Rediscovering a Genuine American System

From the Founding to the Cold War, America’s leading statesmen and political economists understood the importance of a robust national economic policy.

On February 2, 1832, Henry Clay rose on the Senate floor to defend a bold national economic agenda that he had christened eight years earlier “a genuine AMERICAN SYSTEM” (emphasis in original). He had already advanced a number of measures critical to his vision: the Second Bank of the United States, protective tariffs for burgeoning industries, and infrastructure to connect commercial centers to the expansive frontier. But the political revolution in 1828 that drove Clay’s National Republican party from power and installed a backcountry populist in the White House was threatening to undo these projects.

Speaking over the course of three days, Clay documented the “unparalleled prosperity” that the American System had produced. He explained how this “long established system” was “patiently and carefully built up, and sanctioned, … by the nation and its highest and most revered authorities.” His opponents’ alternative, he alleged, was vacuous at best: “When gentlemen have succeeded in their design of an immediate or gradual destruction of the American System, what is their substitute?” Clay asked. “Free trade! Free trade! The call for free trade, is as unavailing as the cry of a spoiled child. … It never has existed; it never will exist.”[1]

'When gentlemen have succeeded in their design of an immediate or gradual destruction of the American System, what is their substitute?' Clay asked. 'Free trade! Free trade! The call for free trade, is as unavailing as the cry of a spoiled child. … It never has existed; it never will exist.'

Clay lost this particular round in the never-ending fight over America’s economic aspirations and the role of government in fulfilling them. President Andrew Jackson vetoed the re-chartering of the national bank that summer and then soundly defeated Clay’s challenge in the presidential election that fall. But he was not the first great American statesman to champion a robust role for public policy in shaping the national economy. Nor would he be the last. The efforts of that coalition, from Hamilton to Lincoln to Eisenhower, kept alive the spirit of the American System from the nation’s founding to the middle of the twentieth century. Through its various expressions, the System helped to deliver the “unparalleled prosperity” Clay once heralded and made American industry the envy of the world.

Conservatives abandoned that tradition in recent decades and then forgot its existence altogether, concocting the myth of a laissez-faire America and conceiving of capitalism as little more than “economic freedom.”[2] The ensuing political struggle between a Left committed to globalization and redistribution and a Right that would do nothing at all, has ignored the actual needs of the nation’s citizenry and its economy. We need more Henry Clays. Conservatives could provide them, if they recognized that the history of American political economy furnishes a rich tradition worthy of conserving.

Hamilton’s Triumph

The very framing of the Constitution emphasized the limited but positive role for government in the American economy. Indeed, the inadequacy of the Articles of Confederation for dealing with essential matters of political economy—international trade, interstate commerce, and public finance—spurred the formation of the Constitutional Convention in the first place. As Article 1, Section 8 makes clear, the Framers understood not only the importance of these economic powers, but also that each one—to lay and collect taxes, to borrow money, and to regulate commerce—was distinct and deserving of enumeration. Such powers were reportedly not a matter of controversy at the Convention.[3]

Still, the proper scope and ends of federal power were open questions. The ensuing public debate was shaped—and still is shaped—by an overarching conflict of visions about the ideal American republic: between the Hamiltonian vision of a commercial republic driven by industrialization and a robust financial system and the Jeffersonian vision of an agrarian democracy of small, free-holding yeomen farmers.

Alexander Hamilton proposed an aggressive economic agenda to President Washington and the First United States Congress. In his first act as the nation’s first Treasury Secretary, he advised Congress to pass a general tariff to fund the government’s debt and operations. He later devised a plan to establish the creditworthiness of the United States by assuming the states’ debts and paying creditors at face value. Against the objections of Secretary of State Thomas Jefferson, Hamilton also persuaded Washington in 1791 to sign a twenty-year charter for the Bank of the United States, a national bank for which “public utility [was] more truly the object … than private profit.”[4]

