms of Free Trade (London, 1903); G. Byng, Protection (London, 1901)
6. H. C. Carey, Principles of Social Science (3 vols., Philadelphia, 1858-1859), Harmony of Interests Agricultural, Manufacturing and Commercial (Philadelphia, 1873)
7. H. M. Hoyt, Protection v. Free Trade, the scientific validity and economic operation of defensive duties in the United States (New York, 1886)
8. Friedrich List, Outlines of American Political Economy (1980-reprint)
9. Friedrich List, National System of Political Economy (1994-reprint)
10. A. M. Low, Protection in the United States (London, 1904); H. 0. Meredith, Protection in France (London, 1904)
11. S. N. Patten, Economic Basis of Protection (Philadelphia, 1890)
12. Ugo Rabbeno, American Commercial Policy (London, 1895)
13. Ellis H. Roberts, Government Revenue, especially the American System, an argument for industrial freedom against the fallacies of free trade (Boston, 1884)
14. R. E. Thompson, Protection to Home Industries (New York, 1886)
15. E. E. Williams, The Case for Protection (London, 1899)
16. J. P. Young, Protection and Progress: a Study of the Economic Bases of the A merican Protective System (Chicago, 1900)
17. Clay, Henry. The Papers of Henry Clay, 1797-1852. Edited by James Hopkins

External links

• Excerpts of the Report on Manufactures by Alexander Hamilton
• Report on Public Credit I by Alexander Hamilton
• Argument in Favor of the National Bank by Alexander Hamilton
• The Harmony of Interests by Henry C. Carey
• The National System of Political Economy by Friedrich List
• Federalist #7, The Federalist Papers by Alexander Hamilton as Publius
• The American System: Speeches on the Tariff Question and Internal Improvements by Congressman Andrew Stewart
• John Bull the Compassionate
• Party Platforms of Republican and Democratic Party's, including links to Third Party's in history.
• Excerpt from The Harmony of Interests
• "Eroding U.S. Industrial Base Comes With Price"
• "Memo to Bush and McCain: National Security Requires Industrial Independence, Too"
• Lincoln Debunked Criticism of the American System from a Libertarian Party activist
• "Punchinello", Vol. 1, Issue 8 pg 125 Article from 1870 against the American System