Later the same year, Hamilton submitted the Report on Manufactures to Congress, outlining a plan to support industrialization through federal “bounties” (subsidies). He argued that the “independence and security” of the United States were “materially connected with the prosperity of manufactures” but that private capital would not be sufficient to support its development. The national interest would “therefore require the incitement and patronage of government.” To modern ears, such state-sponsored industrialization may sound like a response to market failure, but Hamilton’s case was broader: that investment was an affirmative obligation of the federal government. “In a community situated like that of the United States,” he maintained, “the public purse must supply the deficiency of private resource. In what can it be so useful, as in prompting and improving the efforts of industry?”[5]

'There is no Hamilton memorial,' George F. Will has noted. 'But if you seek his monument, look around. This is Hamilton’s America.'

Though not fully implemented in his tenure as Treasury Secretary, Hamilton’s vision of political economy ultimately triumphed. Following its humiliating experience in the War of 1812, the country pursued a number of Hamiltonian reforms. Congress had failed to renew the charter of the First Bank of the United States in 1811, but chartered the Second Bank in 1816. A series of tariffs, beginning in 1816, were also instated with the express purpose of protecting infant domestic industries. In 1817, Congress passed the Navigation Act requiring that interstate trade be conducted with American-owned ships.

Hamilton did not live to see his vindication, but he would especially have appreciated the concessions of his erstwhile opponents. Thomas Jefferson later admitted that “experience” had demonstrated that manufacturing was “as necessary to our independence as to our comfort.”[6] He was emphatic. The person “who is now against domestic manufactures,” he wrote after the War, “must be for reducing either to dependence on that foreign nation [Britain], or to be clothed in skins, and to live like wild beasts in dens and caverns. I am proud to say, I am not one of these” (emphasis in original). James Madison likewise came to defend state-sponsored industrialization through protective tariffs. “Unless aided in its nascent and infant state by public encouragement and a confidence in public protection,” he wrote, entire industries “might remain … for a long time unattempted, or attempted without success.”[7]

“There is no Hamilton memorial,” George F. Will has noted. “But if you seek his monument, look around. This is Hamilton’s America.”[8] This was already true when Henry Clay spoke in 1832. Only the Hamiltonian project went by a new name: the American System.

The American System and Its School

The American System emerged from crisis and the young nation’s sudden awareness of its own mortality. As the United States entered the War of 1812, Henry Clay emerged as a leading War Hawk in the Congress. Economic nationalism was a natural outgrowth of his anti-British posture and would become a common lesson from the experience of war. Its primary aim was self-sufficiency. “We should thus have our wants supplied, when foreign resources are cut off,” Clay advised his fellow lawmakers, “and we should also lay the basis of a system of taxation, to be resorted to when the revenue from imports is stopped by war.”[9]

Clay’s American System integrated three mutually supporting priorities: tariff-based protection of infant industries, a national financial system, and “internal improvements,” which we would today call infrastructure. In 1816, Clay led the passage of an expressly protective tariff for the nation’s burgeoning manufacturing industry, averaging 40 percent on all imported manufactured goods. He also advocated the creation of the Second Bank of the United States and federal funding of canal and railroad projects with revenue generated from land sales.

The American System’s development was supported by political economists whose thinking came to be known as the American School. Like Clay, the thinkers behind the American School were engaged not only in a battle of ideas, but a contest between nations. They were contemporaries of the great British classical economists like David Ricardo and John Stuart Mill and took part in a transatlantic debate over the laws of economics and the role of government. They rebutted the arguments of these “British School” advocates for free trade and laissez-faire and outlined policies to protect America’s interests from what they deemed to be hostile British policy.

Daniel Raymond (1786-1849), for example, established his reputation after publishing criticism of Adam Smith’s Wealth of Nations. Raymond objected to Smith’s very definition of national wealth as the sum of all private wealth, arguing that its distribution mattered and that national wealth ought to reflect “the condition of the whole nation” such that “general prosperity and happiness” would be maximized.[10] Another leading light of the American School was Friedrich List (1789-1846), a German émigré who developed and systematized a “national system” of economics that stressed the importance of industrialization in the emerging global economy. “To attain the highest degree of independence, culture and material prosperity,” List argued, a country “should adopt every measure within its power to defend its economic security.”[11] For the still-developing United States, this meant tariff-based protection and import substitution for the nation’s infant industries. Once the nation had industrialized, however, List’s system advised switching to a reciprocal trade strategy with other industrialized nations, cautiously opening American markets in exchange for access to others.

These were common themes of the American School: treating the nation—rather than the individual—as the principal unit of economic analysis and incorporating social and geo-political factors that today might seem beyond the scope of economics. The British “dismal science” could not satisfy the optimism and liberality of the still young American republic.

The American School struck its mid-century crescendo in the work of Henry Charles Carey (1793-1879). He warned that the purpose of British free trade policy was to “secur[e for] the people of England the … monopoly of machinery” and argued for an aggressive policy of support for infant industries to “break down this monopoly” and “restore the natural tendency” of balancing manufacturing with agriculture to support “stabler self-sufficient communities.”[12]  “The Americans, and few more so than Henry Carey,” writes historian Gabor S. Boritt, “made political economy the beautiful science.”[13]

Yet Carey’s greatest contribution to the American tradition may not have been his writing, but his service as an advisor to an ambitious young statesman from the frontier—an admirer of Henry Clay and a student of the American School named Abraham Lincoln.

As the Civil War raged, Lincoln pursued an American-System agenda on an epic scale.

From his very first campaign manifesto in 1832, Lincoln confessed that “my politics are short and sweet. … I am in favor of national bank … in favor of the internal improvements system and a high protective tariff.” By the time he occupied the White House, his economic policy seemed to have changed little: “I have always been an old-line Henry Clay Whig,” he proclaimed in 1861.[14]

As the Civil War raged, Lincoln pursued an American-System agenda on an epic scale. Having long advocated for protective tariffs, he raised them two times in the course of just three years. From Lincoln’s presidency through World War II, the American home market was the most protected in the world.[15] Lincoln also recreated a federal financial system. With the Legal Tender Act, he granted Treasury the ability to issue “greenbacks,” paper money backed by federal debt. With the National Currency Acts, he taxed state banknotes out of existence and established a network of nationally chartered banks approved to issue U.S. Treasury banknotes. As with protective tariffs, Lincoln had supported ambitious infrastructure projects throughout his political career, and in 1862 he signed legislation to spend millions on what would become the First Transcontinental Railroad.

But Lincoln also expanded the American System’s scope—in both concept and deed. Less than three months after the Battle of Fort Sumter, Lincoln addressed a special session of Congress commemorating the eighty-fifth anniversary of the Declaration of the Independence. At the close of his remarks, the President departed from his stated purpose of securing adequate troops and funding to wage the Civil War to elaborate on the nation’s founding ideals. “The leading object” of the federal government, he said, was “to elevate the condition of men; to lift artificial weights from all shoulders; to clear the paths of laudable pursuit for all; to afford all an unfettered start and a fair chance in the race of life.”[16] The following year Lincoln signed legislation that committed federal land to this purpose: the Homestead Act, offering settlers 160 acres of public land to encourage westward migration, and the Morrill Land-Grant Act, which funded the creation of more than 60 colleges including Cornell University and the Massachusetts Institute of Technology.

“The Hamiltonian tradition,” historian Michael Lind has observed, “could not have found a better spokesman than Lincoln.”[17]

Unfinished Work

At Gettysburg, Lincoln tasked the American people with the “unfinished work” of safeguarding and improving the American experiment. In the century after his death, the federal government advanced an economic agenda to support it. The United States built a modern industrial economy that supported national security, economic independence, and widely shared prosperity, becoming the envy and leader of the world. The tradition of the American System and its School played a central role.

To foster and guide economic development, the U.S. government supported strategic industries through protection and investment and established the foundations for a functioning labor market that could serve American workers and businesses alike. Through World War II, the federal government maintained a robust set of tariffs designed not only to generate revenue, but to buttress American industries. It also created a comprehensive structure for union representation and collective bargaining. As reciprocal trade expanded, policymakers intervened with Farm Bills to support the agricultural sector, preserving sectoral diversification critical for economic self-sufficiency and the vitality of many communities. Taxpayers funded ambitious research and development projects through dedicated agencies, such as DARPA and NASA, that laid the groundwork for the computer revolution of the late twentieth-century.

Buttressing this development was a financial system that used public credit and regulatory oversight to ensure that capital was not only efficiently and productively deployed, but safe from corruption and complete destruction by the business cycle. With the creation of the Federal Reserve in 1913, the United States had a central bank for the first time since the dissolution of the Second Bank of the United States in 1836. The New Deal brought a suite of reforms, including the Glass-Steagall Act, that transformed the nation’s financial system from a speculative market into something more akin to a public utility. New institutions like the FDIC and SEC provided greater security for American’s financial assets and necessary oversight of financial markets while institutions like Fannie Mae, Freddie Mac, and the Small Business Administration provided targeted, subsidized financing to American home and small business owners.

The nation assumed an obligation to create opportunity and draw people to it, rather than lecture those who could not find it themselves.

The tradition of “internal improvements” lived on as well, as American policymakers recognized that the nation’s size was one of its great advantages and that prosperity ought to reach every corner rather than concentrating in a few cities. The United States invested in ambitious infrastructure programs to provide transportation, energy, and communications to the public. With the creation and maintenance of postal, telegraph, and radio networks as well as railroads and eventually interstate highways, the federal government enabled the spread of the population and its economic dynamism across the continent. Projects like the Hoover Dam and agencies like the Tennessee Valley Authority brought electricity to underdeveloped regions.

From every angle available, the United States invested in the prosperity and opportunity of American citizens, recognizing that both a healthy democratic republic and a vibrant economy depended upon prosperity that was widely shared and available to all. The nation assumed an obligation to create opportunity and draw people to it, rather than lecture those who could not find it themselves. The Homestead Acts expanded the availability of land, first opened by President Lincoln, to once-excluded populations and made property ownership available to most Americans. Investments in the American education system—first universal public high school, and then universities—fostered skills to the benefit of both workers and their employers. Land-grant colleges formed a geographically dispersed network of institutions designed for under-served populations, and programs like the G.I. Bill made traditional institutions more accessible.

Restoring Economic Policy

Economic history is filled with policy successes and policy failures, and the American System is no exception. A tradition is not worthy of celebration based solely on its lineage. Nor do its occasional failures invalidate its overarching successes—much less justify a disavowal of the entire project. As Daniel Raymond observed, “The question, therefore, is not, and never will be, between law and no law, regulation and no regulation, but it must always be between the wisdom of different laws and different regulations.”[18]

Yet the modern American right-of-center, rather than balance a worthy skepticism of government overreach with respect for an inherited approach to public policy, has forsaken that tradition—indeed, written it out of existence—in favor of free-market fundamentalism. That is neither conservative nor wise.

Leading “conservatives” now label any departure from laissez-faire as socialism or, at the very least, as a “hyphenated capitalism” that leads down the “road to socialism.”[19] They misunderstand not only the proper role of government in a functioning capitalist system, but the very traditions of American statecraft. If today’s critics are right about the role of government in a capitalist economy, then many of America’s greatest statesmen—even the nation’s and the Republican Party’s very founders—were “hyphenated capitalists” themselves. How, with such a heritage, did the United States get anywhere?

Conservative policymakers ought to study the American history of political economy. They should rediscover principles of public policy that are well-suited to contemporary challenges: that effective government is not only achievable with limited, constitutional powers, but can work alongside private industry to achieve national goals.

Economic stability, national security, widely shared prosperity, strong families, a pluralistic society—in short, the American way of life—are achievements plainly worth conserving. So is the only approach to economic policy that has ever proved capable of producing them.

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Wells King

Wells King is the research director at American Compass.